Is Western Desert a dry run for Meijin?

There are no guarantees on the latest Meijin bid for an Australian company.

PORTFOLIO POINT: Chinese coal group Meijin Energy has launched a bid for Western Desert, but there are several regulatory hoops to get through.

Western Desert Resources (WDR)

A Chinese coal company called Meijin Energy Group has launched an all-cash bid this week for Western Desert at $1.08. However, as already seen this year with Sundance (SDL), the market is growing sceptical of resources takeovers from China and this is not something investors should jump into.

As such, the stock is trading well below the $1.08 level and closed today at $0.995. The reason is firstly a simple general distrust or uncertainty about whether foreign bidders will actually go through with bids in the current environment. However, secondly and notably, Meijin has made two previous bids in Australia and has walked away from both of them. It previously bid for Rockland’s Richfield (RCI) in 2009 and an iron ore group called DMC Mining in 2010. In addition, the bid is highly conditional. It requires three Chinese approvals and Foreign Investment Review Board approval, which, since I understand Meijin is partly state-owned, is no guarantee.

There has been some press speculation that the offer might push Xstrata, which has an infrastructure agreement with Western Desert, into bidding for the company as well. I think this is highly unlikely, as Xstrata’s attention is elsewhere right now.

What’s beginning to emerge from all this is that Chinese companies launching a bid are now often not really bidding. Instead, it’s a way of saying “Let’s maybe have a discussion”, opening the door to due diligence, and then, for whatever reason, they just don’t go ahead with it.

To be honest, I would not buy into this deal. I think that Meijin’s track record is such that it can’t be trusted to go through with it. If you’re a Western Desert shareholder already, I think it’s time to sell out.

Billabong (BBG)

It was another pretty average week for the surf wear retailer after its second private equity bidder pulled out after the briefest of due diligence glances. It was never confirmed officially who this bidder was, but almost everybody says it was Bain Capital.

Obviously, this is a concern. The Billabong share price, since two weeks ago, had moved from the high $1.30s up to $1.46. The indicative bid is at $1.45. It closed today at $1.325. It doesn’t mean that TPG, the initial bidder, won’t go through with a deal, and I suspect they probably still will.

What’s happened in the interim is that Rip Curl, which is unlisted, has put itself up for sale. If you’re a private equity bidder like Bain, and looking at buying a surf wear company, whereas one was maybe for sale before, now there’s two. And Rip Curl might be easier because it’s private, it doesn’t have all the ownership issues, and it doesn’t have the bad public history that Billabong has, and I suspect that’s what changed things.

I think TPG is still interested, and while the price was only ever indicative at $1.45 I don’t think the board will recommend anything lower than that. But clearly the situation in Billabong is not as good as it was a fortnight ago. It’s probably still worth hanging on – and note that I think what really changed was not so much Billabong but the fact Rip Curl has been put up for sale.

Alesco (ALS)

After months of creeping and several extensions, finally Dulux (DLX) has made it over the 50% mark in its bid for Alesco. This means the bid in its present form is now unconditional.

Essentially, Dulux has won the day and the Alesco board will have to climb down off its high horse. Generally speaking, once you get more than 50% of the company that’s the end of it and I think Alesco will now change its recommendation and support the bid.

This also means the potential for the two boards to agree to pay a bigger dividend, on top of the 15c already paid, and I think this will happen now. Control of the company has passed, and Alesco can maximise benefits to shareholders by paying a larger fully-franked dividend – up to 27c more. It’s only extra franking credits – it’s not extra cash – so it will likely mean instead of just getting $1.90 in cash, investors will get as low as $1.63 in cash and up to a 27c dividend as well, plus franking credits.

If you’re still in this stock, I think there’s a good chance of that increased dividend now, but unfortunately the proposal for an even higher dividend (up to a total of 70c was proposed) can’t go ahead because the Dulux bid was declared final.

Echo Entertainment (EGP)

There was a little bit of downward movement last week in the Echo share price after one arm of Genting sold part of its stake.

