Has the financials roundup begun?

PORTFOLIO POINT: Speculation grows about more takeovers in financials. Could AMP turn from predator to prey? And will the ACCC step in?

AXA Asia Pacific (AXA). The next great land grab in Australia is on, with National Australia Bank (NAB) swooping on the financial services industry and making a surprise bid for AXA Asia Pacific, trumping AMP and French-parent AXA SA’s increased offer. NAB’s proposal, well, almost agreement with AXA, sees it acquiring all of AXA’s assets – with an invitation to AXA SA to then buy the Asian business, which is all the French company was after in the first place. The bid is an all-cash offer of $6.43 a share or a cash and scrip alternative, a very clever move by NAB. The bank waited until AMP chief Craig Dunn said his bid was final and, although not technically bound, Dunn sealed this when he claimed: “We regard ourselves as being now bound by the truth in takeovers policy.” As NAB has invited AXA SA to make the same offer for the Asian assets that it would have paid under the AMP proposal, there is no reason it won’t support this bid. I think NAB always had its eye on AXA (it certainly had its eye on AMP as well) but it was the initial bid that spurred this move.

Now the question is, what will AMP do? AMP can always come back with another bid. It can wait for this bid to expire today (December 21) and then technically launch another bid, although I expect it would have to get permission from the Takeovers Panel. There is a precedent for allowing an enhanced offer after a bid has been declared final, when Cemex took over Rinker without any mention of the dividend and the bid was adjusted; however, it would mean a massive loss of face for Craig Dunn. What is equally interesting is the market is pumping up AMP shares, which makes the AMP offer worth more than the NAB one. The reason for that is twofold: first, NAB shares have been hit because it has to raise a lot of money to complete the transaction. If people go for the cash offer they may have to raise several billion. Second, the market knows that if this takeover goes ahead it will be very dilutive for NAB’s earnings for at least two or three years; at this price I think AXA is trading at 23 times next year’s earnings and NAB itself is trading at a discount to the rest of the banks. So NAB is taking the long-term view. But of course the other issue is that the market now thinks AMP is a target – and it may well be – with speculation again that ANZ is the most likely bank to bid for it. I really didn’t think any of the banks are ready to trash their share prices, but now that it’s game on, it’s a distinct possibility.

So far the key to all this has been overlooked. The potential for a surprise ruling from the ACCC is very, very high. ACCC chairman Graeme Samuel has made a number of comments recently saying he’s worried about the growing power of the big banks. It’s been suggested that if Westpac and St George were merging now that the bid might not be allowed to proceed because of their dominance. Even if NAB gets AXA, the wealth management and superannuation markets are still pretty competitive, so on the face of it, there’s no reason this deal wouldn’t go ahead but it might preclude future deals in the space, including a move from one of the big four on AMP. The other possibility is the ACCC just turns around and says it just won’t allow the move by NAB, even though the bank doesn’t have that much power in this industry. If that happens, then AMP’s original offer may be relaunched. However, for both AXA and AMP to be swallowed up by the banks might just be too much for the ACCC to take.

IOOF Holdings (IFL). Last week ANZ Banking Group (ANZ) chief Mike Smith said he had no comment on a possible bid for AXA, but I don’t think you should read too much into this; he may have just been trying to divert attention from something else. There have been rumours, for instance, that the big banks – particularly ANZ – may be looking at taking over small financial services company IOOF which has about $100 billion under management. It is reported the company’s retail funds management business, which accounts for about 5.3% of the market, could be of special interest to the big banks. So, as a much smaller business (with a much smaller price tag), IOOF could be a target. Mandatory superannuation has been just one of the factors that has made our wealth management market so fantastically profitable. I don’t believe bigger is better; bigger sometimes means mediocre. While it might lower average costs, there is also a risk that you can lose your customer focus as well. If we ended up with just four big wealth managers owned by the big four banks, they would end up with average performance; there’s no doubt. The key to robust competition is lots of small, vigorous competitors; scale beyond a certain level is just unnecessary and unhelpful.

Nufarm (NUF). The situation with Nufarm continues, with people concerned that either Sinochem will walk away or produce an offer lower than the $13 it first floated, probably about $12. Last week the main seller, chief executive Doug Rathbone, said $13 was the price he’d been negotiating and what he’d announced to the market though he didn’t say outright it was the lowest bid he would accept. There are whispers Sinochem is going to offer a revised, lower price – and, on Friday, the shares went up quite dramatically in afternoon trade, from $10.60 to $11.10. The major fear is that if a deal falls through the stock will go back to around $9. There are a lot of hedge funds on the register and they will be saying, 'Do a deal; don’t hold out for $13. If $12 is the price, then take the $12 on offer.’

Apparently, Nufarm’s operating conditions have deteriorated a bit, and as a result, Sinochem is probably quite comfortable in saying it doesn’t think the business is doing as well as it thought and therefore offer a revised price. Rathbone is a known seller – he wanted to sell at $17.25 to ChemChina almost two years ago before it walked away – so my view is if it says either $12 is the price or it walks away, then he will be hard pressed to say no.

