Extract looks a done deal

PORTFOLIO POINT: Guangdong Nuclear Power looks set to take over Extract Resources, one of the first Chinese bids taken to completion.

Extract Resources (EXT). Good news for Extract shareholders: China Guangdong Nuclear Power Group (CGNPC) is going to make that $8.65 a share cash bid for the uranium explorer.

CGNPC has a bid on the table for UK-based miner Kalahari, which owns 43% of Extract. As of Friday it had 50% acceptances into that bid, which was enough to trigger the compulsory offer for the Australian company required by ASIC.

This is one of the first Chinese bids we’ve seen that has made it through to the bitter end, despite being the most complex. It had some problems at the start when CGNPC dropped the price it wanted to pay for Kalahari after the PR meltdown post-Fukushima, but the market has accepted this and the lower price for Extract as well. All other bids we’ve seen by Chinese companies have run into problems at some stage and they’ve made speedy exits afterwards.

Today, CGNPC had 89.5% and declared the bid for Kalahari unconditional, making the offer for Extract almost a done deal. Rio Tinto sold its 11.1% in Kalahari to CGNPC last week and there’s no reason why it won’t do the same with its 14.2% of Extract.

This gives CGNPC effective control over 54.2% of Extract shares, making a counter-offer highly unlikely.

Extract went into a trading halt on Friday after CGNPC hit its 50% benchmark, and it closed Monday at $8.60. The market had already priced in the prospect of a bid and there’s a small amount of money to be made but you’re not going to get it for a few months at least. It’s done and dusted and with that premium, it’s not worth buying now.

What this will do, however, is pave the way for more action in the uranium sector. Rio’s takeover of Hathor in Canada and now CGNPC acquiring Kalahari with a strong likelihood of taking Extract as well are good indicators that it’s not unloved anymore. Paladin would be most people’s obvious target in this space.

Spotless Group (SPT). This afternoon the Spotless board bowed to shareholder pressure to let private equity group Pacific Equity Partners into its data room, and crucially this comes without a commitment to the $2.80 minimum that the board said would open the doors to due diligence.

There are some conditions, such as a 12-month standstill deal to stop PEP acquiring Spotless shares unless it makes a bid – and that bid has to be a minimum of the $2.68 a share it originally offered, not the $2.80 that board says still stands but has obviously been abandoned in the face of a threat to spill the board.

The Spotless board’s excuse is that a lengthy fight with shareholders and the suitor would hurt the company’s operations.

Spotless shares surged on the news to close at $2.50, a discount to the standing bid.

Austar United Communications (AUN). Austar is confident that Foxtel’s $1.52 a share offer is going to succeed, and there’s a very tidy rate of return for investors here if they are correct.

Austar traded down towards $1.17 last week. At the closing price on Monday ($1.19), you’ve got 33¢ of upside and a small downside of about 10–15¢. I think that’s a good risk-return tradeoff but then again, you are dealing with a regulator whose decisions are becoming very hard to predict now.

Last week Austar announced it would postponed putting the deal to shareholders until the end of March. It couldn’t give a specific date because the ACCC is being coy about when it will release its findings on the deal. Sure, ACCC chairman Rod Sims has warned that there’s a lot of paperwork to sift through and it’s a complicated deal, but it could also be that it’s desperately trying to find a reason to reject it (and therefore not look stupid after saying no the first time).

I really think the ACCC will struggle to find a reason to do that, however, and if it does refuse to pass the deal again the whole thing will end up in court (dragging the process out even longer).

Further, given the Optus/Telstra stoush over delayed broadcast of sporting events, there is even less of a foundation for the ACCC’s excuse that the NBN will create a new sphere for competition. No one would have thought a few months ago that it was even possible for Optus to subvert the AFL’s multi-million dollar deal with Telstra by allowing customers to record and watch games live with a two minute delay for free.

Technology is quickly overtaking traditional distribution platforms and this is the biggest risk to the Austar-Foxtel deal: we don’t know what kind of technological changes will disrupt the industry next but these very same movements will be destructive to the two companies if it all falls over.

Although there is an excellent premium available and Austar is determined to push this deal through, it won’t be a good looking company to own if it doesn’t go ahead.

oOhMedia! (OOH). It looked like a bog-standard bid last year, when CHAMP PE’s 32.5¢ a share cash bid for outdoor advertising company oOhMedia! was accepted and recommended by the board.

But the heat was turned up by APN’s announcement on Friday that it now owns a substantial stake of 5.25%.

To be clear, I don’t think there’s much chance of APN making a counter-bid (although the board did accept it on condition that no better ones emerged). It might, but the presence of Macquarie and US marketing company WPP Group on the register with a 50% shareholding would mean the counter-offer would have to be pretty compelling.

No, I think APN’s buy-in of around 17¢ just before the final bid was announced and recommended was just an inspired piece of timing and won’t help ordinary shareholders much. What APN may do is take the other option, the one that most people won’t consider: instead of the 32.5¢ payout, shareholders can take 10¢ and one Class B share in an unlisted entity.

This won’t be suitable for small retail investors, but it might be for APN.

It’s hard to make money out of this deal now. oOhMedia! is trading at 32.5¢, so while you can still buy it, you won’t make money unless APN does make that counter offer.

