IOOF goes courting

PORTFOLIO POINT: IOOF’s friendly bid for Australian Wealth Management could be the start of a trend in the financial services sector.
Australian Wealth Management/IOOF. Mergers and acquisitions are to be expected in the financial services sector, where the credit crisis has hit hardest. Today we got a taste perhaps of things to come as funds management group IOOF has made a friendly bid for Australian Wealth Management.

It’s an all-share deal: one IOOF share for 3.73 AWM shares. It’s a difficult one to play: you can’t hedge this one because you’re not allowed to short-sell IOOF, it being a financial stock. The ban on short-selling the financials remains in force until January 27 next year.

Would there be counter-bid? I think it’s highly unlikely at the moment. The market for financial planning and funds management groups is not what it might be, given the huge fall in the stockmarket.

It makes a lot of sense for the two of them to merge; they can combine back offices and reduce all sorts of head office costs; and they’ve got relatively similar business models, so that’s an interesting deal.

A lot of financial companies like this in funds management get paid for their funds under management, and because the stockmarket has come off so much, the level of funds under management they have has come off dramatically as well. So, combining firms to get bigger and to reduce costs makes a lot of sense. But I don’t think you’ll see too many hostile deals right now.

Coca-Cola Amatil/Lion Nathan. Speaking of hostile deals, Lion Nathan has said that it’s very interested in buying Coca-Cola Amatil, but it doesn’t want to go hostile. Now, this doesn’t mean Lion Nathan won’t increase the bid; it simply means that it won’t press ahead with the bid without a recommendation from the Coca-Cola board.

And when you think about it, it would be impossible for Lion Nathan to do so, because if Coca-Cola Amatil rejects the bid, then The Coca-Cola Company (TCCC) in the United States, which owns 30% of the company, must almost by definition reject the bid also, unless you had some bizarre situation where Coca-Cola in the US said “yes”, and Coca-Cola Amatil said “no”. I don’t think that’s going to happen.

If The Coca-Cola Company says it wants to accept the bid, then Coca-Cola Amatil will go along with it. If TCCC says it doesn’t want to accept the bid, the bid can’t go ahead anyway, so Coca-Cola Amatil might as well reject it.

The bid can be picked up in different combinations of cash and scrip but the best one of them is still worth north of $10 a share and the stock is trading at just less than $9 – or just over $9 at Friday’s close.

So if you think that The Coca-Cola Company in America will accept this bid, then there’s good upside to be made, but I stress we don’t know because there are all sorts of issues between Lion’s largest shareholder, Kirin Holdings of Japan, and The Coca-Cola Company in America. It’s not really about Lion and Coca-Cola Amatil; it’s about their two big foreign shareholders. They’re the ones that need to come to an agreement.

Santos. There are two potential deals in the oil and gas sector. First, Santos is having its 15% ownership cap removed this week. The cap has been in place for almost 30 years now. It was originally put in place by the South Australian government to stop Alan Bond buying the company; presumably there’s not a great deal of risk about that now!

Is Santos a takeover target? It certainly could be. We’ve seen plenty of activity in the gas sector in particular, such as BG Group’s bids for Origin Energy and Queensland Gas.

I think BG would be interested in Santos when the cap disappears. If you want to buy a big supplier of gas, there’s a whole host of smaller companies, and then there’s Woodside, Origin Energy and Santos. Origin has done its deal with ConocoPhillips, which makes it less likely someone else will take it over.

So Santos is one of the big ones left that doesn’t have any really big shareholders. When it was announced a year ago that it would look to remove this cap, the market responded by pushing Santos’s share price up, but then of course the realities of the oil price falling kicked in.

You wouldn’t assume anything would happen straight away, but because it operates in a popular space and has an open register, you never know.

Nexus Energy. At the other end of the scale, the share price of Nexus Energy has collapsed over the past couple of months, partly because the oil price has gone down, and partly because its deal with the Japanese group Mitsui & Co has fallen through. The trading house pulled out of plans to buy a 25% stake in the Crux gas liquids project in Western Australia for $385 million last month, putting Nexus in a very difficult position. It’s now putting itself up for sale, either in part of in its entirety.

Now, just because a company says it’s for sale doesn’t mean that anybody actually wants to buy it. In fact, you’d have to say that Mitsui having pulled out sort of gives you the opposite impression.

But if you want to buy a small oil and gas company, Nexus is for sale. The thing is, though, that what Nexus is really saying is it lacks the financial resources itself to develop these projects, and it needs a big partner to do so.

