?Nine billion dollar dazzler

PORTFOLIO POINT: Why swap so much money into Australian dollars – could it herald a bid for Woodside, or perhaps Foster’s?

Woodside Petroleum (WPL): A takeover of Woodside was the talk of the industry last week especially after news slipped out that Barclays had conducted a $9 billion currency swap from US to Australian dollars, which is roughly the size of Shell’s stake in Woodside, and about the amount needed to take out Foster’s as well.

Both companies are genuine takeover targets and what we call “pregnant with a deal”, so brokers and analysts are running around trying to find evidence to support acquisition of each and the currency swap is one of these because often a company will seek to lock in its currency exposure before making a play. However, if as I’ve discussed before the most likely bidder is BHP Billiton, it is a company that doesn’t need a currency hedge.

There is speculation that BP or Japanese company Mitsui might be sniffing around the stake due to their dealings with Woodside; it’s possible, but it would be difficult because it would require the approval of the Foreign Investment Review Board. Things might be different his time, though, as being a foreign entity was not the only reason then Treasurer Peter Costello rejected the Shell takeover bid in 2001.

The key issue for Costello was Shell’s refusal to give a firm commitment to developing the North-West Shelf ahead of its other global projects, and the government was worried Shell would just sit on the asset. But the world was vastly different back then and anybody who buys Woodside today will want to ramp up production as quickly as possible.

The other wild rumour, spurred by a Merrill Lynch note, is that Shell may want to swap its shareholding for ownership of a stake in Woodside’s gas fields. This doesn’t really make sense to me: why go from owning Woodside to owning a piece of its assets? Woodside’s share price has been very strong for the past two weeks, which means that investors are expecting – rightly or wrongly – that a deal is on the cards.

BC Iron (BCI): There is definitely going to be some court action over Regent Pacific’s sudden exit from its $345 million bid for BC Iron, but not all of it is going to be against the suitor.

BC Iron is taking Regent to the Takeovers Panel to force it to renew the bid (Regent is adamant it won’t and it doesn’t have to), but what BC did not tell the market is that under the Scheme Implementation Agreement, the deal is conditional on the Regent board not changing its mind. Regent denies it has broken the contract and it seems to me it had the right to pull out if it felt like it, which is exactly what it did.

So BC Iron’s shareholders are considering a case against the iron ore miner, and if the Takeovers Panel agrees with Regent, BC Iron could face an investigation by both the takeovers regulator and ASIC about why it the market wasn’t informed about that condition.

I wouldn’t go anywhere near this situation right now: there are going to be law suits going back and forth for some time.

Mantra Resources (MRU): And in a deal where there won’t be a Takeovers Panel case even though there probably should be, Russian state-owned uranium company ARMZ has come back to Mantra Resources with a lower offer, after abruptly walking away when the problems at Fukushima began to be played out in the global media.

ARMZ offered $8 a share in a very low conditioned deal, and is now offering $7.02 ($6.87 a share plus a 15¢ dividend), which Mantra has accepted. It’s criminal that they can come back and put this bid in front of the Mantra; there was no material adverse change clause in the offer contract, meaning that unlike Regent Pacific, ARMZ couldn’t pull out because it changed its mind nor could it rely on a change in the uranium price to exit the deal.

Mantra obviously feels it has to sell, probably because it needs financing to develop, but it’s really weak of the board to just accept to a lower price when we know how low conditional the bid was.

Lundin Mining: Equinox’s $C4.8 billion bid for Lundin is getting messier due to the amount of scrip involved in both the Australian pretender’s offer, and in the Canadian suitor Inmet Mining’s all-scrip merger of equals.

Lundin has rejected Equinox’s offer as not good enough. Meanwhile Equinox is trying to cast aspersions on Inmet, saying the Panamanian government –which has jurisdiction over Inmet’s main project – is making life difficult for foreign miners. Shareholders are also seriously questioning the value in a deal that would require $US3.8 billion in debt to finance. I would not be buying into Equinox – it’s always better to play the target than the bidder.

Neither deal is clear thanks to the scrip elements of both bids. If Equinox had just offered cash the board of Lundin couldn’t have recommended against it because they have a duty to get the best deal for their shareholders. I think that because the share prices of all three companies have bounced around a lot, the Lundin board is playing for time until it becomes clear which really has the best offer.

West Australian Newspapers (WAN): Kerry Stokes’ backdoor bid for WAN may get up now that one of the two proxy advisers – CGI Glass Lewis – has thrown its weight behind the merger. If the proxies are coming in behind the deal it means they think that on balance it’s a good deal, and that the level of debt – while it seems a lot – is not too bad when you look at the cash flows from Seven Network.

Stokes is also campaigning hard to convince shareholders and the market it’s not a bad deal. The most interesting thing he said last week was that in 15 years the newspaper model could be dead so on that basis Stokes is telling WAN shareholders that they need to buy something else, and oh look, here’s a television company.

He also said the low retail shareholder takeup of the convertible loan securities (CULS, which will convert into ordinary shares) and the capital raising was due to natural disasters, which is probably a fair enough comment. Retail shareholders are notoriously skittish and the timing of the issue was awful.

