Dulux takes a halt

The takeover action between Dulux and Alesco is warming up, with share trading halted.

PORTFOLIO POINT: Dulux and Alesco both halted trading today, signalling new takeover developments are likely to be announced this week.

Alesco (ALS). Shares in both Alesco and its suitor Dulux (DLX) went into a trading halt today. Alesco announced a halt this morning after shares plunged more than 8% at the open, “to continue its discussions with DuluxGroup”, and Dulux announced a halt roughly half an hour later.

At time of writing neither company had released a statement, though one is expected before the market open on Wednesday at the latest. At the last statement provided to the ASX on Friday, Dulux had reached 42.35% of Alesco, with almost half of that in the institutional acceptance facility, after Argo Investments tipped its stake in. If that gets to 50%, the Alesco board will almost certainly have to change its recommendation and accept a bid.

There is also some press speculation as to whether Alesco has warmed to the idea of a further special dividend, to make use of some more of the 18c of franking credits offered in Dulux’s bid. However, the Alesco board dismissed such a dividend as outside capital management capacity as recently as July 27.

Hastings Diversified Utilities Fund (HDF). For some time now I’ve been saying investors should hold off from buying into Hastings because most of the upside had already been priced in. The situation has now changed and I think there’s some real potential here with a low level of risk.

While the share price hasn’t really moved – it’s been sitting around $2.54-55 and closed today at $2.52 – there there are now definitely two firm bids on the table. APA has come back and offered 0.39 shares for each HDF share plus 60c cash, so it’s worth about $2.45. The target board has looked at the fact APA’s share price has been pretty consistent and has now said the bid’s superior to PPA’s offer of $2.325 cash. What this means is that PPA has until tomorrow to match or better the offer.

With both bids recommended it’s like in real estate where the auctioneer has declared the house on the market, so now it’s just about bidding a bit more.

I think it’s highly unlikely that, having got this far, PPA will just drop out. Whether they have to bid $2.50 in cash or above remains to be seen, but APA could also afford to bid more as well. You’ve got a decent bidding war here, and while you still don’t want to overpay your downside at $2.54 is 5c or 6c, while your upside is as much as 15c to 20c.

At $2.70 it probably starts to get a bit expensive for both parties, but it’s a better buy at the current price now than it was a week ago.

Sundance (SDL). Nothing formal has been announced with the Hanlong takeover, but the rumour is the bidders have come back with a reduced bid from 57c a share to 40c. If that’s true, it’s much, much lower and just terrible. I’ve been saying to keep away from Sundance for quite a while now, and the latest developments just confirm this and the reasons why.

My understanding is that the Sundance board feels it can’t recommend 40c. Originally the first 50c bid was rejected; Sundance negotiated it up to 57c, and to go back to 40c would be humiliating. The problem is the iron ore price has sunk in that time, and therein lies the story. If you graphed 50c, to 57c, then back down to 40c, and graph the iron ore price over that same period they would follow each other. A fall of 57c to 40c is almost exactly the same as $160 to $115. The stock is suspended, and has been for the better part of two weeks now, so there’s not much investors can do anyway – if you’re in it, you have no choice but to wait.

This is one of the reasons why the Foreign Investment Review Board is being pushed to take a harder line on state-owned companies. It’s partially about what their real intentions are, but it’s also because it’s just not transparent. You can’t tell the extent to which the company has changed its mind, versus whether the state-run bureaucracy has changed its mind. How is it the state’s job to tell a business what price it should pay? Yet in China that’s what happens because they have to approve the release of currency. From what I understand, Chinese companies are all anxious to expand and become foreign players, but because the government has to approve them all, essentially they’re anointing winners. This is another salutary lesson that there are some foreign bidders that shouldn’t be trusted at the moment.

Elders (ELD). This company’s been a bit of a basket case for years, though the brand name is still valuable and it would make some sense for another rural services company to take it over. In light of some recent buying, the press is speculating that company could be Ruralco.

