Follow the money

PORTFOLIO POINT: Watch the wealth management and insurance sectors. A bid from IOOF might herald a renewal in takeover activity.

DKN Financial Group (DKN). Australia’s seventh-largest wealth management company, IOOF (IFL), has pitched a 75¢ a share bid for DKN and it’s a signal that you should be watching this sector for future takeovers.

The $88 million bid is still in the early stages and isn’t 100% certain – though it seems likely to go through – and, importantly, it doesn’t mean IOOF is no longer a target. This company and Perpetual are the two main options for big takeovers in the wealth management industry because the regulator has indicated, in its efforts to tighten industry standards, that it favours a smaller number of players who have the scale to deal with compliance issues and be well capitalised.

So the question is now whose moves you should be watching. The big banks can’t do it – we know this because NAB wasn’t allowed to buy AXA last year on the grounds that it would have too much market control. But AMP could make a play for IOOF; it was allowed to buy AXA, we just don’t know whether the regulator would let it through the gate. A foreign company could also play a part here; remember that we saw private equity group Kolhberg Kravis Roberts come through with an offer for Perpetual just last year.

For those wanting to play the latest bid in the wealth management sector, DKN has traded fairly consistently between 69¢ and 70¢ since the offer was announced, which is a 6.67–8% discount to the bid. It’s not a liquid stock, but if you can buy it at 69¢ that’s a good margin.

Territory Resources (TTY). This guaranteed takeover is an excellent example of a type of bid that doesn’t come around very often and creates a good situation for shareholders in the target company.

At the end of May, South African miner Exxaro Resources made a conditional, off-market bid of $123 million, or 46¢ a share for the iron ore miner. Then Noble Group, with whom Territory had recently broken off takeover negotiations and which controls the company’s marketing rights and owns its debt, trumped that with an on-market, unconditional offer of 50¢ a share.

An on-market offer is a guaranteed deal. Not only does Noble have to go through with the bid, but it has to be open for two months – July 21 is the end date for this one. So you have what we call a “hard put”, which places a floor under the price and the possibility of a higher bid.

Exxaro said it’s considering its options, but it will have to move sooner rather than later because the longer it leaves an on-market bid open the fewer shares will be available to sell into its offer, which is reliant on 60% acceptance. Noble already owns 32.01% of Territory’s shares. If Territory was a good buy for Exxaro at 46¢, I don’t see why it’s still not at 52–53¢.

So if you already own Territory shares just sit back and see what happens, you can sell into Noble’s bid right up until the last day of the offer period. If you want to get in now, the miner closed Monday at 51¢, which is a tiny 1.96% downside and with a 50:50 chance of a higher bid, that’s a not a bad risk to take.

Insurance Australia Group (IAG). Last week Commonwealth Bank strenuously denied it was considering a takeover of IAG, but of course it would say that. All the big banks would have run the numbers on IAG and QBE at some time and both companies are takeover targets, it’s just that the Commonwealth Bank doesn’t want to buy it right at this very moment.

The idea of banks buying insurers isn’t new. Back in the 1990s, they tried out the whole bank-assurance model, which failed but every decade or so the banks go through another phase of wanting to give it another try.

This time there is the added incentive that growth via the wealth management acquisitions avenue has been well and truly blocked off, as evidenced by the ACCC’s refusal to allow NAB to buy AMP, so they have to try a new area and that is insurance.

The competition regulator might have a problem with Commonwealth buying IAG, but insurance is a pretty competitive business and the banks don’t have much influence over it, yet, so who knows? The point we need to all be aware of is that IAG is still a target.

iiNet (IIN). I always say that watching where the strategic stakes are is critical to knowing who might be in line for a takeover, and we’ve got just such a situation with internet provider iiNet.

Amcom Telecommunications used to own a 23% stake. It recently sold off 3% and said it would distribute the remaining 20% in specie to its own shareholders. But, and that’s a big but, now everyone knows that stake is for sale and there’s no way Amcom will turn down an offer for the whole if there’s a 20% premium attached. I’d say this puts iiNet in play.

There’s no bid on the table so for the short-term, risk-averse investor it’s probably not one to get into. But if you’ve got a medium-term focus it’s a good one to look at. Beware though, because iiNet probably isn’t a takeover target without that strategic stake being available because the online industry is in serious flux. Small companies may do really well in the post-NBN world, or they may get destroyed by a cashed-up Telstra.

Charter Hall Office REIT (CQO). The saga between the property trust and three of its major shareholders has taken another turn, with property trust veteran Bill Moss being invited in to run the business, much to the annoyance of the current management team.

One of the agitators, Orange Capital, said last week that at the July shareholder meeting it had called alongside Luxor Capital and Point Lobos Capital, they planned to vote on replacing current manager Charter Hall with Moss Capital Funds Management. Bill Moss is regarded as one of the architects of the listed property trust model and in fact founded the Macquarie Office Trust during his 23 year stint at Macquarie before it was sold to Charter Hall.

But now he’s back. Without downplaying his ability at all, you need to consider the fact that when he left the industry it was a very different time; it’s a much tougher environment now. It’s one thing to look back on your track record when asset values surged and the Macquarie model was working splendidly. He might just find it much harder to make assets like this work in the current environment.

