Rain on the Sundance parade

PORTFOLIO POINT: Sundance investors should wait until more light is shed on the Sundance takeover bid. Until then, the best option is to stay away.

Sundance (SDL). The bid from Sichuan Hanlong Group hangs in limbo at the moment, and trading in the stock remains suspended. According to Sundance, China’s National Development and Reform Commission (NDRC) has granted provisional approval for the deal at a “reasonable acquisition price”. The rumour is that this means the bid price has to be cut to get approval, and the question is by how much?

When this bid first surfaced originally it was 50c a share, and the Sundance board rejected it. Hanlong came back with 57c, which the board accepted, and since then the iron ore market has deteriorated somewhat. One thing we’ve learnt with offshore bidders lately that we’re not used to in Australia is when markets change, so can the price.

From what I understand they’ll push the bid back to 50c, and I think Sundance would be mad not to take it. It’s not just the company they’ve got to buy – it’s also the associated infrastructure spending, which is two to three times as much as what the company is actually worth. However, if they come back at 45c a share then the board is in a really difficult situation.

If a new deal is done it will be positive in one sense, but negative in another, in that it will show you can’t rely on these deals. That’s why I was never comfortable with this, and recommended staying away. If a deal comes out, they have FIRB, African, Chinese, and presumably funding approval in place and it’s a much easier deal. Then investors should look where it trades and it could be worth buying for a small arbitrage. Until they’ve reached agreement, the right thing to do will still be to stay away from it.

Alesco (ALS). The ongoing Dulux (DLX) takeover is now at the stage where it could get very interesting. There’s now a fair chance Dulux could edge up to above 50% acceptances – it’s almost at 40% – and I think at 50% the Alesco board will have to agree they’ve been beaten.

The bid is still conditional on 90% acceptances, but at 50% Dulux could declare it unconditional, sack the board, and the bid will go through. So the movement from 40% to 50% is crucial. There are all these applications going back and forth to the Takeovers Panel, but it really comes down to the acceptances. Dulux will not increase its bid. Alesco has said the bid’s not high enough. It just comes down to what shareholders do. I think Alesco made a mistake rejecting it – given the outlook and bad press about building companies and construction you’d be mad not to accept it.

Another interesting aspect is Wilson Asset Management, which has come in and started buying up Alesco shares on market to put into the Dulux institutional acceptance facility. Geoff Wilson’s playing a very high-risk game here – his fund is now a major shareholder. When it buys, that’s unconditional. If the bid doesn’t go ahead it’s stuck with the shares. I would say Wilson’s goal is to get Dulux up to that 50%, and I don’t think he can do it himself, so he’s relying on other people doing what he’s doing. I’d say it’s one where he’s in so deep now he has no choice but to go deeper.

Given the stock closed today at $2.06, which is above the cash component, and given the board won’t pay that large dividend to enable franking credits, I would still be inclined to take the money and run. The upside if I’m wrong is not great, but the downside if I’m right is very great.

Consolidated Media Holdings (CMJ). Since last week when I discussed Cons. Media, the Australian Competition and Consumer Commission (ACCC) has approved News Corp’s bid, as expected. Kerry Stokes could still counter bid, depending on the regulator, and the bid now looks likely to go through – though the stock’s trading a little below (closing at $3.43 today).

Having said that, it’s still possible Stokes could just refuse the bid as he owns 25% of Cons Media, but I don’t think that’s in his nature. I think he’ll try and cut a deal for himself. It’s difficult to do that, because you’re not supposed to pay to any one shareholder some befit you don’t pay to the others, but Stokes could maybe get some kind of understanding around bidding for future sporting contests, or some other way his companies could work with News Corp. You can’t put too much on the table, but it’s debatable Stokes would really want to borrow so much money to buy out the rest of Cons Media when it still wouldn’t result in control of Foxtel.

I think this is a good looking deal now. The minimum is you’ll get $3.50 with the News Corp bid, and there’s still a possibility Stokes and Seven Group will decide to up the ante.

Echo Entertainment (EGP). Moving from James Packer’s media assets to his gambling assets, a clearer picture is gradually emerging around Echo. I did some thinking over the weekend, and spoke to a couple of people who know a bit about the situation, and the view from them is that Packer doesn’t really want to bid for the whole thing.

Genting could bid for the whole thing, both Genting and Crown feel Echo’s Star City casino in Sydney is not well managed, and the same goes for the Brisbane casino. The main goal here is really to have a six star high roller casino in Sydney. One angle might be that the monopoly license that the Star has expires in 2019. Given how long it takes to build these things, Packer might say “let’s start the process for a second casino, and assume we’ll be able to twist the arm of the NSW state government then”.

I do think there would be a pretty major public outcry if a second casino license were to be granted. Who knows, in six or seven years, how popular or unpopular whatever state government would be?

