Dulux gets a foot in the door

Dulux’s bid for Alesco is likely to go ahead, but the paint company might have to pay a bit more.

PORTFOLIO POINT: Dulux appears to be on track to pick up Alesco – and has room to increase its offer – but market conditions and an upcoming valuation could prove a challenge.

Alesco (ALS). Dulux (DLX) looks committed to its bid for garage door business Alesco after picking up 20% of the company, and there’s a reasonable chance of an increase in price here.

This bid appears hostile at the moment, but the maximum acceptance from institutional shareholders indicates it’s not super-hostile, since now the board knows a big chunk of the company is happy with $2 a share.

Generally, industry buyers are more likely to pay-up than private equity, and given that Dulux has already put some money on the table, I think the prospect of it walking away from this one is low. That Dulux now owns 20% unconditionally also reduces the chance somebody else might have a crack at it. So the offer, despite the fact it has a few conditions, is quite likely to proceed and Dulux could afford to pay a bit – but not a lot – extra; say $2.20.

Alesco has been trading between $2.02 and $2.05 – though it lifted to close at $2.10 today – which tells you the market thinks there is a chance of an increase in the bid. My rule of thumb is never to pay more than 3% over the bid, which in this case would be $2.06.

Two things to watch for are, firstly, the market condition – the ASX/S&P 200 must not close below 3,950 points for three consecutive trading days, because of the possibility of a market slump – and, secondly, Alesco’s advisers say it will get an independent valuation and a lot will depend on how that valuation comes in.

Eureka (EKA). The hostile bid from Aurora Oil and Gas (AUT) for Eureka is particularly interesting because it’s on-market, and you don’t see many on-market bids in Australia.

Aurora’s bid is 45c, and Eureka has traded well above that since it was announced, so Aurora has not been buying any shares. In an on-market bid, the bidder instructs a broker to sit in the market at a particular price for a minimum of a month. These bids are effectively unconditional, and they can lift or extend the bid at any time. When these do happen, typically shares trade above the bid and as the end of the bid period approaches, the market starts trending down.

The bid is hostile, Eureka’s board says the company is worth a lot more, and if the market keeps the share price well above 45c there’s a good chance Aurora will pay more. The good thing about this is the worst thing that can happen from now until the end of the bid period is that you get 45c.

Eureka closed at 50c, which is 11% above the bid price, and I would never normally pay that. In this case, I would say the limit would be maybe 1.5-2c above. This is not to say Aurora won’t pay a higher price, but at 50c you’ve already got 10% downside risk. There is a reasonable chance of an increase, but at the moment the price is too expensive relative to the existing bid.

Echo (EGP), Consolidated Media Holdings (CMJ). It’s unusual for James Packer to play out his intentions in the press, but that appears to be what’s happening. The notion is being leaked that Packer wants to sell his ConsMedia Foxtel stake, and use the money to fund a Crown (CWN) tilt at Echo. But the idea that the sale of one leads to the purchase of the other is not that simple.

Packer owns just over 50% of ConsMedia, Kerry Stokes owns 25% and the rest is free-floating. In turn, ConsMedia holds 25% of Foxtel. The problem, I believe, is that a sale of the Foxtel stake would create capital gains tax at the ConsMedia level. However, the sale of ConsMedia, even at about $4 a share (it closed today at $3.21), wouldn’t necessarily mean much CGT. Even if this did happen – and the whole company would need to be sold, so there’s Kerry Stokes’ 25% and the remaining shareholders to worry about – Packer would still need to get that money into Crown somehow.

The point is, Packer owns 50% of an entity that owns 25% of Foxtel, which is his last major media asset, and he’s willing to sell it. It’s a question of price, and of how it’s structured, but I maintain that Echo – though its share price has seen a very big increase in the past few months – is still a good takeover target.

Spotless (SPT). Spotless closed today at $2.54, and the bid on the table is effectively $2.66 discounting the dividend that’s already been paid, or about $2.67 with the 95% franked special dividend.

This is an agreed bid, and highly unlikely to fall away. Investors won’t see an increase in the bid, but if you annualise the return on $2.54, it’s the equivalent of getting 14% per annum, with just the existing bid being fulfilled – not including franking credits. That’s not a bad return.

Woodside (WPL). Management commented last week that they’re still aware Shell wants to sell its 24% stake, and whether Woodside is a takeover target at the moment really depends on the future of that stake.

Woodside just sold a 15% stake in the Browse Basin project to a Japanese joint venture for $2 billion, and it’s no surprise with no Japanese nuclear power plants operating at the moment that they are committing to owning a chunk of gas.

Woodside is probably a takeover target for the time being, but they have indicated they might be able to place the 24% Shell stake with multiple buyers. If it’s sold to one buyer, there’s probably a bid for the company; if it’s broken up, there’s probably not.

Commonwealth Property Office Fund (CPA). There’s talk that Commonwealth could be offloaded, and that Dexus (DXS) could be a buyer. Commonwealth shares have risen above $1.00 for the first time in several years on the back of this speculation, but I also believe Dexus itself is a takeover target. Until recently, Dexus was trading at a significant discount to net tangible asset value, and it has been reducing that discount through a buyback of its shares. It’s hard to see that it would go and buy a portfolio of assets worth half as much as itself again, but buybacks do get halted if deals present themselves.

In Australian property trusts, the weak are surrendering to the strong. Dexus is reasonably strong, but I don’t believe Dexus would be able to pick up Commonwealth at a massive discount, and if it doesn’t do a deal it’s investing in its own shares to remove that discount in itself.

Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.

-Takeover Action April 30-May 4, 2012
Accent Resources
Xingang Resources
Brockman Resources
Wah Nam International
Dulux Group
Curnamona Energy
Havilah Resources
Eureka Energy
Aurora Oil & Gas
Hastings Diversified
APA Group
Ext to Apr 30
Simon Henry
Ideas International
Gartner Australia
Pre-bid acceptances
Magma Metals
Panoramic Resources
Ext to May 10
Scandinavian Resources
Hannan's Reward
Somerton Energy
Cooper Energy
Pre-bid agreement
Thakral Holdings
Brookfield Asset Management
UCL Resources
Ext to May 8
Schemes of Arrangement
Gloucester Coal
Yancoal (Yanzhou Coal)
64.5% holder Noble Group in favour. Vote Jun 4.
Vote May 31
Spotless Group
Pacific Equity Partners
Vote late Jul
Sundance Resources
Hanlong Mining Investment
Reverse Takeover
Millepede International
Angline Pastoral Pty Ltd
Angline and shareholders to control 67.6%. Vote early May
Foreshadowed Offers
Goodman Fielder
Wilmar International
Press speculation
Unnamed party
Non-binding indicative offer

Source: News Bites

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