Fairfax Media (FXJ). For a very private person, Gina Rinehart has done a very good job of frightening the horses with her drive to buy up to 15% of Fairfax shares.

She made an old-fashioned share raid on the newspaper company last week, starting with 4.9% and ending last week with 12.6%. Rumour has it she’s still buying on-market.

The big question is, what’s she doing here? I’d be very surprised if Rinehart wants to make a bid for the whole company. One of my colleagues thinks there is enormous hidden value in Fairfax but I don’t think there’s any such pot of gold. I also don’t believe the conspiracy theories that it’s a right wing takeover of national mastheads.

The alternative hypothesis is that Rinehart, like many people of her age, are struggling to comprehend how much world media has changed in the past five years and they still think a newspaper is what forms opinion. It’s quite possible that by investing in Ten Network (of which she owns 10% and has a board seat) and Fairfax she doesn’t understand the media landscape and doesn’t realise that newspapers aren’t as influential as they once were.

Pacific Brands (PBG). I’m amazed at how strong the PacBrands’ share price has been trading, given that we don’t have a bid and it was simply a rumour that it could be 66¢ or 68¢ a share.

It’s been hovering around the mid- to high-60¢ area and I’ve seen analysis that says a takeover offer could be as high as 75¢, but I wouldn’t be buying shares priced in the high 60s just to make a possible 10% return if a bid ever happens.

Apparently PacBrands is talking to Kohlberg Kravis Roberts, and apparently TPG is watching and waiting to see where those talks go, but as I’ve said before, I have no idea why they’d want it.

CEO Sue Morphett, by all accounts, has done a brilliant job at cutting costs, rationalising brands and shortening supply lines. I don’t know what else a private equity owner could do; the hard work has been done.

Then again, there’s not much left out there for private equity to invest in. It’s like they’re scratching at things they could have looking at a decade ago (and many did: PacBrands has already been through a period of private equity ownership).

Because they’re run by MBA-types who know how to fix balance sheets, private equity groups generally go for simple, established businesses in sectors such as retail, wholesaling and transport. A bit of financial magic is woven over the companies before they are flicked back onto the market, but the targets available are fewer, and they’ve often had to weave their own magic just to stay alive.

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

-Takeover action, January 30 - February 3, 2012
Date	Target	ASX	Bidder	(%)	Notes
19/01/12	Accent Resources	ACS	Xingang Resources	20.68
24/01/12	African Iron	AKI	Exxaro Australia	21.05	Pre-bid acceptance
10/01/12	Anvil Mining	AVM	Minmetals Resources	40.10	Lock up deal on 40.1%. Ext to Feb 16
23/01/12	Brockman Resources	BRM	Wah Nam International	57.64
20/01/12	Contango Capital Partners	CCQ	Contango Micro Cap	73.50	Ext to Feb 20
03/02/12	Extract Resources	EXT	Taurus Minerals	42.74	Kalahari offer unconditional
16/12/11	Gold One International	GDO	BCX Gold Investments	82.80	Unconditional
15/12/11	Hastings Diversified	HDF	APA Group	20.71
02/02/12	Living and Leisure	LLA	Merlin Entertainments	73.54
18/07/11	Mintails	MLI	Seager Rex Harbour	37.33
31/01/12	MSF Sugar	MSF	Mitr Phol Sugar	31.72	FIRB approves
02/02/11	Razor Risk Technologies	RZR	TMX Australia	87.29
23/01/12	Signature Metals	SBL	LionGold	26.01
12/05/11	Sphere Minerals	SPH	Xstrata	75.29	Unconditional
Schemes of Arrangement
12/12/11	Aston Resources	AZT	Whitehaven Coal	19.99	Vote late Mar
08/12/11	Austar United Communications	AUN	Foxtel	0.00	Vote Feb 17
29/08/11	Auzex Resources	AZZ	Bullabulling Gold	0.00	See GGG Resources - 50/50 merger
20/01/12	Charter Hall Office REIT	CQO	Macquarie Capital consortium	0.00	Vote about Mar 15
25/11/11	Flinders Mines	FMS	Magnitogorsk Iron and Steel Works	0.00	Vote Mar 1
29/08/11	GGG Resources	GGB	Bullabulling Gold	0.00	See Auzex Resources - 50/50 merger
20/01/12	oOh!media	OOH	Champ III Funds	19.60	Vote Feb 27
11/10/11	Sundance Resources	SDL	Hanlong Mining Investment	17.99
Backdoor Listing
05/01/12	Consolidated Steel	CGQ	CFT Holdings (HK)	0.00	Approved
12/08/11	Millepede International	MPD	Cool D'Fine	0.00	Marine HVAC provider. Vote mid-Nov
Foreshadowed Offers
27/09/11	Bannerman Resources	BMN	Sichuan Hanlong	0.00	Conditional proposal. Talks continue
17/10/11	Customers	CUS	Unnamed party	0.00	Non-binding discussions
08/12/11	Endocoal	EOC	Unnamed parties	0.00	Unsolicited approaches
05/10/11	New Hope Corp	NHC	Unnamed parties	0.00	Proposals invited
06/06/11	Pulse Health	PHG	Unnamed party	0.00	Expression of interest
01/12/11	Spotless Group	SPT	Pacific Equity Partners	19.64	Revised proposal

Source: News Bites