Caltex Australia (CTX). Coming back to Caltex and the ACCC’s rejection of its deal to buy Mobil’s service stations, it’s very hard to know what Caltex will be looking at next. It has two businesses: refining, which in this day and age no one wants to own – it is now considered a “dirty” business with low-margins; and retailing – the real place to make money – through the stores at the service stations, which is the real reason it wanted Mobil. Most of the smaller independent service stations have been snapped up and are now part of chains, and no one wants any in the country towns.

So now we have Caltex, which was willing to buy, and Mobil, which wants to sell out in Australia, but with the ACCC on the warpath there doesn’t seem to be any way around it. The ACCC is always under political pressure to be seen as doing something in this sector. Last week the ACCC surprisingly blocked the bid by GUD Holdings (GUD) for Breville Group (BRG) despite the tie-up looking almost certain. So the ACCC is playing a very active role in mergers right now, and if it is prepared to go in against toasters and sandwich makers, and the petrol market, which is politically sensitive market, well, the banking and wealth management is fair game.

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

nTakeover action, December 14-18, 2009
Date	Target	ASX	Bidder	(%)	Notes
08/10/09	Adultshop.com	ASC	SexyLand	0.00
10/12/09	Ausmelt	AET	Outotec	23.00
27/11/09	Breville Group	BRG	GUD Holdings	48.12
13/11/09	Centaurus Resources	CUR	Glengarry Resources	18.98
09/12/09	Challenger Kenedix Japan	CKT	Challenger Life Company	0.00
19/11/09	Danks Holdings	DKS	Carboxy	97.82	Carboxy a JV of Woolworths (66%) and Lowe's (34%)
18/12/09	Dark Blue Sea	DBS	Photon Group	90.42
17/12/09	Dioro Exploration	DIO	Ramelius Resources	36.39
30/11/09	Energy Developments	ENE	Pacific Equity	0.00	Improved offer through Greenspark.
15/12/09	Energy Metals	EME	China Uranium Development Company	65.22	Bid for 70%.
21/09/09	Hamilton James & Bruce Group	HJB	Charterhouse	73.72
01/12/09	Indophil Resources	IRN	Zijin Mining Group Company	0.00	Directors accept.
15/12/09	KLM Group	KLM	Programmed Maintenance Services	64.73
07/12/09	Mdwinter Resources	MWN	Skala	7.00	Proportional offer. Rejected.
09/11/09	NewSat	NWT	EWC Payments	0.00	EWC recommend rejection.
16/12/09	PearlStreet	PST	Campbell Brothers	98.03
06/10/09	Polaris Metals	POL	Lion Diversified	25.50
17/12/09	Polaris Metals	POL	Mineral Resources	65.20	Unconditional.
06/11/09	Rey Resources	REY	Crosby Capital	0.00	Directors reject.
30/10/09	Rey Resources	REY	Gujarat NRE Minerals	16.85	Rey rejects offer.
13/11/09	RMA Energy	RMT	CREC Resources	51.39	Seeks 80% of outstanding holdings.
01/09/09	Sino Strategic International	SSI	CY Foundation Group	0.00	Common chairman and shareholder
10/09/09	Tandou	TAN	Guinness Peat	19.90	Seeks 50% of outstanding holdings.
16/12/09	Vesture	VES	Prudential Investment Company	0.00	Withdrawn.
11/11/09	Zedex Minerals	ZDX	Olympus Pacific Minerals	0.00	Olympus to list on ASX.
Scheme of Arrangement
14/12/09	AXA Asia Pacific Holdings	AXA	AMP and AXA SA	53.93	Revised scheme rejected.
17/12/09	AXA Asia Pacific Holdings	AXA	National Australia Bank	0.00	Recommended.
17/11/09	Corvette Resources	COV	Tianshan Goldfields	0.00
06/10/09	Cytopia	CYT	YM Biosciences	0.00	Vote January
15/12/09	Eircom Holdings	ERC	STT Communications	0.00	Approved.
05/11/09	Gas2Grid	GGX	Orion Petroleum	0.00	Vote January
01/12/09	Nufarm	NUF	Sinochem Corporation	0.00	Deal stalled. Discussions continue.
30/11/09	PacMag Metals	PMH	Entrée Gold	0.00	Vote April.
11/11/09	PIPE Networks	PWK	SP Telemedia	19.90	Vote March.
27/10/09	Transurban Group	TCL	Canada Pension Plan Investment Board and Ontario Teahcers' Pension Plan	0.00	Board rejects.
16/10/09	United Minerals	UMC	BHP Billiton	0.00
03/09/09	Universal Resources	URL	Vulcan Resources	0.00	Vote January
Backdoor Listing
25/09/09	Biosignal	BOS	RGM Entertainment	0.00	RGM shareholders to receive 87.35%
Foreshadowed Offers
11/12/09	Ausmelt	AET	Unnamed party	0.00	Indicative proposal at higher price.
02/10/09	Polaris Metals	POL	Third party	0.00	Possible competing offer
28/10/09	Rocklands Richfield	RCI	Jindal Steel & Power	0.00	Extends due diligence to Nov 30.
05/11/09	Rocklands Richfield	RCI	Meijin Energy	0.00
08/12/09	Warnambool Cheese and Butter Factory	WCB	Unnamed party	0.00	Indicative proposal.

Source: News Bites