Out goes the takeover froth

Late last week we saw the first signs that the fallout in the sub-prime mortgage market has crept into the general credit markets. Cadbury Schweppes delayed the $15 billion sale of its drinks division due to 'extreme volatility in debt markets’. The financing for Chrysler's sale for to US Cerberus fell through and several other private equity raisings have been curtailed or renegotiated.

Private equity groups have been very active in Australia over the past 18 months; they have probably been involved in about 25% of the takeovers in our market. All things being equal, if private equity dried up completely you would only see the number of bids fall by about one quarter.

What the liquidity crunch will do is eliminate the more speculative bids. Those bids that rely on cheap and easy money will no longer get to market. However, not all private equity bids are created equally; the more serious players like Kohlberg Kravis Roberts, Blackstone and CVC will continue to wheel and deal.

Of course, even companies like this will need to reassess their pipeline of deals, factoring in the new risks and either paying more for their debt or allowing for greater slabs of equity. It's worth noting that these firms have raised enormous amounts of money in recent times. Blackstone raised $5 billion just last month. They are not going to let this money lie idle.

Fundamentally, nothing has changed in the Australian market. The overall price/earnings multiple of the Australian market is slightly below its long-term average. There were some stocks that fell sharply on Friday, including Fosters and Orica’, which have been touted as potential targets at one time or another. But overall the selling was pretty indiscriminate. BHP Billiton and Rio Tinto also came off quite sharply which indicates that it was mostly panic selling.

I’m usually very reluctant to make big-picture predictions about the market, but there are some pretty hefty earnings increases about to come through for our big resources companies. The expectation is that most will deliver earnings upgrades of about 15% or more. Price/earnings multiples remain at reasonable levels, unemployment is at a record low and the recent weakness in the market might even discourage the Reserve Bank from raising rates.

One question you might want to ask yourself is: Does the Chinese market still need our raw materials? The answer, of course, is yes. The Shanghai Composite actually put on about 6% last week. The real drivers behind the strength in our market remain strong and as a result the economy will stay on solid ground.

Coles. The Wesfarmers-led takeover of Coles is looking pretty shaky but not because of the money, which I believe is all lined up. Wesfarmers shares account for 75% of the bid's value and those shares have been falling steadily. Today reports have emerged that Texas Pacific Group (TPG) might be prepared to inject some cash into the deal. TPG originally teamed up with a group of private equity companies and Woolworths. That came undone when they couldn’t make the numbers stack up. This would be a very welcome development for shareholders who prefer cash. At this point Coles will be doing everything it can to get this deal through. It’s possible that the terms of the deal will change between now and the special shareholders’ meeting later this year to approve the scheme of arrangement, making it more attractive to all parties.

Symbion. The Symbion bid remains a hot topic. Healthscope has a cash-and-scrip proposal on the table. Last week I mentioned that I thought Primary Healthcare’s growing stake in Symbion was perhaps part of a broader strategy to get a seat at the table come deal time. It's now speculated that Primary now hold as much as 15% of Symbion. Healthscope requires 75% approval to get it over the line and Primary is restricted to a stake of 19.99% before it needs to make a bid. That might be all it needs to block the takeover because it’s rare that every shareholder votes. My feeling is that it’s a pretty big punt for Primary to buy this much of Symbion but nothing is impossible.

Consolidated Minerals. My firm and a number of other hedge funds were approached by Southern Cross Equities wanting to buy at least a 5% stake in Consolidated Minerals early in the week. Since then it emerged that there was another buyer out there also looking for a similar sized stake. Now against the general trend of the market ConsMin rose about 10% on Friday so it’s clear that someone was snapping them up on market. It’s now been revealed that that was a Ukrainian company called Privat, a steel maker but it has manganese contracts. Now my understanding is that Privat is not going to make a full bid for ConsMin but it probably doesn’t want the Pallinghurst consortium led by Brian Gilbertson to win this one. I expect it’s done a deal with Territory so it may agree to support Territory’s proposal, which is possibly going to be revised this week in return for some long-term contracts of manganese. A good situation here for ConsMin where you’ve got two bidders plus another party buying a stake, and as a result the shares have just continued to go up.

Alinta. Alinta’s the subject of a very complicated deal by Babcock & Brown. The news there is that it’s going to shareholders in a couple of weeks and it will almost certainly be voted through and what’s interesting is the shape of the deal. It’s a cash and scrip offer: you get shares in Babcock & Brown Infrastructure, Babcock & Brown Power, Babcock & Brown Wind and Australian Pipeline Trust. So you actually get shares in four things in exchange for your Alinta shares. The interesting thing is if you work out the value of all of those it contains a 4–5% premium when compared with the current Alinta share price. So there is an opportunity there for people, providing of course that you want exposure to all those Babcock & Brown vehicles. The possibility of a counter bid here is looking pretty remote.