Cash Converters (CCV): We picked Cash Converters as a takeover target a while ago because a group called Easy Corp owns 33%. We were right – almost – but the suitor has gone for a very sneaky route and it looks like they’re going to get away with it.

Easy Corp, instead of launching a full takeover for the remaining 67%, has made a proportional bid for 20% of the company. This is an unusual move and happens when a suitor wants only a chunk of a company, say 30%. They say to the other shareholders that the bid is for three of every 10 shares they own so no one can accept more or less, and it’s usually done via Scheme of Arrangement. This is what Kerry Stokes does: creep higher and higher up a company’s register until taking control without ever having to pay a higher price for the shares.

But in this case it means Easy Corp will get to 53%, with a bid of 91¢, without having to pay a premium for the controlling stake because Cash Converters was trading in the mid-80s beforehand.

We sold out of Cash Converters as soon as I read it was a proportional bid, because you don’t get a clean exit once after the bid is over: it’s less liquid, the company will probably drop out of the ASX 300 index, and you’re not even getting a decent premium. Disappointing for all concerned.

Riversdale (RIV): We are getting to the sharp end of Rio Tinto’s $3.9 billion quest for Riversdale now, as the $16.50 offer ends tonight (March 28) and they have a week to get to 50% after that with the lower $16 a share offer. As at 9am Monday, Rio had 39.66% of Riversdale. My gut tells me they won’t walk away – they’ll go unconditional or make this bid work somehow, though the expected deals over the weekend with Tata Steel and CSN didn’t materialise – but it’s too risky now to get into.

Riversdale is trading too high, given the risk. On Friday it closed at $16.15, just under 1% higher than the lower bid. Now let’s say the bid doesn’t go through, you’ll lose $3–4, perhaps more, so your downside is considerable compared to the amount of risk you’re taking on.

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

-Takeover action, March 21-25, 2011
Date	Target	ASX	Bidder	(%)	Notes
14/03/11	Anchor Resources	AHR	China Shandong Jinshunda Group	5.14
24/03/11	Aragon Resources	AAG	Westgold Resources	40.95
14/03/11	Austereo Group	AEO	Southern Cross Media Group	16.62
16/03/11	Auzex Resources	AZX	GGG Resources	8.50
03/03/11	Brockman Resources	BRM	Wah Nam International Holdings	27.50
24/03/11	Crane Group	CRG	Fletcher Building	74.95
10/03/11	EDT Retail	EDT	EPN Investment Management	48.00
21/02/11	FerrAus	FRS	Wah Nam International Holdings	16.79
22/12/10	Frankland River Olive Company	FLR	Toscana (WA)	19.36	Recap bid by related company.
24/03/11	Jabiru Metals	JML	Independence Group	41.70
01/02/11	Kresta Holdings	KRS	Wildweb Enterprises	0.00
24/02/11	Laguna Resources	LRC	Kingsgate Consolidated	69.90	Recommended off-market offer announced
21/03/11	Mintails	MLI	Seager Rex Harbour	32.40
21/03/11	Oaks Hotels & Resorts	OAK	Minor International Public Company	14.96
07/03/11	Odyssey Gaming	ODG	eBet	0.04
03/03/11	Riversdale Mining	RIV	Rio Tinto	18.74
17/03/11	Sphere Minerals	SPH	Xstrata	75.70	Unconditional.
24/03/11	Stuart Petroleum	STU	Senex Energy	73.57
23/02/11	White Canyon Uranium	WCU	Denison Mines	19.90
Schemes of Arrangement
21/03/11	Amadeus Energy	AMU	Eden Petroleum Investments 2010	0.00	Vote June.
07/03/11	Ascent Pharmahealth	APH	Strides Arcolab	60.00	Vote April.
25/10/10	ASX	ASX	Singapore Exchange	0.00	Parties announce agreement. Vote Mar 2011.
18/11/10	AXA Asia Pacific	AXA	AMP	0.00	Vote end Mar.
15/03/11	BC Iron	BCI	Regent Pacific Group	19.90	Regent to withdraw.
22/03/11	Cash Converters	CCV	EZCORP	33.00	Offer for controlling 53%.
17/01/11	CPI Group	CPI	PagePack (AU)	0.00	Vote April.
22/03/11	Mantra Resources	MRU	ARMZ Uranium Holding Co	0.00	Vote June.
21/02/11	Redflex Holdings	RDF	Carlyle Group-Macquarie Group	0.00	Vote May.
12/01/11	RP Data	RPX	CoreLogic	40.20	Vote April.
14/02/11	Sylvastate	SYL	Whitefield	0.00	Vote April.
29/12/10	Tower Australia	TAL	The Dai-ichi Life Insurance Company	29.00	Vote Q2 2011.
Backdoor Listing
08/02/11	Millepede International	MPD	Cool D'Fine	0.00	Marine HVAC provider.
Foreshadowed Offers
02/03/11	Austar United Communication	AUN	Foxtel	0.00	Talks with controlling holder.
30/12/10	Berkeley Resources	BKY	OAO Severstal	0.00	Talks continue.
10/12/10	Bravura Solutions	BVA	Unnamed parties	0.00	Indicative scheme approaches.
12/11/10	Caledon Resources	CCD	Guangdong Rising Asset Management	0.00	Possible scheme. FIRB-approved.

Source: News Bites