Potential in Sundance play

PORTFOLIO POINT: A Sundance takeover could be better for investors, even though the ConnectEast bid is bigger.

Connect East Group (CEU). A subsidiary of Australian infrastructure investment manager CP2 – Horizon Roads – launched a $2.2 billion friendly takeover for ConnectEast on Friday, making a bridesmaid of the company I had always thought would be the one to make an offer – Transurban.

CP2 owns 35% of ConnectEast already, making any counter-bid exceedingly difficult, but with Peabody’s Macarthur Coal bid as a template it is possible that another suitor could come in with a sweeter bid than the 55¢ a share offer that is conditional only on 50% acceptances. Transurban might, but that’s highly questionable.

CP2’s offer is a 22.4% premium on the July 21 closing price, which is a couple of per cent lower than the optimal 25% premium, but given ConnectEast floated at $1 you might think anyone who bought in at the float or any time up to the end of 2008 would be feeling pretty hard done by. However, anyone who participated in the capital raisings of 55¢/share in 2008 and 33¢/share in 2009 should be pretty happy to exit at a profit or close to it after distributions.

The stock is trading at 54¢, so if you think there’s a chance another bidder might come in then it’s not a bad trade. Even if they don’t you’ll make a very small profit because CP2’s offer is unlikely to be opposed given the board has recommended it.

Transurban (TCL). On the back of the ConnectEast bid, a number of people are speculating that this might be the start of a string of infrastructure company takeovers because the whole sector is cheap and therefore now is the time to buy things.

Transurban is generally at the top of most people’s hit list but I’ve just decided to take it off mine and it won’t return until certain criteria are satisfied again.

Canada Pension Plan Investment Board (CPPIB) – one member of the consortium that made an offer that Transurban spurned – has sold its 12% in the company as a block for $5.23 a share, which has torpedoed the toll road operator’s share price in the process.

The consortium had a combined 37% stake before one member sold its 13% last year, however the current bidder for ConnectEast, CP2, is still Transurban’s largest shareholder with a 14.5% stake.

But now that CPPIB has sold its strategic shareholding and CP2 is spending its money elsewhere, the obvious bidders for Transurban have disappeared. The fact that Transurban shares have returned to trade above the consortium’s bid price vindicates the board’s decision to reject the 2010 offer, but it will be under pressure now that the main candidates for a buyout are clearly no longer interested.

Sundance Resources (SDL). There is good news on the Sundance takeover as there is a rumour doing the rounds that Xstrata might be taking a look at the coal miner’s books. If true, this is a very good sign.

Sundance has opened a data room for interested suitors because while it’s still talking to 18.6% shareholder Sichuan Hanlong about its 50¢ a share ($1.44 billion) bid, the offer is hostile as it doesn’t have the board’s recommendation. Xstrata is one of the more obvious bidders, but there could well be several more suitors attracted to this opportunity.

Second, the fact that they are still negotiating with Hanlong is also good news for the prospect of a takeover occurring.

Sundance is trading at 52¢, which indicates investors are expecting a counter-bid or a boost from Hanlong. It was an excellent deal when it was trading at 48¢ after the bid last week, and it’s still good at the current price. This is one of the better takeover situations available for investors to play now, as I think the chance of a superior price is high.

Austar United Communications (AUN). Perhaps the most shocking takeover news of the week came from Austar, or, more accurately, from the ACCC’s concerns about the $2 billion takeover by Foxtel.

The ACCC said on Friday that a merger between the two companies would result in significantly less competition as a country-wide monopoly would affect markets for audio-visual content, pay TV and some telecommunications products.

There are three things that I think the ACCC has taken issue with: News Corp’s involvement as a 25% shareholder of Foxtel following the phone hacking fallout in the UK; Telstra’s 50% ownership of Foxtel and the potential advantage it might have with bundling telecommunications services together; and the general perception that the ACCC has allowed too much consolidation take place in other sectors such as banking, petrol retailing and supermarkets.

One of the ACCC’s justifications was that when the NBN is built Austar and Foxtel will be able to become vigorous competitors because instead of only having about 2% of overlap on the Gold Coast, they will be able to sell content online in a much wider market than each is able to access now.

Now it’s one thing for the ACCC to look at current market shares and pass judgment on them, but to try and predict what the situation will be like in several years’ time if the NBN does get up as envisaged is massively outside its remit, in my opinion. I still think the takeover will go ahead, but it’s going to take much longer now because Foxtel will challenge the decision in court, if an agreement can’t be reached.

There are rumours too that some other bidder might come in and sweep Austar out of Foxtel’s arms. But who? Optus or iiNet have been floated but they’re unlikely candidates.

