Hungry China will spark M&A

PORTFOLIO POINT: As China moves to buy up resources (and resources stocks), expect some action among Australian miners.
Fortescue/Rio Tinto. There’s quite a lot of action going on in the resources sector, and signs of more money coming out of China will have a significant bearing on mergers and acquisition activity in our big mining stocks.

It’s clear now that in the past few months various Chinese entities, such as pension funds, state-owned resource companies, metal processors and so forth have not only been making bids for mining companies around the world but have also been buying up physical stocks of base metals.

This has led to a rally in base metals prices and it is a clear indication that the Chinese government is aiming derive maximum advantage from the weakness in equity and metal commodity markets.

Fortescue, which is awaiting Chinese approval for a proposed $644.8 million deal with Hunan Valin Steel, is hoping to engage more Chinese investors to fund the expansion of its iron ore production and transportation.

The iron ore prices in the spot market have fallen dramatically and we’ve got the contract renegotiations coming up at the moment, but even if they fall back 40% or so, they’ll only be back to where they were a couple of years ago. I think that the Chinese will look to extract some of those savings, but at the same time they still want iron ore to be produced.

The infrastructure is all in place and the Chinese want Fortescue to be a third player in Australia behind the Hamersley deposits of Rio and BHP.

The other big question in the resource market right now is what Rio Tinto intends to do with the $US19.5 billion ($A27.14 billion) deal with Chinalco. Since the Chinalco deal was first mooted, Rio share prices have basically doubled from $30 a share to $60. The board has faced its shareholders in Australia at today’s AGM and said it was taking tough action to remain strong during the downturn and be ready to grow when a recovery takes place, but it will take a bit more than that to convince angry investors.

Rio’s London shareholders have already vented their frustration at the Chinalco deal, saying the deal favoured Chinalco ahead of them. The convertible notes being offered to Chinalco look very attractive at the moment and potentially give Chinalco a very cheap entry into Rio’s price.

I still think there’s a good chance that the Chinalco deal will be abandoned or indeed watered down substantially in its current form, and that the company will go back to just doing a large discounted rights issue to all of its shareholders; the big institutional shareholders, and a follow-up one to its smaller retail shareholders. When the stock was $30 such a move was difficult to contemplate, but at $60 a share you could do an equity raising at, say, $45 and still get a positive outcome without handing over a significant chunk of the company to Chinalco.

Asciano. Just leaving resources aside for a bit, we understand that Asciano had its deadline on Friday for receiving bids for the company. The company has not disclosed what the bids are but said it was now considering them.

It is likely that some of the bids are for the whole company, while others are for specific assets. Now, the market is quite hopeful that a bid for all of Asciano could be north of $2 a share but let’s keep in mind that the board might knock back a full bid and opt to just sell part of the option.

Asciano’s share price has rallied significantly from 70¢ up to $1.35 at the moment, and something is definitely on the cards, we just don’t know what. This makes investing in Asciano right now a riskier prospect. Let’s just say Asciano only commits to sale of some assets and recapitalisation, then there is a potential for the market to be disappointed. On the other hand, someone might bid $2.50 a share for the whole thing and you could almost double your money from this point.

It’s difficult to say what is in Asciano’s best interests and it’s one of the reasons the whole process has taken so long. Boards, as I’ve said before, often can’t quite contemplate that someone else might be able to run the company better than them, so they’ll knock back bids and say, 'No, no, the shareholders should stick with our plan for growth’. And in this case the plan for growth was overwhelmed by the burden of debt.

The one thing Asciano would like to avoid is end up in a situation where shareholders and the board are at loggerheads about what constitutes as a successful outcome. With a string of poor decisions in the past, the Asciano board will find it hard to persuade shareholders to see their point of view.

More importantly, Asciano has avoided going under and I think there will be some form of resolution. So it’s probably not a bad punt, but it’s at the riskier end of the spectrum, because you don’t know what you’re going to get, and the board has a habit of making silly decisions.

Babcock & Brown Capital. Interestingly, there’s another management buyout in play, this time for one of failed investment bank Babcock & Brown’s satellites, Babcock & Brown Capital (BCM).

It looks like a trio of former Babcock & Brown executives – Robert Topfer, John Shin and Warwick Bray – have put together a vehicle called Taemas Bridge and launched a proposal worth $175 million for BCM, which holds two major assets: a big chunk of Irish telecommunications firm Eircom; and Golden Pages, an Israeli version of the Yellow Pages online business directory.

There is some speculation that Taemas Bridge might not be the only suitor here with an Irish newspaper reporting over the weekend that Singapore Technologies Telemedia (STT), a unit of state-owned Singapore Technologies Group, is planning to make a rival bid.

Now the bid from Taemas is at $1.05, shareholders can get $1 cash plus 5¢ worth of equity in some unlisted thing. The stock has been trading around 95¢ to $1. It’s just over $1 today and if you’ve got another player, it could be an interesting one.

We haven’t seen many contested bids for a while, but I must stress that the involvement of STT is still speculative. It would seem the risk of some of these Babcock satellites disappearing completely has eased and valuations have got to the level where there is some appeal.

Consolidated Rutile. There’s also some activity in the lower end of the resources sector with mineral sands miner Consolidated Rutile (CRT) receiving a $165 million all-cash takeover bid from Unimin Australia, which already owns a 20% stake in the target. The offer also has support of the company’s major shareholder, Iluka Resources, which owns a 51% stake, so effectively 70% of the company has agreed to accept the offer.

Iluka needs cash to pay down its own debt and the CRT stake was never very strategic; it was a badly thought out takeover from quite a few years ago, so Iluka is happy to sell.

