Herald, the centre of attention

Herald Resources. An important play to watch is zinc and gold miner Herald Resources. Now Herald has been one I’ve spoken about on and off for the past couple of months. Just to summarise, it’s got two bidders. The first bidder, Bumi, has a cash bid at $2.25, which was recommended by Herald’s board. The second bidder is another Indonesian company, Antam, which bid $2.50. Since that $2.50 bid, the stock has traded between about $2.65 and $2.80 in expectations of a higher bid. Now two things have happened. First, Bumi has kept extending its bid (remember, this is the underbidder at $2.25) and at the moment it expires on April 18. Now why would it keep extending a bid that it can’t win unless it was thinking about bidding more? Second, Bumi has commissioned an independent expert’s report for its own shareholders on the value of Herald and has come up with a maximum value north of $3.50 a share. Bumi could thus re-bid anywhere between $2.60 and $3.80.

So what we’ve got here is two bidders, both whom have plenty of cash, who both want this, and both have now got their own internal valuations that are higher than the current share price and bids. All in all, this is a highly prospective situation.

Indophil Resources/Lion Selection. Another deal in the resources sector is Indophil’s hostile bid for Lion Selection. It’s a takeover situation we covered a couple of weeks ago and has cropped up in the news again. This deal is interesting because it’s really a fight over the Cracow gold mine in central Queensland. Newcrest owns a big chunk of the mine, which it is planning to sell it to Beadell Resources. Lion owns a reasonable chunk of Cracow as well, and in keeping with its plans to turn itself from an investment company into a gold miner, has an option to buy Newcrest’s stake. Indeed, a lot of people think Cracow is well undervalued and that this is why Indophil wants to takeover Lion. Now I know for a fact that Lion does not want to be taken over by Indophil, but Lion’s problem is that it is only halfway between turning itself into a mining company. Nevertheless, Lion will do what it can to fight this one off.

So, do you invest in Lion or not? I think it’s a difficult one because the outcome of this takeover is very uncertain, but having said that, it’s obvious that the Cracow gold mine is a good one otherwise companies wouldn’t be going after it. Usually in these situations, it makes sense to buy the entity that has the most direct exposure to the asset sought, which is Lion Selection Group, but in Lion’s case there is a fair bit that has to happen and the takeover may not go through.

This deal is one for the more speculative investor, and you’ve got to have a firm view on gold with this. If you think, for instance, that gold’s going to go back to $US1000 an ounce then this is the sort of company to buy into. If you think on the other hand that the global economy is out of the woods and gold will go down in relation to the US dollar and shares, then possibly not. Lion is positioning itself as a pure gold play and you always need to keep the gold price in mind.

Mt Gibson Iron. Also in resources there’s been a placement of 19.8% in Mt Gibson Iron by Russian billionaire Alisher Usmanov. Originally Usmanov wanted to sell to Shougang, a Chinese steel company, but Shougang had a reasonable stake in another Mt Gibson shareholder, APAC Resources. APAC already owned 18% of Mt Gibson so the Takeovers Panel said that Shougang couldn’t acquire another 20% without making a takeover bid. Now the stake is basically being sold down to institutions. Does this make it more or less of a takeover target? It’s in the category of “maybe”. We know of course that Midwest Corporation, which I’ll talk about next, is very much in the sights of another Chinese company being Sinosteel. Maybe Shougang will try to do the same. All those institutions that have bought into Mt Gibson will probably be happy to sell at a higher price but there’s no bid yet on the table.

Midwest/Sinosteel. Now contrast that with Midwest. Midwest has traded north of $6 in the past two weeks, yet the bid by Sinosteel is at $5.60. The stock is settling back towards the $5.70–5.80 mark and I would say if you can get it around $5.70 you’re paying less than 2% over a hostile cash bid, which is probably not a bad play because clearly the Chinese want this. The board is resisting the offer as iron ore is just as hot as it has ever been. The board knows that the Chinese steel companies are realising that they will be held hostage by BHP, Rio and Vale. They’re looking to own their own sources of supply and in the Pilbara it means Midwest, Mt Gibson and Murchison.