Perhaps unsurprisingly I don’t think these concerns would have made it onto the ACCC’s radar had News Corp’s phone hacking scandal not blown up. Austar has dropped right back to where it was before rumours of a bid from Foxtel arose and I’d be surprised if it fell much further. I still think there’s a good chance of a takeover getting up, but it’s going to be a long, drawn-out process.

News Corp (NWS). News Corp’s lack of oversight of its UK newspapers has derailed one pay-TV bid (BSkyB) and is probably at the root of another, and now people are saying that it might want to sell off the Australian newspaper arm.

Apparently Rupert Murdoch wanted Lachlan to buy the Australian newspapers, but he’d have to divest his Channel Ten and/or his DMG radio assets because he wouldn’t be allowed to own all of them and there’s no indication he actually wants them anyway. Apart from him, there’s no one else who’d buy them.

Fairfax is the only other newspaper business in Australia and it’s struggling with papers that it probably wishes it didn’t have, and is having to sell other assets to pay for them. Some publishers might be keen on some of the Murdoch tabloids and broadsheets, but the answer is that no one is interested.

Nine Entertainment. Nine is bragging about having seven advertising partners lined up for the London Olympics and the 300-plus hours of programming it’s won for the free-to-air (FTA) and digital channels. Nine is ahead of its free-to-air and pay-TV rivals in terms of locking in the advance sales, but this won’t prompt private equity owner CVC to launch another attempt at an IPO.

Just because Nine has some advance sales is neither here nor there in terms of the overall market. The companies it will be compared to – Ten and Seven West Media – are trading at or near recent lows, and it will be a hard slog selling the business into that kind of market.

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

-Takeover action, July 18-22, 2011
Date	Target	ASX	Bidder	(%)	Notes
24/06/11	Auzex Resources	AZX	GGG Resources	8.50	Ext to August 4.
22/07/11	ConnectEast	CEU	CP2	35.01
21/07/11	Crescent Gold	CRE	Focus Minerals	36.18
18/07/11	EDT Retail	EDT	EPN Investment Management	96.45	Closed.
18/07/11	Mintails	MLI	Seager Rex Harbour	37.33
19/07/11	NSX	NSX	Financial & Energy Exchange	26.17
08/07/11	QMastor	QML	Triple Point Technology	0.00	Shareholders with 11% reject.
12/05/11	Sphere Minerals	SPH	Xstrata	75.29	Unconditional.
21/07/11	Territory Resources	TTY	Noble Group	90.51
Schemes of Arrangement
22/07/11	Austar United Communications	AUN	Foxtel	0.00	ACCC raises competition issues.
01/07/10	Caledon Resources	CCD	Guangdong Rising Asset Management	0.00	Vote July 25.
22/03/11	Cash Converters	CCV	Ezcorp	33.00	Offer for controlling 53%.
15/07/11	Cellestis	CST	Qiagen Australia	19.90	Vote August 3.
13/07/11	Centrebet International	CIL	Sportingbet	0.00	Vote August 17.
15/06/11	Conquest Mining	CQT	Catalpa Resources	0.00	Vote September.
27/06/11	DKN Financial	DKN	IOOF Holdings	18.49
18/07/11	Eastern Star Gas	ESG	Santos	20.90
15/07/11	iSoft	ISF	Computer Sciences Corp	0.00	Approved.
28/06/11	Valad Property Group	VPG	Blackstone	0.00	Vote August 1
Backdoor Listing
08/02/11	Millepede International	MPD	Cool D'Fine	0.00	Marine HVAC provider.
Foreshadowed Offers
27/05/11	Accent Resources	ACS	Unnamed party	0.00	Possible friendly takeover.
11/07/11	Bannerman Resources	BMN	Sichuan Hanlong	0.00	Conditional proposal
14/06/11	Big Air Group	BGL	Vocus	0.00	AFR report. Big Air says "No offer".
21/06/11	Foster's Group	FGL	SABMiller	0.00	Unsolicited conditional offer.
25/05/11	MacarthurCook Property Securities	MPS	P-REIT (BlackWall)	0.00
11/07/11	Macarthur Coal	MCC	Peabody/ArcelorMittal	0.00	Conditional proposal
06/06/11	Pulse Health	PHG	Unnamed party	0.00	Expression of interest.
09/05/11	Spotless Group	SPT	Unnamed private equity group	0.00	Indicative offer rejected.
18/07/11	Sundance Energy	SDL	Hanlong Mining Investment	0.00	Proposed scheme.

Source: News Bites