The deal offers 40¢ a share if Unimin ends up with less than 90% of CRT, and 45¢ if it gets to 90%. CRT is currently trading at 43¢.

Avoca Resources/ Dioro. We also have the $49 million scrip takeover offer by gold producer Avoca Resources for smaller rival Dioro Exploration.

Avoca is offering one of its shares for every 2.82 Dioro shares, effectively valuing Dioro at 53¢ per share based on Avoca's closing price of $1.495 on April 9.

It’s not entirely clear whether the board of Dioro is going to treat this offer as hostile or friendly. Technically it’s a hostile bid because it wasn’t discussed in advance, and I think they’ll probably recommend it in the absence of a higher bid and then go and try and find a higher bid. It’s also interesting to note that in the first couple of days, the stock traded at about a 9% discount to the value of the bid, and that margin has now closed quite dramatically.

So there’s an outside chance here that someone else comes along and has a crack at it, but it makes most sense for Avoca resources to buy it. They have the neighbouring tenements, so you might see a counter-bid, but this is the only one you can play really, if you can short Avoca, because it is scrip bid and it’s fairly leveraged to the gold price which, as we know, can move around.

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

nTakeover Action April 6-17, 2009
Date	Target	ASX	Bidder	(%)	Notes
16/01/09	3D Oil	TDO	Drillsearch Energy	19.90
08/04/09	Amazing Loans	AZD	IEG Holdings	86.53	To be removed from listing.
16/04/09	Arana Therapeutics	AAH	Cephalon	29.78
16/04/09	Bonaparte Diamond Mines	BON	Minemakers	23.80
17/04/09	Bonaparte Diamond Mines	BON	Union Resources	0.00	JV partner in Namibia phosphate project.
13/03/09	Broadcast Production Services	BKR	Prime Media Group	77.34	Offer for the balance. Ext to May 22.
17/04/09	Consolidated Rutile	CRT	Unimin Australia	19.60	Major shareholder Iluka to accept.
14/04/09	Dioro Exploration	DIO	Avoca Resources	14.95
17/04/09	Fermiscan Holdings	FER	Polartechnics	0.00	3-for-2 off-market.
20/01/09	GoldLink IncomePlus	GLI	Emerald Capital	52.71	Closed. Holding depends on Panel finding.
19/03/09	Hannans Reward	HNR	Fox Resources	0.00	Not for options.
27/03/08	Heartware International	HIN	Thoratec Corp	0.00	Subject to approvals.
01/04/09	Hutchison Telecommunications	HTA	Vodafone	52.30	ACCC concerned. Further submissions by Apr 17.
04/03/09	Murchison Metals	MMX	Sinosteel	5.85	Cleared by FIRB to move to 49.9%
14/04/09	Queensland Ores	QOL	Metallica Minerals	0.00	Recommends Metallica offer.
07/04/09	Queensland Ores	QOL	Outback Metals	9.47
08/04/09	Target Energy	TEX	Blaze Asset	0.00	Blaze formed by Odin Energy and Advance Energy.
10/03/09	Terrain Minerals	TMX	Iron Mountain Mining	0.00
21/03/09	Whitehaven Coal	WHC	Gloucester Coal	0.00	Panel orders shareholder approval. Pre-bid agreement relinquished
Scheme of Arrangement
08/04/09	Adelaide Managed Funds Asset Backed Yield Trust	AYT	Bendigo and Adelaide Bank	0.00	Offer dropped.
01/04/09	Australasian Resources	ARH	Resource Development International	66.37	Agreement expired.
06/03/09	Australian Wealth Management	AUW	IOOF Holdings	0.00	Vote April 22.
03/04/09	Chalice Gold Mines	CHN	Sub-Sahara Resources	0.00	To complete mid-July.
17/04/09	OZ Minerals	OZL	China Minmetals Corp	0.00	Vote June 12.
12/01/09	International Goldfields	IGC	NKWE Platinum	0.00	To complete March 31.
20/02/09	Island Sky Australia	ISK	Salton Inc	0.00	Vote July 6.
08/04/09	Jackson Minerals	JAK	Scimitar Resources	0.00	Vote May 18.
31/03/09	Macquarie Communications Infrastructure	MCG	Canada Pension Plan Investment Board	0.00	Vote late June.
14/04/09	People Telecom	PEO	M2 Telecommunications Group	0.00	Merger complete.
Backdoor Listing
30/03/09	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	43.68	Approved.
16/03/09	Metminco	MNC	Hampton Mining	0.00	To acquire 51% of unlisted Hampton. Change of control. Approved.
Foreshadowed Offers
16/03/09	Asciano	AIO	Multiple expressions of interest	0.00	Interest for parts of business/recapilisation.
22/12/09	Babcock & Brown Power	BBP	Several unnamed parties	0.00	Non-binding indicative submissions.
28/10/08	Becton Property	BEC	Several unnamed parties	0.00	Due diligence starts.
03/02/09	Felix Resources	FLX	Several expressions of interest	0.00	Discussions continue.
09/02/09	Gold Aura	GOA	Anomaly Resources	0.00	Discussions.
16/03/09	Progen Pharmaceuticals	PGL	Cytopia	5.00	Cytopia seeks removal of board.
04/02/09	Redflex Holdings	RDF	Unnamed parties	0.00	Unsolicited indicative proposals - still inadequate.
27/02/09	Ventracor	VCR	Two unnamed parties	0.00	Discussions continue.
30/12/08	Vision Group	VGH	Several unnamed parties	0.00	Non-binding conditional offers.

Source: NewsBites