Zinifex/Oxiana. The other big resources deal is Zinifex and Oxiana. Zinifex is trading at about a 5–6% discount to the value of Oxiana’s bid because a lot of people had thought Xstrata and Vale were going to merge. Now that they’re not going to, people are speculating Xstrata may come in. My view on this is that it makes sense for Oxiana and Zinifex to merge and that Xstrata can buy them together after the merger. I do think this is a takeover that is more likely to succeed than not and as a result of the spread, the discount that Zinifex is trading at, this is an attractive opportunity.

Just Group/Premier Investments. Outside of resources, the most notable deal from last week was Premier Investments’ offer for Just Group. Well, we bought into this and then sold out again, and the Just Group share price went up to about $4.20, which was slightly above the value of the bid. The bid is a mixture of cash and shares in Premier Investments. Now it needs to be understood that Premier Investments is essentially a cashbox, and its share price is about 15% lower than its cash value. In essence, it’s got $9 something of cash per share and it’s trading around $8. Solomon Lew, as you know, is a very canny trader of retail assets and he knows when to buy and he knows when to sell. Clearly, he thinks Just Group represents good value, but would he lift his bid? I don’t know. He might, but it would not be in keeping for him to do so. He’s been the sort of person, as with Colorado Group, who forces others to lift their bids when he owns a substantial stake, but clearly he wants the Just Group and the Just Group is a substantial retail asset in Australia. I think at around $4 a share it’s not a bad play.

Just Group’s board, meanwhile, is recommending that shareholders reject Premier’s bid, but this means it has to go out and find someone else to bid the stock, which may not eventuate. So it’s going to come down to what shareholders want, and considering that owning Premier – a cashbox – will be effectively the same as owning Just Group chaired by Solomon Lew, presumably, this is contest over management, not synergy. And would a Just Group run by Solomon Lew be a better company? Quite possibly.

Spotless Group/Programmed Maintenance Services. The other takeover of note is of course Spotless Group’s bid for Programmed Maintenance Services, which the Programmed Maintenance board is probably going to reject. There’s an argument that some Spotless shareholders are not entirely happy with the deal but I think it’s a deal that’s most likely to go ahead. Spotless can raise money for it and, as I said a week ago, it’s one that the market is struggling to price because there’s an all scrip, cash and scrip, and predominantly cash alternative, with the predominantly cash bid being the most attractive at the moment. Will there be a counter bidder? It’s possible and Transpacific Industries Group is a company that might look at it, but again, it’s probably unlikely. Either way, however, this opportunity has limited downside for those going long on Programmed Maintenance.

Beyond International/Destra. On to some deals that have hit a wall. Destra’s bid for Beyond International has come unstuck for two reasons. Firstly, Destra chief executive Dominc Carosa had his own position in the company largely financed through Opes Prime. Second, Destra’s holding in Beyond was also financed through Opes, so you’d have to say that the chances of them proceeding with a bid are very low. The idea that some of these companies would use a margin lending firm to finance takeovers is just mind boggling and is, in a way, indicative of just how silly the market had got, perhaps, at the end of its bull phase last year. I’m also sceptical of any managing director who has had to use a lender of last resort like Opes.

Consolidated Media. Finally, Lachlan Murdoch’s attempt to buy Consolidated Media has fallen through after the media firm's shareholders and a private equity consortium led by Murdoch failed to reach an agreement on a lower offer. As I have said for the past two weeks, I didn’t think Murdoch would come back with a bid, but now, in any case, it’s looking pretty much dead in the water.

