Game on for Ludowici

PORTFOLIO POINT: Weir Group of the UK comes in over the top of FLSmidth, which could be in an interesting position if it tries to up the ante.

Ludowici (LDW). It looks like the first decent contested bid in months is infusing the market with confidence, and if you followed my advice two weeks ago you’ve made a very healthy return already.

On Friday night UK company Weir Group came in over the top of the recommended offer with a bid of $7.92 per share.

Not only is that a 127% increase on where Ludowici was trading before any suitors enter the fray, but it’s a full 10% higher than Danish company FLSmidth’s initial $7.20 and the first hostile counter bid that’s come from out of the blue in some time.

If you got into Ludowici when I first spoke about the deal and it was trading around $6.80, you’d have made 16.5% already, so well done. Now that it’s up around $7.90, it’s not worth getting into.

The fact that it’s trading so close to the bid when the counter is still conditional on due diligence suggests one thing: that the market thinks FLSmidth is going to make a counter offer – but things could get tricky here.

FLSmidth CEO Jørgen Huno Rasmussen made some comments about not increasing the $7.20 bid just to encourage shareholders to part with their stakes. He later said that he didn’t think these remarks would restrict the Danish company from lifting the offer if another suitor entered the fray.

Unfortunately, under Australian law if a company says an offer price is final it can’t then increase the bid even if another party comes in.

Even more unfortunately for FLSmidth, Weir stepped in with a better counter offer and although FLSmidth is claiming the comments were lost in translation, Weir is threatening to take them to the Takeovers Panel if ASIC finds that the Danes are allowed to increase their offer.

There has been some precedent here. The Takeovers Panel doesn’t want to stop shareholders from getting the best deal they can, so at times they have allowed higher bids to go through even though the original bidder made the mistake of saying its offer was final.

But having said that, Weir may have made its offer on the grounds that it couldn’t be trumped by FLSmidth’s apparently final offer.

But either way, if you as an investor were able to get set two weeks ago it’s an excellent situation and hopefully a harbinger of things to come.

Gunns (GNS). New Zealander Richard Chandler is about to buy a 39% stake in timber company Gunns for $150 million, but this is not a “takeover by stealth” as some people are saying, and not a company investors should be speculating in unless they can handle losing their whole investment.

Gunns, as many will know, has been struggling for years but to take an immediate 39% stake without paying a premium or making a takeover offer must still be approved by what shareholders are left. I’m guessing they’ll allow this, because it’s either that or oblivion for the company.

As for speculation that by getting 39% (or more, depending on whether an associated $130 million rights issue is fully subscribed to by existing shareholders) this is effectively a takeover of Gunns by Chandler, do you really want to be the last one left if the company falls over and he’s able to pick it off from liquidators?

One of the rules about trying to predict takeovers is to remember that you have buy into a healthy business – one you would be happy to own in the absence of a bid. Using my methodology, you may only get takeover offers for one-third of your portfolio, and you don’t want to be left holding stocks that disappear because they’ve literally gone broke.

Gunns does not fit the mould of having solid balance sheets and good cash flows, and I’d say Mr Chandler is taking a big punt. But do you want to punt with him? Do you buy into Fairfax because Gina Rinehart did, or Channel Ten because Lachlan Murdoch did? So-called experts or the very rich don’t always get it right, and you’ve got to look at the wider context of the business and the industry, and not just at whether you could make one spectacular gain on the outside chance of a successful takeover.

Extract Resources (EXT). Extract made a very interesting comment last week. After China Guangdong Nuclear Power Corp (CGNPC) gained control of its 43% shareholder Kalahari, it said it might still seek other suitors.

CGNPC has to make an $8.65 per share follow-on offer for Extract under Australian takeover rules, since it took more than double the stake allowed without shareholder approval via the acquisition of Kalahari. But given the size of that holding I don’t see who would want to go up against CGNPC in a bidding war for the remaining 57%.

