Pacific Equity Partners' Bradken bid hits bedrock

Pacific Equity Partners' proposed bid for mining services group Bradken ultimately failed because at $5.10 a share it had too high a price on the table, and ­accordingly couldn't get the right financial terms from lenders.

The asking price was well ahead of the market before yesterday at $4.11 a share but down on the $6 a share proposed last Aug­ust -- which tells you something about the market confidence in the mining services sector.

Yesterday's 35.7 per cent fall in the wake of the bid withdrawal to a near five-year low of $2.64 was way overdone, given the stock was trading at $3.30 before the bid was known early last month.

Concerns over debt levels are also overdone, but then again Bradken confided last month that the board had approved a “small equity raising” that was shelved for the bid.

Next month, Bradken boss Brian Hodges is expected to release his half-year accounts, it's predicted that this will show net debt has climbed from around $370 million to more than $400m -- but with earnings before interest, tax, depreciation and amortisation of around $170m, the debt covenants of three times are easily covered.

Just as PEP failed to get bank fin­ance at the right price for an overpriced bid for one of the better placed mining service companies, Hodges will worry at what price he needs to raise any equity.

Given the confidence he has in the business, he may well try to outrun the sceptics.

PEP was always the most optimistic partner in this battle and having approached other potential partners, Bain Capital Asia eventually pulled the plug on the deal.

The reality is financing on the right terms was plainly always going to be a problem.

The market was yesterday obviously spooked by the private ­equity withdrawal and didn't take much notice of the multiple lines of encouragement in the statement -- pointing to the fact that 70 per cent of Bradken's business is mining volume not price related.

As with all mining service companies, the issue is the fear of the unknown and in this case bank fear of lending money on the right terms to the sector.

No one knows when we will hit the trough, but Bradken is a lot better placed than most and while leveraged bidders can't get the right terms to justify a $5.10 a share bid, the fundamentals support a share price well above present levels.

Reform in the mail

Communications Minister Malcolm Turnbull is on track to deregulate Australia Post in the face of some concerns over its impact on the licensed post offices.

In the next few weeks, cabinet is due to consider his plans to de­regulate the regular mail service to give more flexibility around stamp prices and end mandated next-day delivery.

The reforms are aimed more flexibility to better reflect costs.

The deregulation is aimed at helping Australia Post offset the massive fall in regular mail as email and other devices overtake it.

BCG has estimated that without some changes, over the next 10 years Australia Post's deficit on its mail business will total $12.1bn, swamping the booming parcel revenue to push company-wide losses to $6.6bn

Last September, a Senate committee called for more consultation with stakeholders before any further deregulation of mail services.

Its concerns include treatment of so-called licensed post offices, the franchises that account for 1,357 of the 2,036 post offices in regional Australia.

They are the backbone of the service, yet based on evidenced given to the Senate are not treated well.

The committee was chaired by South Australian Liberal Party senator Anne Ruston and included South Australian independent senator Nick Xenophon.

Printing Industries Association NSW chief Bill Healey is leasing a consortium of stakeholders from print shops to trade unions that are concerned at the race to deregulate without consultation.

Australia Post rejects the claims it has not been talking the issues through with stakeholders and both it and the government take the view that without doing something, Australia Post will be a massive budgetary burden.

But Healey maintains: “Don't believe the story that mail is dead.”

Post wants to change the system so senders can pay extra to get next-day delivery but the regular mail may take, say, three days to ­arrive.

The stakeholder group noted the Senate committee report described the relationship between Australia Post and the franchisees as ‘dysfunctional'.

It wants to restore ACCC scrutiny of business mail services, which was stopped under the previous government.

It wants better pricing of Australia Post products to boost franchise earnings and the ability to recoup money lost on unsold stamps -- in short, much the same financial flexibility Australia Post boss Ahmed Fahour is seeking for his mail business.

In the past decade, Australia Post has delivered $2.4bn in cash to government coffers and the ­argument is that maybe some of that money should have been invested in the regular mail business. The argument is that 98 per cent of people open their mail and 85 per cent read the mail against just 25 per cent of people who open and read their emails.

Surveys show 32 per cent of people prefer to get their bills by post.

Fahour would argue the benefits of regular mail are not in dispute -- it's just the way it is priced now will result in the company going heavily into negative ­territory.

Turnbull agrees but clearly ­Fahour has some house-cleaning to do to placate the naysayers.

Wildly, madly, soggy

Chief financial officers are maximum cautious on the year ahead according to the latest ­Deloitte survey, which continues a series of dismal business surveys showing corporate leaders in no hurry to boost investment spending.

The quarterly survey followed this week's release of the NAB business confidence survey, which, in the words of economist Alan Oster, was “soggy”.

Business wasn't wildly negative but also wasn't madly positive.

Yesterday's inflation figure came in just on the high side for core inflation, which probably means no change to interest rates next week.

NAB, ANZ and Westpac are all tipping a 0.5 per cent rate cut this year, with the first two saying the first cut will come in March.

Singapore surprised yesterday by cutting rates, which adds to the feeling that Asian growth rates are slowing.

The Deloitte survey noted CFOs “appear to be caught in a crisis of confidence when it comes to the country's business environment and their willingness to take on risk”.

Canberra and China are the key villains and Tony Abbott's Australia Day honours gaffe hardly inspired more confidence.

As noted earlier in the week, business may yearn for security but it also needs to step on its own two feet to make its own decisions and take calculated risks to grow.

The Deloitte survey shows no evidence that business is prepared to take any risks in the present climate. Astonishingly, only 6 per cent of those surveyed were confident about the financial prospects of their company or, put another way, 94 per cent are not confident.

Some 85 per cent of those asked said the present levels of uncertainty would remain for at least the rest of this calendar year.

This article first appeared in The Australian and is reproduced here with permission.