So I think the most likely outcome is not a full bid for Echo, although can’t be ruled out. I’d say there’s about a one-third chance of a full bid from either Genting or Crown, a two-thirds chance Genting and Crown team up, buy a few more shares and get a few board seats, but zero chance that nothing will happen. No bid doesn’t mean that Echo’s no good – if anything, Packer and Genting looking to buy more shares will be good for the share price in the short term.

Northern Iron (NFE). The same fears that lead to caution on Sundance are the reason Northern Iron is trading at such a massive discount despite two competing bids. You’ve got Aditya Birla as one bidder at $1.40, and Prominvest out of Switzerland, apparently backed by Russian money, at $1.42. Northern closed today at $1.15 today.

People just don’t know what to think of these bidders and I think they’re right to be like that.

Iron ore prices have been riding around this tipping point where Chinese mines become uneconomic. Orthodox theory suggests if the price falls, they just shut down production, and lower cost Australian mines reap the benefits. However what we know from China is that sometimes production is just forced through, even at a loss, just to keep things going. This idea that rational economic theory can be relied upon is not really true and not really tested.

Normally you’d buy into Northern Iron – you’ve got two bidders – but the quality of the bidders is not great. And the underlying market in which they operate is at a rather nervous point.

Having said that there’s a big margin to be made if either one of those bid gets up. If you’ve got risk appetite go for it, but I wouldn’t trust it.

Hastings Diversified Utilities Fund (HDF). The market correctly anticipated APA would come back with a higher offer, and we’re told its 60c cash, but we still don’t know what the scrip ratio is. I want to see what that ratio is, because I think the APA share price could come under pressure. Additionally, it may well be that the PPA consortium could up its bid by 10c cash.

Because of the potential for the share price to deteriorate, a scrip bid price often has to be well in excess of the cash price to get people to accept. The only benefit is shareholders who end up taking a scrip bid is you get capital gains relief in a rollover, and for some people that is quite attractive, but not everyone.

Whitehaven Coal (WHC). Finally, the Whitehaven share price is telling you Tinkler is struggling to get the money for his $5.20 a share bid, and might even be looking at a lower price now given the share price is down at $3.67.

Given the original talk was that he’d have to pay $5.50 to $6, it all comes down to what the board will recommend. At the moment the board doesn’t have to make a recommendation because there’s no formal bid, but having dangled $5.20 if he comes back at $4.50 I don’t how successful he’d be.

This is the issue making bids when you don’t have finance in place – You can do it, but what Tinkler needs to do is twofold. He needs the debt, and he needs some of the existing equity holders to come on board and some of them might just be prepared to take the money.

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

Takeover Action July 30-August 3, 2012
Date	Target	Code	Bidder	(%)	Notes
02/08/2012	Alesco	ALS	Dulux Group	22.95	Ext to Aug 7
02/08/2012	Castlemaine Goldfields	CGT	Lion Selection	58.97
12/07/2012	Clearview Wealth	CVW	Crescent Cap Management	11.60
23/07/2012	Genesis Resources	GES	Clancy Exploration	10.90	Ext to Aug 20. Uncond.
25/07/2012	Hastings Diversified	HDF	APA Group	20.71	May lift offer
18/07/2012	Hastings Diversified	HDF	Pipeline Partners	8.10
27/07/2012	Minemakers	MAK	UCL Resources	1.02
02/08/2012	Norton Gold Fields	NGF	Zijin Mining Group	58.33	FIRB approved
26/07/2012	Plan B Group	PLB	IOOF Holdings	0.00
02/08/2012	Precious Metals Resources	PMR	Sovereign Gold Co	6.44
29/06/2012	Real Estate Capital Partners USA Property Trust	RCU	Woolley GAL II	32.81	Incl associate's holding
16/07/2012	Rocklands Richfield	RCI	Shandong Energy	51.10	Pre-bid agreement
04/06/2012	Thakral Holdings	THG	Brookfield Asset Management	38.58
Schemes of Arrangement
02/08/2012	Sundance Resources	SDL	Hanlong Mining Investment	17.99	To complete Nov 2012
Foreshadowed Offers
23/07/2012	Beach Energy	BPT	Origin Energy	0.00	Rumour in media
21/05/2012	PMP	PMP	TMA Group	0.00	Indicative offer
13/07/2012	IFS Construction Services	IFS	Millenium Scaffolding Services	20.32	Proposed cash offer
01/08/2012	Navigator Resources	NAV	Unnamed listed company	0.00	Indicative proposal
27/07/2012	Real Estate Capital Partners USA Property Trust	RCU	Saban Capital Group	0.00	Indicative offer
13/07/2012	Whitehaven Coal	WHC	Tinkler Group	48.30	48.3% in shares expressed

Source: News Bites