The shareholders want the underlying value of the assets to be released, and Charter Hall Office may see an extra 5% added to its share price just because of Moss’s reputation, but to be fair the current management is already selling off the US assets and getting good bids for them so I’m not sure how much more he could do.

But whether it’s Bill Moss running Charter Hall Office, there’s a clean bid for the whole trust, or there’s an accelerated sale of all assets with all capital returned to shareholders, something is definitely going to happen and when it does, it will be good for all of the shareholders currently tied up here.

Catalpa Resources (CAH), Conquest Mining (CQT), St Barbara (SBM). What looked like a pretty normal cat-and-mouse takeover game quickly turned into a very complicated situation, and I’d be selling up while there are still two bids on the table.

For a quick rundown, St Barbara made a $350 million cash and scrip bid for Catalpa in May in order to create a new mid-tier gold miner. Then Newcrest Mining and Conquest Mining stepped in with a merger-of-equals plan where Catalpa would pay 0.3 shares for every Conquest share, and the merged entity would then buy two mines from Newcrest, who would also end up with a 33% stake in the new $1.1 billion company.

Both deals are mainly scrip and both are complex with no clear value at the end of the process. In a volatile market it’s nice to see the cash and have a clear exit strategy when there’s a takeover, which is why if you own Catalpa shares, you should probably take some profits now.

St Barbara will probably come back with a better offer, but as it can’t provide any much more cash, and more scrip would be too dilutive, it won’t be much higher.

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

-Takeover action, June 6-17, 2011
Date	Target	ASX	Bidder	(%)	Notes
14/06/11	Abra Mining	AII	Hunan Nonferrous Metals Corp	85.37
26/05/11	Austar United Communications	AUN	Foxtel	0.00	Conditional offer.
27/05/11	Auzex Resources	AZX	GGG Resources	8.50	Ext to July 4.
14/06/11	Brockman Resources	BRM	Wah Nam International Holdings	53.40	Closed.
07/06/11	ChemGenex Pharmaceuticals	CXS	Cephalon	91.73
17/06/11	EDT Retail	EDT	EPN Investment Management	57.34	Expert says not F&R. Ext to July 1.
02/06/11	Equinox Minerals	EQN	Barrick Gold	85.00
13/05/11	FerrAus	FRS	Wah Nam International Holdings	17.95
08/06/11	Frankland River Olive Company	FLR	Toscana (WA)	61.00	Closing June 21.
14/04/11	Mintails	MLI	Seager Rex Harbour	38.78
13/05/11	NSX	NSX	Financial & Energy Exchange	25.14
14/06/11	Oaks Hotels & Resorts	OAK	Minor International Public Company	93.83	Ext to June 17.
17/06/11	Odyssey Gaming	ODG	eBet	84.22	See Foreshadowed Offers.
14/06/11	Rabinov Property Trust	RBV	Growthpoint Properties	98.87
17/06/11	Riversdale Mining	RIV	Rio Tinto	99.74	Ext to June 17.
09/06/11	Rocklands Richfield	RCI	Jindal Steel & Power	52.91	Ext to June 20.
12/05/11	Sphere Minerals	SPH	Xstrata	75.29	Unconditional.
23/05/11	Territory Resources	TTY	Exxaro Resources	11.20
09/06/11	Territory Resources	TTY	Noble Group	32.01
17/06/11	White Canyon Uranium	WCU	Denison Mines	95.67
Reverse Takeover
26/05/11	Eftel	EFT	ClubTelco	0.00	Vote June 29. ClubTelco to hold 75%.
Schemes of Arrangement
22/03/11	Cash Converters	CCV	Ezcorp	33.00	Offer for controlling 53%.
15/06/11	Cellestis	CST	Qiagen Australia	19.90	Vote late July 20.
27/05/11	Centrebet International	CIL	Sportingbet	0.00	Vote August.
14/06/11	iSoft	ISF	Computer Sciences Corp	0.00	Vote July 15.
01/04/11	Transfield Services Infrastructure	TSI	Ratchaburi Electricity Generating Holding	43.80	Associated interest. Scheme for 80% interest.
30/05/11	Valad Property Group	VPG	Blackstone	0.00	Vote July 4.
Backdoor Listing
08/02/11	Millepede International	MPD	Cool D'Fine	0.00	Marine HVAC provider.
Foreshadowed Offers
27/05/11	Accent Resources	ACS	Unnamed party	0.00	Possible friendly takeover.
14/06/11	Big Air Group	BGL	Vocus	0.00	AFR report. Big Air says "No offer".
15/06/10	Caledon Resources	CCD	Guangdong Rising Asset Management	0.00	Possible scheme. FIRB-approved. Non-solicitation to July 6.
13/05/11	Catalpa Resources	CAH	St Barbara	0.00	Proposed scheme.
14/06/11	DKN Financial	DKN	IOOF Holdings	18.49	Non-binding offer.
25/05/11	MacarthurCook Property Securities	MPS	P-REIT (BlackWall)	0.00
11/04/11	Odyssey Gaming	ODG	Unnamed third party	0.00	Potential offer.
06/06/11	Pulse Health	PHG	Unnamed party	0.00	Expression of interest.
09/05/11	Spotless Group	SPT	Unnamed private equity group	0.00	Indicative offer rejected.
30/05/11	Sundance Resources	SDL	Hanlong Mining	19.00	AFR report.

Source: News Bites