nTakeover Action July 23-27, 2007
Date	Target	ASX	Bidder	(%)	Notes
5/07/07	Auspine	ANE	Gunns	26.00
12/07/07	Avantogen	ACU	Chopin Opus One	84.98	Diluted from 87.62%.
20/07/07	Becker Group	BKR	Prime Television. Extended to July 26.	74.95	Unconditional.
24/07/07	Bremer Park	BML	Walker Corporation	53.07
17/07/07	Consolidated Minerals	CSM	Territory Resources	0.00	Offer confirmed.
20/07/07	Consolidated Minerals	CSM	Pallinghurst Resources/AMCI	0.00	$3.30 recommended cash offer.
17/07/07	Cumnock Coal	CMK	Xstrata Coal	93.98	Acquired 10.01% in call option with Itochu Coal.
27/07/07	Evans & Tate	ETW	Yarraman Estate	0.00	Offer of July 25 rejected.
26/07/07	Mackay Permanent Building Society	MPB	Wide Bay Australia	15.65
24/07/07	MTM Entertainment Trust	MME	Ivany Entertainment	83.70	Committed shareholding.
26/07/07	Multiplex Group	MXG	Brookfield Group	27.70	Comprising Brookfield 19.99% and Roberts Family 12.82%. FIRB approval.
24/07/07	OmegaCorp	OMC	Denison Mines Corp	80.22	FIRB approval.
28/02/07	Queensland Gas	QGC	TCW/Societe Generale	0.00
5/06/07	Rocklands Richfields	RCI	Bowen Energy	0.00
24/07/07	Tourism Holdings	THL	MFS	10.02	Offer withdrawn on failure to reach 90%.
21/06/07	Vietnam Industrial Investments	VII	Prudential Vietnam Securities Investment Fund Management Co and VII director Henry Lam Van Hung	0.00
9/07/07	Volant Petroleum	VOL	Sky Energy Investment/Karl Thomson Holdings	94.43	Unconditional. Extended to August 6.
nScheme of Arrangement
27/07/07	Alinta	AAN	Babcock & Brown; Singapore Power	0.00	Vote August 27.
4/07/07	Bolnisi Gold	BSG	Coeur D'Alene Mines Corp	19.99	No vote date set. Due diligence completed
2/07/07	Coles Group	CGJ	Wesfarmers	12.10	Vote October.
4/07/07	Elkedra Diamonds	EDN	Vaaldium Resources	0.00
28/06/07	Evogenix	EGX	Peptech	19.99	Committed. Vote August 9.
2/07/07	Flight Centre	FLT	Pacific Equity Partners	0.00	Sale of business into JV, buyback, div; exit option for small shareholders. Vote August.
27/06/07	GRD	GRD	Transfield Services	0.00	Conditional offer.
18/07/07	HPAL	HPX	Salmat	0.00
19/06/07	Investa Properties	IPG	Morgan Stanley Real Estate	0.00	Vote August 22.
27/07/07	Magna Pacific (Holdings)	MPH	Destra Corporation	19.90	Vote delayed from July 30. TBA.
21/06/07	Oriel Communications	OCO	FCP Brencorp	0.00	75% acquisition proposed. No vote date set.
27/07/07	Orion Telecommunications	OTL	M2 Telecommunications Group	0.00	Vote September.
22/06/07	Smorgon Steel	SSX	Onesteel	19.98	ACCC not to intervene in proposed offer. Vote July 31.
25/07/07	Southern Cross Broadcasting (Australia)	SBC	Macquarie Media Group	16.40	ACCC to assess acquisition.
29/05/07	Symbion Health	SYB	Healthscope	11.10	Vote August.
nForeshadowed Offers
15/05/07	Ausdrill	ASL	Approach from $2 billion party	0.00
25/07/07	Evans & Tate	ETW	Ferngrove Vineyards	0.00	Offer withdrawn.
12/06/07	Great Southern	GTP	Unnamed party	0.00	Expression of interest.
2/07/07	Great Southern	GTP	Unnamed parties	0.00	Interest from other partes - following previous expression of interest.
27/06/07	Health Corporation	HEA	Unnamed party	0.00	Non-binding terms sheet.
17/07/07	Paladin Resources	PDN	Cameco	0.00	Paladin denies AFR report of possible bid.
26/07/07	PCH Group	PCG	Cape	0.00	Re-start of takeover negotiations. Discussions continue.
25/07/07	Viking Industries	VKI	Provik shareholder consortium		Conditional offer at $1.09. Offer due in August.
29/06/07	Warehouse Group	WHS	Woolworths		NZ Commerce Commission declines approval of an offer. Woolworths appeals to NZ High Court.
29/06/07	Warehouse Group	WHS	Foodstuffs Co-operatives		NZ Commerce Commission declines approval of an offer. Foodstuffs appeals to NZ High Court.
nBackdoor Listing
13/06/07	Mark Sensing	MPI	Sonofax Holding	63.00	Due diligence continues.

Source: NewsBites