Graincorp still in opportunity field

PORTFOLIO POINT: Graincorp looks attractive, while Echo Entertainment looks to have lost its appeal as a potential Crown target.

Graincorp (GNC)

I think there is an excellent opportunity for investors with Graincorp at the moment. Readers may recall that last week I wrote the price had gone a little high at $12.50, but might be worth buying if the price came down (click here). Since then, it’s drifted back to $12.15-$12.20, closing at $12.20 today, and at that price it’s only about 3.5% above the current bid.

Making it even more attractive for investors, there some analysis around suggesting that with the franking credits in GrainCorp, they could boost the bid without actually adding to the cash paid. Graincorp apparently has up to $100 million in franking credits which would be useless to bidder Archer Daniels Midland because it’s foreign. The suggestion is that with franking credits and a special dividend, the $11.75 a share offer could be worth roughly $12.18 to investors who can make use of the credits.

So what you’re seeing here are low-cost ways that the deal could be sweetened, and I think you’re almost guaranteed – even if they don’t improve the bid from $11.75 – to have it converted to capital and a fully franked dividend. That means buying at $12.20 or below is a very good risk-reward trade-off. You’ve got all these franking credits, which the bidder might as well pay out because it can’t use them anyway, and the initial enthusiasm that pushed the share price up a little high has waned.

It’s now bang on my normal level of how much to pay over, and it’s an excellent buying opportunity at this price.

Echo Entertainment (EGP)

Unfortunately for investors the strategic appeal of Echo as a takeover target took a hit this week, as it appears James Packer has both sides of New South Wales politics on side for a Crown development in Barangaroo come 2019.

Our takeover portfolio reduced holdings in Echo last week, at roughly $3.80, and the stock’s now fallen back about 10% to close at $3.54 today, where I think it roughly would or should be with no real deal on the table. So Echo is less attractive than it was, but that doesn’t completely eliminate its appeal.

If Packer is able to do a deal for a second casino licence in Sydney, and at the moment it’s just a rumour, not definite, Genting is still there and still proceeding with a proposal to acquire 25% and Packer’s approval for 25% is still going ahead as well.

Echo obviously will argue that a second licence should go to a public tender and so forth and maybe it will, but Packer would probably still win that tender. Having said that, Packer may use this as a bargaining chip and Echo might think it’s better to have him ‘inside the tent’, because doing a deal might still be preferable than trying to compete with him with a separate licence. So, don’t think for a moment that this is all over – Genting might come in and do a deal with Echo to build its own high roller casino, so Echo is not still without its strategic appeal. But it’s lost some of the shine it had.

Acer Energy (ACN)

Drillsearch (DLS) has increased its on-market bid for Acer. While that should be great news for investors, the problem is that it has only increased it to 28.5c and that’s where the stock was trading. Although we got an increased bid, I said it was worth buying up to 28.5-29c, and that’s what you’ll probably now get.

Senex Energy, who had bought up about 7.5% of Acer and was the other likely bidder, will now probably struggle to launch its own bid. One of Acer’s biggest investors, Republic Investment Management, has accepted the 28.5c, and that means Drillsearch will now have over 40% including the roughly 20% it owned unconditionally before. Once it gets to 50% it’s game over.

Now, there’s a small chance this bid gets increased – say Senex finds another backer or gets together a rival bid – and if you own Acer shares you might as well hang on because there’s no downside. The stock closed today at 28.5c, right on the bid, so it’s worth waiting just to see if anything happens.

This has been a good deal that’s played out, except that the bid has only been increased to where the stock already was and two of the company’s bigger investors decided that was good enough.

Arrium (ARI)

Arium is so volatile at the moment – it has been a good buy several times, but it’s turned into a real trading stock.

We have thus far, in our portfolio, bought at 68c, then sold at 78c, bought again at 76.5c, and sold some at 85c. Frankly, when it gets too far above the current proposed bid of 75c, it becomes a sell, but when it drifts back as it does to 76-77c it becomes a buy. It closed today at 81c. That’s just in between a buy and a sell for me.

What’s changed is that the consortium of POSCO, Noble and the three Korean investment funds, has offered to come back and talk to the board. So they’re definitely still engaged, and it helps that the iron ore price has stayed firm.

I still think there’s a big chance of an increase here, but given the swings and roundabouts in this it’s definitely one for the traders. I would say it’s definitely a buy around 77c, and if it jumps up to 85-86c again, as it did last Thursday, you’d probably let some go.  Again, at 77c, it’s only 3% above the bid. At 85c, it’s 12-13% above the bid. I do think there’ll be an increase; the only question is how much.

Discovery Metals (DML)

Cathay Fortune’s $1.70-a-share cash bid has been knocked back by the Discovery board, but Cathay has come back and decided to take the bid hostile – straight to the shareholders.

It’s still $1.70, but Cathay has shown its willingness to proceed with this, and this is interesting because normally the view is that a Chinese buyer, if they can’t make it friendly, just won’t do it. This group has decided to go hostile and I think that’s a very interesting development. This puts the pressure on the board now, knowing that the bid will proceed anyway, to justify why $1.70 isn’t good enough.

It also suggests that Cathay Fortune is pretty confident with its funding and approvals.

From what I understand, Cathay commercially oriented than some of the government-owned companies. I would say it suggests that Cathay Fortune has got its financing in place, and it’s got its permission in place, or if they haven’t got it yet, then they’re very confident about getting it.

After this was announced, the stock went from around $1.65 to $1.75, and closed today at $1.72. I think anywhere in the low $1.70s it’s good buying. You’ve got a hostile buyer that has strong intent; it’s definitely one where I think the bid could be increased.

SFG Australia (SFW)

For disclosure, I was one of the initial directors of Snowball Group over 10 years ago, which became SFG Australia. I’m not now and I haven’t been involved with it since 2002, but it is reportedly in talks to merge with WHK Group.

They’re both mid to large listed players in accounting, and apparently they’ve talked about it being a merger of equals. I think one is worth about $350 million and the other about $280 million, so it’s not even clear which would become the bidder. The situation suggests neither party will end up with much of a premium.

It’s probably good in the sense that if they do merge it would improve liquidity and presumably they get more economies of scale, so I think it’s actually good for both companies. It’s just talks at the moment, but it would almost certainly be a scrip deal if it’s a ‘merger of equals’ and while there might be a special dividend it won’t be an exit as such for investors. Another benefit of scrip rollovers is you don’t pay capital gains.

Across the financial services sector the small are getting killed off. Mariner lobbed a $24.5 million scrip offer for Wilson HTM last week as well, following a failed bid for small broker Austock earlier in the year. All the players are looking to combine and the broking industry is having a hard time of it. I’ve written before that IOOF (IFL) is a target I quite like in this space.

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