It looks like Genting Singapore sold its roughly 5% stake and Genting Hong Kong owned another 5% – creating a total roughly 10% ownership. I must admit, I didn’t realise that Genting had so many different arms. Apparently there’s another holding company, and they’ve all got the same name, but they’re listed in different jurisdictions.

All this aside, I don’t think it makes Echo any less of a takeover target. It was decided that it will be the Hong Kong arm that will make any bid, and it’s the Hong Kong arm which has applied for regulatory permission to go above 10% in any case.

That doesn’t mean it will buy the 5% back straight away. I think it’ll wait until they get permission to go above 10% and then move to increase its stake. In the meanwhile, in a couple of weeks, we’re expecting Crown’s (CWN) bid to go above 10% up to 25%, to be approved by the Queensland and New South Wales gaming commissions.

Exco Resources (EXS)

There’s a good result for investors in Exco, which I said looked like a good opportunity at 20c (see my column on September 3). The original bid by Washington H. Soul Pattinson was 19c a share, the board rejected it, and the bid’s been increased to 26.5c – so a big increase. The bid has now been accepted and won’t go any higher.

It’s often the case for small companies, especially where the bidder already owns a stake, that the suitor will pay up because it doesn’t cost them that much to do it. So with Exco it was a great result for anybody who held it, and we haven’t had many increases lately, so that’s one to be celebrated.

David Jones (DJS)

The department store may well be putting up a flag for a buyer with its announced intentions to review its property assets, but it doesn’t really change the fundamentals of the company.

David Jones has come out and said it will look at what to do with its property portfolio. It’s interesting that years ago the company sold out of its properties and was leasing them, and then in 2005, under Mark McInnes, they decided to buy them back. Now it looks like they’re thinking of selling again.

The issue with David Jones is the properties are in their books at about $460 million, however, the market value of those properties is anywhere from $600-800 million. The company said an “initial review” put them at $612 million on rent of about $39 million a year. It does highlight some surplus asset value on the books, maybe $200-300 million but maybe not that much.

In the current environment, who knows what these buildings are worth, and while it makes it a little more attractive I don’t think the property review changes anything about the fundamental business, and investors should be looking at that instead.

Takeover Action September 17-21, 2012
21/09/2012AlescoALSDulux Group49.18
21/09/2012Bremer Park BPKWalker Corporation61.29
21/09/2012Clearview WealthCVWCrescent Capital Management69.24
23/08/2012Exco ResourcesEXSWashington H Soul Pattinson19.90
11/09/2012Fisher & Paykel Appliances HoldingsFPAHaier20.00
21/09/2012Hastings DiversifiedHDFAPA Group40.01Recommends offer
24/08/2012Hastings DiversifiedHDFPipeline Partners8.75
20/08/2012MinemakersMAKUCL Resources3.29
18/09/2012ENKENKDMCI & D&A Income87.70
17/09/2012Plan B GroupPLBIOOF Holdings86.19
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl associates' holdings
12/09/2012Rocklands RichfieldRCIShandong Energy97.37Pre-bid agreement
21/09/2012Thakral HoldingsTHGBrookfield Asset Management95.81
5/09/2012United OrogenUOGIron Mountain Mining74.03
18/09/2012Western Desert ResourcesWDRMeijin Energy Group0.00
Schemes of Arrangement
24/07/2012Billabong InternationalBBGTPG International Llc0.00
20/09/2012CGA MiningCGAB2Gold Corp0.00
7/09/2012Consolidated Media HoldingsCMJNews Ltd0.00Binding proposal
6/08/2012Integra Mining IGRSilver Lake Resources0.00Vote late Nov
2/08/2012Sundance ResourcesSDLHanlong Mining Investment17.99To complete in Nov 2012. 
14/09/2012WAM CapitalWAMPremium Investors0.00Vote late Nov
Foreshadowed Offers
5/09/2012Billabong InternationalBBGAnother party0.00Indicative proposal
16/08/2012Goodman FielderGFFWilmar International0.00Goodman denies speculation 
21/05/2012PMPPMPTMA Group0.00Indicative proposal
27/07/2012Real Estate Capital Partners USA Property TrustRCUSaban Capital Group0.00Indicative proposal

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