Rinehart's retreat

PORTFOLIO POINT: The Fairfax story isn’t finished, but a takeover bid in the near term is now probably off the agenda for Gina Rinehart.

Fairfax (FXJ). We saw a very unusual thing last week, in that Gina Rinehart cut her stake in Fairfax from roughly 18.6% to just under 15%, yet this likely strengthens her hand for a board seat. However, it also means a full takeover bid is less likely at this point.

Fairfax’s directors and officers’ liability insurance specifically doesn’t cover anyone who owns more than 15% of the company, so it seems Rinehart sold down to avoid this being another thing the board could use against her bid for seats. Really, whether you have 15% or 18%, I think she has a very strong case. I suspect Rinehart and the board will eventually find a compromise to the Charter of Independence dispute, because for all the time and energy it is taking to fend off Rinehart, Fairfax should be spending it working out how to improve the business.

As far as a full takeover, though, it seems unlikely she would have sold down if she wanted to make a full bid. People can change their minds, she could come back, but it looks as though Rinehart will keep pushing for a couple of board seats, then get a really good look at the business and learn about it. Rinehart’s actions at Ten are instructive. After gaining board representation, a full takeover could be considered down the line, but I would not buy in on that basis.

Echo Entertainment (EGP). There are numerous hurdles and complications surrounding Echo and a potential takeover, and while there is no actual bid at the moment I would still firmly consider this a prospective target.

We know that a couple of Genting’s top people have been in Australia, visiting regulators in both New South Wales and Queensland, seeking permission to go above a 10% stake. State gambling regulatory permission is required to move above 10%, and because Genting is foreign to go above 15% it will require Foreign Investment Review Board approval.

On that point, it depends what Genting ask for, but if they get permission to go above 15% they would probably be clear in terms of FIRB approval to make a full bid as well. Even so, FIRB would probably have to assess the takeover as being in the national interest, but I don’t think this would be a problem with Genting – it’s a very large, well-run, well-established company.

At the same time, James Packer’s Crown has put in an application to go above 10% as well, but only as high as 25%, and it is interesting to think about what Packer is doing here. It may well be that he only wants 20% (the maximum allowable without launching a full takeover) and then use the 'creep’ provision in the legislation to slowly move up to 25%, get a couple of board seats and use them to approve his plans. If, however, Genting gets approval and launches a full bid – which they could afford to do – I think Packer would clearly try to counter it. He would know that if he’s allowed to go to 25%, he’d likely be allowed 100%, so the limit won’t preclude another application later on.

It’s entirely possible Crown and Genting could work together on this, but as soon as they’re seen to be co-operating they would have to report their stakes as combined – thus breaching many of those limits. They have to do all their probity separately, and that’s what they appear to be doing, but a joint purchase rather than competing for Echo is a distinct possibility.

That said, Genting could certainly afford to buy it on its own, and so could Crown, though it may strain the balance sheet more.

There’s a long way to go on this, and Crown’s plans for a casino development at Barangaroo, the reason it needs Echo’s NSW casino license so much, complicate it even further. However, this remains one of my top prospective bids.

David Jones (DJS). While most of the highly unusual activity around David Jones was covered last week, and there is every indication the EB bid was not serious, the David Jones share price has curiously not fallen back to previous levels.

David Jones closed at $2.40 today, sharply off a high of $2.65 in the immediate aftermath of the bid announcement but above the $2.26 David Jones was trading at immediately prior, and more than 12% above where it was a month ago in early June. This is because the bid, whatever the real motives were, has highlighted the potential stored value.

However, investors should remember the environment is different now to when Myer was taken over and sold off, and consumer spending and property markets are both weak. Another point of concern is Mark McInnes, now at Solomon Lew’s Premier Retail, who appears to be poaching some of the best of his former David Jones colleagues. He has about half a dozen now, and I’m not saying it’s rats from a sinking ship, and McInnes is highly respected retailer, but losing a lot of good people is rarely good for a business.

One additional thing to think about is potential legislative change to come out of this episode.