nTakeover Action March 31- April 4, 2008
Date	Target	ASX	Bidder	(%)		Notes
02/04/08	Allegiance Mining NL	AGM	Zinifex	82.40
25/03/08	Auckland International Airport	AIA	CPP Investment Board (Canada Pension Plan)	63.50		Partial offer - for 39.53%.
28/03/08	Babcock & Brown Environmental Investments	BEI	Babcock & Brown	88.84		Extended to April 18.
11/03/08	Challenger Infrastructure Group	CIF	Consensus Business Group	0.00
25/03/08	Dolomatrix	DMX	Transpacific	22.70
28/02/08	Findlay Securities	FDY	Zodiac Capital	13.41		Incl 7.29% held by Findlay Sec exec director.
07/03/08	Golden West Resources	GWR	Fairstar Resources	32.97		Extended to April 11.
01/04/08	Gosford Quarry	GQH	Guinness Peat	90.17		Compulsory acquisition.
02/04/08	Herald Resources	HER	PT Bumi Resources	19.91		Recommendation withdrawn in favour of PT Antam offer. Closing April 18.
30/01/08	Herald Resources	HER	PT Antam and Shenzhen	11.00		Recommended offer.
06/03/08	Jetset Travelworld	JET	Qantas	0.00		Potential 58%, subject to Jetset vote late May.
02/04/08	Just Group	JST	Premier Investments	23.67
19/03/08	Lion Selection	LST	Indophil Resources	0.00
31/03/08	Midwest Corporation	MIS	Sinosteel	19.89		Offer formalised.
01/04/08	Mineral Securities	MXX	CopperCo	0.00		Depatch of offer documents June 7.
01/04/08	Olympia Resources	OLY	Territory Resources	36.40
27/03/08	Programmed Maintenance	PRG	Spotless Group	13.20		Incl 10.3% pre-bid acceptances.
06/02/08	Rio Tinto	RIO	BHP Billiton	0.00		Offer formalised.
06/03/08	Vietnam Industrial Investments	VII	Corbyns International	82.14
nScheme of Arrangement
23/01/08	Anzon Australia	AZA	Nexus Energy	53.10		Anzon Energy, with 53.1%, will vote in favour. Vote April 18.
26/03/08	CBH Resources	CBH	Perilya	0.00		No vote date set.
28/03/08	China Education	CEH	Raffles Education	90.98		No vote date set.
11/03/08	Dyno Nobel	DXL	Incitec Pivot	0.00		No vote date set.
20/03/08	Equigold	EQI	Lihir Gold	9.17		No vote date set.
18/03/08	Macquarie Private Capital	MPG	Bear Stearns Private Equity	0.00		Vote late April/early May. Macquarie expects offer to proceed.
03/03/08	Zinifex	ZFX	Oxiana	0.00		Vote May/June.
nBackdoor Listing
31/03/08	Global Approach	GLO	Teys	46.70		Revised proposal.
nForeshadowed Offers
05/03/08	Aquila Resources	AQA	AMCI	0.00		AMCI requested the register.
03/04/08	Atech Holdings	ATH	New major shareholders	32.54		Board seeking intentions of new shareholders.
10/12/07	Atlas Group	AHS	Unnamed parties	0.00		Investigations advance, but no offer yet.
02/04/08	Beyond International	BYI	Destra Corp	0.00		10% holding forfeited to Opes Prime receiver.
05/11/07	Blue Energy	BUL	Sydney Gas	0.00		Discussions.
08/02/08	Chariot	CTI	TPG/SP Telemedia	70.60		Offer dependent on SPT Telemedia acquisition of TPG.
06/03/08	Consolidated Media Holdings	CMJ	Illyria /Consolidated Press JV	37.90		Proposed scheme acquisition. New backer sought.
29/02/08	Mark Sensing	MPI	Unidentified party	0.00		Merger talks proceeding.
05/12/07	Mirvac Group	MGR	Lend Lease Corp	0.00		Talks confirmed.
01/04/08	Mount Gibson Iron	MGX	Shougang Concord	0.49		Takeovers Panel reverses 19.73% acquisition.
14/03/08	Trust Company	TRU	Equity Trustees	0.00		Talks confirmed.
28/02/08	Warehouse Group	WHS	Woolworths	0.00		Agreement on suspension of NZ Commerce Commission clearance order till May 1 appeal.
28/02/08	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		Agreement on suspension of NZ Commerce Commission clearance order till May 1 appeal.

Source: NewsBites