Right now big companies can raise money, and we’re seeing the banks doing capital raisings, as well as CSR and Nufarm and so forth. But for small companies it’s almost impossible, whichever industry they’re in. So small companies that don’t have sufficient cash will go to the wall over the next six months, unless the sharemarket improves dramatically or the banks start lending. The thing is, speculative capital has disappeared because people have lost too much money. So by offering large discounts to their share prices, big companies can raise money. The small companies can’t.

If you’re looking at your investment portfolio, you’ve got to look at balance sheets right now and ask: “Who’s in good shape, who can survive, and who can’t?” If a small to medium-sized company needs to raise money to make progress, it’s in trouble because the banks aren’t lending and the markets don’t want to do share issues to smaller businesses.

Takeovers might be the other option, but again, if I were a private equity firm, I’d be saying: “We’ll just buy from the receivers when these things go bust.” So it’s tough news, but only the really strong businesses will survive.

Rio Tinto/BHP Billiton. Rio has close to $US50 billion of debt, whereas BHP has less than $10 billion. I’ve said many times that I think ultimately BHP will win this contest, but if, for example, it just got too hard for BHP or the European regulator said it wouldn’t allow the takeover to proceed, then Rio’s in trouble. It’s not going to disappear, but it’s one of the bigger lumps of debt out there that needs to be refinanced over the next few years. So if Rio potentially has issues with its refinancing, you can imagine for smaller companies it’s just going to be very difficult.

CITIC Australia. This is a small deal, but an interesting one for shareholders. CITIC Australia announced a while ago that it had a 75¢ privatisation proposal from its parent CITIC, the China International Trust and Investment Corporation.

What they hinted at, and what has turned out to be a very lucrative opportunity, is they said that because the company had franking credits which CITIC can’t use; the 75¢ would be made up of the capital return and a fully franked dividend. Well they just came out last week, and it turns out of the 75¢, the capital return is only 17¢ and 58¢ is the fully franked dividend. So the stock has gone from about 72¢ to 80¢. But the point is that even at 80¢, you’re getting something like 20¢ worth of franking credits.

So if you’re someone who’s sitting on capital gains – and there’s not too many people who have got those right now – this is a way you can generate a capital loss by buying a stock at 80¢; you’ll get 75¢ back, but of the 75¢, 58¢ will count as a fully franked dividend, and so you can report a big loss on the trade, which will generate a capital loss and replace it with a tax advantaged dividend. So for certain sorts of shareholders that makes sense. I stress: take your own financial advice on these sorts of issues.

MYOB. As we know, accounting software firm MYOB has a bid on the table from the Archer Capital-backed Manhattan Software Bidco Pty Ltd, for $1.0215 cash per share, or 10¢ more if they get to 90% acceptance.

The board is still fending off the bid; I think it’s running round trying to get a better bid, and the rumour is that Sage, a competitor in the small business software market, has pulled out of the running. It might be that Sage was doing due diligence and found something it didn’t like, or it might be it simply doesn’t want to pay a higher price, we don’t know. But apparently Sage is out of the running, so at the moment there aren’t any other bidders. An industry bidder is the most likely counter-bidder in this case, not another private equity firm.

You wouldn’t want to overpay for this one. The stock has been trading up to $1.08–1.10 on small parcels of shares. The Archer Capital-backed bid still has a condition that the board agrees to the deal; that condition has not been waived and has been repeated in the bidder’s statement. Right now the board is not accepting the deal and chief executive Craig Winkler, who owns about a quarter of the company, certainly isn’t accepting it. Right now, you can’t see all those conditions being agreed to, so it’s a difficult one.

Murchison Metals/POSCO. Just finally, we read that POSCO, the South Korean steel giant, has increased its stake in Murchison. Of course, POSCO owns a chunk of Macarthur Coal, so as a steel maker it’s getting its hands on supplies of iron ore and coal, which is what they use to make steel. These sorts of shareholdings are generally designed not to make money on the share side, but for a company like POSCO to do supply deals. It’s important not to read too much into them. POSCO paid $20 a share for Macarthur Coal, and its share price traded down to $3.50 recently.

So you wouldn’t buy it expecting $20 to be repeated. POSCO’s main issue is getting supplies of the pulverised coal that Macarthur makes; the investment side of it is secondary to that.

It’s not impossible that Murchison would be taken over, but right now the fundamentals for iron ore aren’t very good, and there’s no need to buy an entire company to secure supply; as we’re finding, there is plenty of supply out there. Fortescue has had to cut back on its expansion plans, Rio has done the same and there are rumours that BHP is also cutting back on its iron ore production. So, POSCO doesn’t need to go and make a full bid to get a source of supply.

