Hastings: Tell us what you want

PORTFOLIO POINT: There is no independent expert’s report to back the board’s claim that APA’s offer is inadequate, and Hastings is not naming its own price.

Hastings Diversified Utilities Fund (HDF). You’ve got to question a situation where a fund’s manager rejects a takeover offer out of hand, with no evidence to back their claim that the deal is too low – especially when they’ve just sucked $30 million in fees out of it.

The board of Westpac’s Hastings Funds Management (HFM) rejected APA Group’s hostile $2 a share offer for its listed Hastings Diversified Utilities Fund, saying simply that the cash and scrip offer is inadequate.

However, HFM has not released an independent expert’s report to back that claim. These aren’t essential in takeovers but neither has HFM put its own price on the business, creating the controversial situation where they’ve just extracted $30.1 million in fees in cash (and are still deciding on how they want to be paid the other $24 million – cash or scrip), yet are rejecting a deal that may well be more in shareholders’ interests.

Presumably APA won’t be keeping HFM on to manage the fund if it ends up taking Hastings over, as it uses an internal management structure, so the board has some questions to answer over whether it’s rejecting the offer because it undervalues the company (and if so, give us some proof) or because they don’t want to give up the lucrative fees.

To be fair, they could have taken a bigger performance fee, because it’s based on market value rather than profits, but they didn’t because they correctly said that some of the share price rise was due to APA’s offer and they couldn’t take credit for it. Still, whenever you see fees being paid on the basis of anything other than profits, I think it’s a warning sign about the management company and its motives.

The offer is 50¢ cash and 0.326 APA shares for every Hastings share, and values the company at about $1.92 when you strip out the dividend that’s already going to be paid out to shareholders. This is a decent premium to where Hastings has traded since the crash in 2008 (between 44¢ and $1.81).

If I were a Hastings shareholder, I’d be pressuring the board to at least put their own value on the company, then justify it and their rejection of the APA bid.

Spotless Group (SPT). Spotless is in a stalemate: suitor Pacific Equity Partners (PEP) isn’t moving from its offer of $2.68 a share but the board won’t budge from its counter valuation of $2.80 (technically it is $2.74 plus a 6¢ dividend). The only movement is coming from the shareholders, three of whom are trying to roll the whole board.

The gap between the two bids is small so I’m increasingly surprised that the parties don’t seem to be edging towards some kind of agreement. The longer it drags on the more the next dividend comes into play so all PEP has to do is pay an extra 6¢ and let the company pay out the rest to shareholders itself.

On the other hand, and I’ve said it before, sometimes these private equity bidders dig in their heels and say that’s the price, take it or leave it, because it’s all they have the authority to offer and anything beyond that price no longer makes their internal rate of return. PEP is in the box seat here. I’ve seen the Spotless board’s valuation and it’s based on very rubbery figures that rely on fancy profit improvements that are three or four years away. In the current environment it’s almost impossible to forecast that far out.

The shareholders are doing all the leg work here, so it may be that PEP is sitting back and waiting for them to sort it out. They know 26% of shareholders will be happy with $2.68 because that’s how much they have in pre-bid commitments, and up to half would probably take it, so why bother offering more if the board is going to be turfed out anyway?

PaperlinX (PPX). The best way to play the unnamed private equity bid of $117 million for PaperlinX is to leave it alone, but out of interest’s sake (and some schadenfreude) here’s the latest development in this saga.

Last week, the trustee of the hybrid said the bid triggered a clause that allows holders to convert their notes into equity, or be paid out in full – the hybrid has a face value of $100 even though it was only worth $18.52 on Monday night. If all the note holders took this option, it would reduce current shareholders’ ownership down to about 20% of the ailing company. Either way, shareholders aren’t going to see much of any takeover wealth.

The bid is valued at 9¢ per share and $21.85 per hybrid, and if it goes ahead the two classes of shareholders have to accept the total bid and then debate among themselves how to divide that pool between them.

Sundance Resources (SDL). This takeover has been dragging on since October and has been becoming more and more brittle, as hits have come from all angles.