I think David Jones’ board did the right thing in releasing the information to the market, as it was going to come out in the media in any case, and I don’t think they had any choice. It materially moved the share price. But I do think there will be a regulatory scratching of heads over what to do. You can’t have rules in both directions, encouraging the release of information and then trying to stop it, so while there will be some sort of inquiry I don’t think anything will change because continuous disclosure is too ingrained.

Flinders Mines (FMS). The Magnitogorsk Iron & Steel Works bid is well and truly over now, and I stand by my view the legal troubles were engineered as a way out of the deal. Had Magnitogorsk still wanted to proceed they would have extended the bid and fought it in the courts.

Flinders Mines is now trading below where it was before the bid, by a couple of cents, but the overall outlook for iron ore has deteriorated and I’ve not actually heard the identity of any other potential bidder. There is talk that other bidders will come out now, but conditions have deteriorated and if the bid never happened the share price would probably be where it is now anyway. I’m not sure there are any automatic alternative bidders, so I would leave it alone.

Spotless (SPT). There’s a small but interesting trade in Spotless at the moment. With only a couple of weeks to go before the shareholder vote, the stock gained 3c today to close at $2.60 and the PEP takeover pays out $2.66 plus a little extra with franking credits. This means the annualised rate of return is very high – up around 30% – because you get your money in about five weeks.

What seems to have happened is this: The bid is $2.62, with a 4c, 95%-franked, dividend but it is also recently ex-dividend another 5c full-franked dividend and it seems the market is only pricing in one of these. There’s a very small market condition risk if the ASX S&P200 falls 500 or 600 points in the next few weeks, but we’re talking about making 8c in five weeks with very low risk.

Whitehaven (WHC). The Coalworks (CWK) bid has now been wrapped up, for $1 cash and some Orpheus (OEG) shares, but the big question of whether Nathan Tinkler will bid for Whitehaven remains.

Whitehaven closed almost 5% lower today at $4.09, and has been trading in the low $4 range, but a bid would have to be north of $5, and maybe as high as $5.50. I do not believe Tinkler has the money to do this, and a lot will depend on financing. To get a lot of debt to buy a coal company at the moment may prove difficult, and I have a feeling that we may have seen the peak of coal M&A activity for now.

Tinkler has pulled off some big deals before, and he could possibly team up with a big coal company from China or Japan, but I would be surprised if he bought the whole thing, and I think it’s less likely in the current market.

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

-Takeover Action July 2-July 6, 2012
Date	Target	Code	Bidder	(%)	Notes
05/07/2012	Alesco	ALS	Dulux Group	24.89
29/06/2012	Austock Group	ACK	Mariner Group	0.00
05/07/2012	Castlemaine Goldfields	CGT	Lion Selection	13.90
04/07/2012	Coalworks	CWK	Whitehaven Coal	95.52
04/07/2012	Eureka Energy	EKA	Aurora Oil & Gas	98.30
22/06/2012	Genesis Resources	GES	Clancy Exploration	8.01	Ext to Jul 30
15/05/2012	Hastings Diversified	HDF	APA Group	20.71	Closing Jul 15
03/07/20122	Hydromet	HMC	Simon Henry	94.07
24/05/2012	Minemakers	MAK	UCL Resources	0.00
31/05/2012	Norton Gold Fields	NGF	Zijin Mining Group	16.98
05/07/2012	Orion Metals	ORM	Conglin Investment Group	32.23
29/06/2012	Real Estate Capital Partners USA Property Trust	RCU	Woolley GAL II	32.81	Incl associate's holding
02/07/2012	Rocklands Richfield	RCI	Shandong Energy	50.10	Pre-bid agreement
04/06/2012	Thakral Holdings	THG	Brookfield Asset Management	38.58
Schemes of Arrangement
15/06/2012	Spotless Group	SPT	Pacific Equity Partners	19.64	Vote Jul 25
22/06/2012	Sundance Resources	SDL	Hanlong Mining Investment	17.99	To complete Nov 2012
Foreshadowed Offers
02/07/2012	David Jones	DJS	EB Private Equity	0.00	Withdrawn
21/05/2012	PMP	PMP	TMA Group	0.00	Non-binding indicative offer

Source: News Bites