For full disclosure, my father took over and ran Elders in the early 1980s and merged it with what was then Carlton and United Breweries. A bit like Wesfarmers, the company tried to become a little conglomerate, and really, as a company, it’s failed. While Ruralco may well go after it, and while I think it’s good to have exposure to agricultural assets at the moment, Elders is too much of a risk. It’s got some really unhealthy businesses attached to it – the automotive parts business would have to be on its last legs – and its banking covenants and debt can’t be in that great shape. Plus there’s a big convertible note out there.

I’ve said before, my rule about potential bids is that it’s fine to play them but you have to comfortable owning the company in the absence of a bid, and Elders doesn’t fit that category for me.

Echo Entertainment (EGP). Crown (CWN) is raising about $400 million via a convertible note, and the obvious question is whether this is a prelude to a bid for Echo. Possibly, but I don’t think so at the moment.

Remember Crown is also committed to spending $568 million in Perth, and it wants to advance its plans in Sydney, and James Packer probably wants to avoid equity raisings at the moment until he completes the sale of Consolidated Media (CMJ). Crown’s not likely to do anything aggressive with Echo, or anyone else for that matter, until the ConsMedia sale is done.

As I wrote recently, I think ideally Packer would like to work together with Genting to both buy 20% of Echo and get on the board, then push the company toward developing a second, linked casino in Sydney. But you never know – they might think they’ll do that and then fall out. But a full bid would need fresh equity and James Packer needs to ConsMedia money before that will happen.

Another point is that when companies raise equity capital, they need to give people a bit of a reason because they want to know what the money’s going to. But with debt capital they raise it when they can, and at the moment corporate debt markets are open and there have been plenty of times in the past five years when the market’s been well and truly closed. This is just relatively cheap capital, and I wouldn’t read too much into it.

Integra (IGR). Finally, a deal between Integra and Silver Lake Resources (SLR) was announced early last week. It’s a friendly scrip merger and it’s been approved by both companies’ boards. You can’t hedge it easily, they’re very hard to short, so would you buy it now? No. There are too many imponderables with the price of gold, silver, the dollar and everything else. It’s a good deal, and creates a medium-to-large miner out of two smaller miners but it’s not a deal one can buy into and make money out of.

This is something you might see start to happen with a few iron ore plays that have proximity of assets – it just makes more sense to start working together to cut costs and climb up the sharemarket ladder.

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

Takeover Action August 6-August 10, 2012
Dulux Group
08/08/2012Castlemaine GoldfieldsCGTLion Selection74.91
12/07/2012Clearview WealthCVWCrescent Cap Management11.60
23/07/2012Genesis Resources
Clancy Exploration
Ext to Aug 20. Uncond.
09/08/2012Hastings Diversified
APA Group
Lifts offer
18/07/2012Hastings DiversifiedHDFPipeline Partners8.10
UCL Resources
09/08/2012Norton Gold Fields
Zijin Mining Group
FIRB approved
09/08/2012ENKENKDMCI & D&A Income45.50
26/07/2012Plan B GroupPLBIOOF Holdings0.00
08/08/2012Precious Metals ResourcesPMRSovereign Gold Co   23.38
29/06/2012Real Estate Capital Partners USA Property Trust
Woolley GAL II
Incl associate's holding
07/08/2012Rocklands Richfield
Shandong Energy
Pre-bid agreement
04/06/2012Thakral Holdings
Brookfield Asset Management
Schemes of Arrangement
06/08/2012Integra MiningIGRSilver Lake Resources0.00
02/08/2012Sundance Resources
Hanlong Mining Investment
To complete Nov 2012
Foreshadowed Offers
23/07/2012Beach EnergyBPTOrigin Energy0.00Rumour in media
13/07/2012IFS Construction ServicesIFSMillenium Scaffolding Services20.32Proposed cash offer
09/08/2012Navigator ResourcesNAVLionGold0.00Indicative offer
PMPTMA Group0.00Indicative offer
27/07/2012Real Estate Capital Partners USA Property TrustRCUSaban Capital Group0.00Indicative offer
10/08/2012Whitehaven Coal
Tinkler Group
48.3% in shares expressed

Source: News Bites

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