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

nTakeover Action November 17-21, 2008
Date	Target	Code	Bidder	(%)		Notes
10/11/08	Aequs Capital	AQE	Findlay Securities	19.99
18/11/08	Amazing Loans	AZD	IEG Holdings	27.32		Letter of intent received.
23/10/08	Babcock & Brown Communities	BBC	Prime Retirement & Aged Care Property Trust	0.20		Seeks up to 40%. Ext to Nov 28.
19/11/08	BigAir Group	BGL	Clever Communications	13.58		Ext to Dec 24.
21/11/08	Broadcast Production Services	BKR	Prime Media Group	76.04		Offer for the balance. Ext to Jan 7.
18/11/08	GoldLink IncomePlus	GLI	Emerald Capital	27.06		Seeks 45%. Ext to Dec 10.
20/11/08	Huntley Investment	HIC	Brickworks Investment	71.14
10/11/08	Incremental Petroleum	IPM	Cooper Energy	26.78		Offer closes.
20/11/08	Incremental Petroleum	IPM	TransAtlantic Petroleum	12.63
20/11/08	Ingena Corp	IGG	UXC	39.57
22/09/08	Murchison Metals	MMX	Sinosteel	0.00		Cleared by FIRB to move to 49.9%
07/11/08	MYOB	MYO	Archer Capital, HarbourVest Partners	0.00		See Foreshadowed Offers.
28/10/08	Pelorus Property	PPI	Pelorus unlisted funds	0.00		Vote Nov 28 on group merger.
02/10/08	Perilya	PEM	CBH Resources	0.00		Renewed offer.
20/11/08	Queensland Gas	QGC	BG Group	94.68
03/07/08	Rio Tinto	RIO	BHP Billiton	0.00		ACCC clears offer.
nScheme of Arrangement
24/07/08	Australasian Resources	ARH	Resource Development International	66.37		Resource Devel associated with Clive Palmer who holds 66.37%.
22/10/08	Aviva Corp	AVA	NEMI Northern Energy & Mining	0.00		50-50 eventual shareholding split. No vote set.
20/11/08	Extract Resources	EXT	Kalahari Minerals	39.11		Scheme terminated.
04/11/08	Island Sky Australia	ISK	Salton Inc	0.00		No vote date set.
17/11/08	St George Bank	SGB	Westpac Banking Corp	0.00		Court approves scheme.
nBackdoor Listing
20/11/08	BMA Gold	BMO	Aflease Gold shareholders	95.60		Aflease shareholders to control "Gold One".
21/11/08	Grange Resources	GRR	Australian Bulk Minerals shareholders	73.90		ABM shareholders will have 73.9% if reverse takeover succeeds. FIRB approval.
06/11/08	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	0.00		Agreement signed, subject to EGM.
22/10/08	Mark Sensing	MPI	TMA Group	82.00		Shareholders approve proposal.
07/11/08	Metminco	MNC	Hampton Mining	0.00		To acquire 51% of unlisted Hampton. Change of control.
nForeshadowed Offers
03/11/08	APN News & Media	APN	Several unnamed parties	39.00		Independent News & Media has approaches on its 39% holding.
23/10/08	Babcock & Brown	BNB	Unnamed parties	0.00		Expressions of interest.
28/10/08	Becton Property	BEC	Several unnamed parties	0.00		Due diligence starts.
22/10/08	Bravura Solutions	BVA	Ironbridge Capital	0.00		Discussions terminated. Possible alternative proposal.
17/11/08	Coca-Cola Amatil	CCL	Lion Nathan	0.00		Conditional offer rejected.
14/10/08	Felix Resources	FLX	Several expressions of interest	0.00		New approaches.
16/10/08	Jackgreen	JGL	Unnamed parties	0.00		Received approaches.
07/11/08	MDS Financial	MWS	Unnamed parties	0.00		Rejects offer for Market Data. Other discussions continue.
07/11/08	MYOB	MYO	Unnamed parties	0.00		Possible alternatives to Archer proposal.
14/11/08	Redflex Holdings	RDF	Unnamed parties	0.00		Unsolicited indicative proposals.
16/06/08	Staging Connections	STG	Several parties	0.00		Non-binding proposals. Due diligence proceeding.
07/11/08	Warehouse Group	WHS	Woolworths	0.00		Media reports that Woolworths still interested in offer.

Source: NewsBites