The latest blow is speculation that Hanlong Mining wants to lower its bid back to the original 50¢ from the final 57¢ a share deal, to which, so the speculation says, Sundance’s response will be to walk away.

I suspect there’s a bit of gaming going on here. Hanlong hasn’t got any of the approvals it needs, from China, the Congo or Cameroon, and the iron ore price has fallen back about 15% since it made the higher offer. I said at the time that if ore prices fell they might try to use it to wiggle out and, sure enough, they may be trying to get out of the deal.

But if Hanlong can’t get the approvals it doesn’t matter whether the deal is 50¢ or 57¢, it’s not going ahead anyway.

This whole situation reinforces the stereotype of the Chinese bidder – regulatory problems, conditional bids and pulling out when the state of affairs turns less than ideal. We’ve yet to see a nice, clean hostile bid from a Chinese company: one where the bidder really wants to go ahead rather than testing the water, goes through all the regulatory procedures including the Foreign Investment Review Board, and is also of a reasonable size.

African Iron (AKI). If you’re already in African Iron, well done because this takeover is likely to happen and you’ll at least get your 51¢ if and when acceptances cross the 50% mark, or 57¢ if they pass 75%. If you’re not in, don’t bother.

The directors of African Iron are accepting the offer for their holdings and although these aren’t very large, it’s symbolic and says the takeover has their full support. South African company Exxaro now has just over 20% of the company, with the directors’ stakes and 19.99% of Cape Lambert’s committed to the cause.

However, with African Iron closing at 56¢ on Monday, I think the market is being over-optimistic about the chances of a counter bid or a higher deal. The board has accepted the offer as it stands so they won’t be asking for more money, and a creditable name would be circulating through the rumour-mill be now if there was a credible counter offer in the wings.

The market could be feeling confident about Exxaro as well, it being a South African company and very similar in many respects to Australian businesses – it’s not going to walk away from the deal or try to reprice it, for example – but I think at the price African Iron is trading at you’re better off waiting for it to fall closer to 51¢ or ignore it.

Billabong International (BBG). I don’t buy the comments suggesting private equity is all agog over Billabong. It’s got no assets that kind of investor would be interested in, and piles of debt.

I think retail takeover plays are interesting where there’s a solid asset to go after: property redevelopment in Sydney and Melbourne with Myer, David Jones prime locations, Harvey Norman’s portfolio.

But all Billabong owns are brands and they are only worth as much as their ability to generate a profit, and from the sounds of it they aren’t doing much of that. One analysis I saw suggested that if earnings fall another 15%, which in the current retail environment is by no means impossible, they could technically be in breach of their interest cover ratio.

I look at this company and it has lots of debt and intangibles and goodwill on its balance sheet – and private equity does not pay much for goodwill.

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

-Takeover action, January 16-20, 2012
Date	Target	ASX	Bidder	(%)	Notes
19/01/12	Accent Resources	ACS	Xingang Resources	17.58
13/01/12	African Iron	AKI	Exxaro Australia	19.99	Pre-bid acceptance
10/01/12	Anvil Mining	AVM	Minmetals Resources	40.10	Lock up deal on 40.1%. Ext to Feb 16
13/01/12	Brockman Resources	BRM	Wah Nam International	55.33
20/01/12	Contango Capital Partners	CCQ	Contango Micro Cap	72.82	Ext to Feb 20
16/12/11	Gold One International	GDO	BCX Gold Investments	82.80	Unconditional
15/12/11	Hastings Diversified	HDF	APA Group	20.71
13/01/12	Laguna Resources	LRC	Kingsgate Consolidated	98.14
19/01/12	Living and Leisure	LLA	Merlin Entertainments	51.28
18/07/11	Mintails	MLI	Seager Rex Harbour	37.33
16/01/12	MSF Sugar	MSF	Mitr Phol Sugar	76.90	FIRB approves
17/01/11	Razor Risk Technologies	RZR	TMX Australia	72.98
16/01/12	Signature Metals	SBL	LionGold	23.45
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 Energy	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
19/01/12	Extract Resources	EXT	Taurus Minerals	42.74	Conditional on upstream acquisition of Kalahari
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