If Ludowici has taught us anything, it’s that contested bids are possible in this market and if CGNPC didn’t want Extract, someone else could come along. But my understanding is that the whole reason for the Kalahari takeover is so it could gain control of Extract.

Rio Tinto, 11% owner of Extract, also made an interesting comment when it said it wanted to be involved in any development of the Husab uranium site in Namibia.

I can’t see Rio going up against CGNPC either because it would be far easier for them to cooperate. And as for making a deal where Rio sold its stake in return for a joint venture arrangement – illegal in Australia because that equates to one shareholder getting a return that’s unavailable to all others – in an African jurisdiction it could be hard for the ASX or the local regulator to prevent it.

Extract is now trading at $8.58. It may be a good opportunity if you can get it below the bid and make a return of more than 1%, because who knows? Something else may happen, it’s not beyond the realms of possibility.

African Iron (AKI). Shareholders have until tomorrow to accept into Exxaro’s 51¢ a share offer for African Iron, because the South African company is in no mood to extend it further if it doesn’t hit the 50% mark by 5pm Perth time.

Exxaro said last week that if it does get to 50% acceptances by February 14 it will extend the offer, and remember: if it gets to 75%, shareholders get an extra 6¢.

Up until Thursday, African Iron was trading up around 56¢, which suggested that the market thought there was a chance of another bidder coming in. But since then the miner’s share price has slid down to 54-55¢ as it becomes less sure that someone else will come in or that Exxaro will hit that 50% target in time.

Cape Lambert sold its remaining 5.1% to Exxaro today, giving the South African a 30% stake, but there’s no word yet on what fellow 19.9% shareholder Equatorial Resources plans to do.

Austar United Communications (AUN). Austar has set the date for its shareholder meeting to decide on Foxtel’s $1.52 a share takeover proposal, for March 30.

Presumably this means it’s talked to someone from the ACCC and they’ve said the regulator’s report on the deal will be out by then.

Both Austar and Foxtel are pushing ahead and the former’s share price has started to creep up, but at $1.26 it’s still a good opportunity. The last time I wrote about Austar it was down at $1.17 but there’s still enough return in this one to make it worth a punt.

The downside is probably down to $1, but the upside is 20.6%, or 26¢. You’ve got to accept that you could lose (you are betting against an increasingly unpredictable government regulator) but you’re not going to lose all your money, as in a PaperlinX or Gunns speculation.

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

-Takeover action, February 6-10, 2012
Date	Target	ASX	Bidder	(%)	Notes
09/02/12	Accent Resources	ACS	Xingang Resources	49.70
08/02/12	African Iron	AKI	Exxaro Australia	24.90	Pre-bid acceptance
10/01/12	Anvil Mining	AVM	Minmetals Resources	40.10	Lock up deal on 40.1%. Ext to Feb 16
09/02/12	Brockman Resources	BRM	Wah Nam International	71.49
06/02/12	Contango Capital Partners	CCQ	Contango Micro Cap	74.10	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
09/02/12	Living and Leisure	LLA	Merlin Entertainments	93.66
08/02/12	Magma Metals	MMW	Panoramic Resources	9.34
18/07/11	Mintails	MLI	Seager Rex Harbour	37.33
09/02/12	MSF Sugar	MSF	Mitr Phol Sugar	79.55	Unconditional
07/02/11	Razor Risk Technologies	RZR	TMX Australia	89.97
09/02/12	Signature Metals	SBL	LionGold	29.27
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
10/02/12	Austar United Communications	AUN	Foxtel	0.00	Vote Mar 30
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
07/02/12	Flinders Mines	FMS	Magnitogorsk Iron and Steel Works	0.00	Vote Mar 30
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
10/02/12	Millepede International	MPD	Cool D'Fine	0.00	Agreement terminated
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
23/01/12	Ludowici	LDW	FLSmidth	22.00	Indicative 22% support for scheme
10/02/12	Ludowici	LDW	Weir Group	0.00	Indicative proposal
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
06/02/11	Spotless Group	SPT	Pacific Equity Partners	19.64	Non-exclusive due diligence

Source: News Bites