Rio and Chinalco might help each other

PORTFOLIO POINT: The Chinese aluminium company could be looking to buy assets, just as Rio could be looking to raise money.
Rio Tinto. Rio Tinto’s share price has languished since BHP Billiton walked away from its takeover offer last year. Like so many companies, Rio needs to raise money because it’s got too much debt from the Alcan acquisition of almost two years ago. There’s been talk of a big rights issue and how that might be structured, because being a dual-listed company it’s complicated doing separate rights issues in each market, especially when the stock trades at different prices in each market.

It’s now emerging that Rio’s largest single shareholder, Chinese aluminium company Chinalco, which owns 9% of Rio’s total stock and 12% of its London-listed stock, might be looking to buy assets. This makes sense because a company like Chinalco wants access to sources of supply.

Now Chinalco made a dreadful mistake by buying its Rio stake at the top of the market. Its stake is now worth about 70% less than what it paid; it’s lost billions on it. But at the same time, if it can now get access to some of Rio’s assets then Chinalco has probably achieved what it wants, which is low-cost supplies of things such as bauxite. If it does happen, it will get Rio out a hole because Rio desperately needs to sell assets in a buyer’s market.

Speaking of rights issues, one company that’s always touted as a buyer for Australian small and mid-cap miners is Swiss-based giant Xstrata. Xstrata has been acquisitive in the past, spending $US3.6 billion to buy nickel miner Jubilee and coal producer Resource Pacific. But interestingly, Xstrata itself is in the process of raising capital, and launched a big rights issue in the UK last week. That tells you Xstrata is in survival mode too and isn’t going to making any massive acquisitions any time soon. Gold miner Newcrest is another big company that has announced it’s doing a capital raising of $500 million.

This is how much the world has changed for mineral companies over the past three to six months: commodity prices have absolutely collapsed, and companies that were healthy, such as Xstrata and Rio, now have some severe problems.

I still think there will be merger activity in certain sectors in the resource sector, but it is more likely to be scrip or share bids than cash bids, because cash is just too hard to get now.

International All Sports/Centrebet International. Online wagering group Centrebet International Ltd has made a hostile offer today (February 2) for gaming products company International All Sports, which put its Australian operations for sale last year but failed to get an attractive offer. Centrebet’s offer is 28¢ a share, but it will rise to 33¢ if it gets to 90% acceptances.

IAS, which floated at $2 in 1999, has been hurt by the fairly woeful performance of its international division. Its shares closed last week at 16¢, and rose 11¢ today on the takeover offer. They’re both small companies: IAS is only capped at $18 million at the bid price, and Centrebet is capped at $117 million, so it’s just consolidation in the gaming sector. Darwin-based bookie and company founder Mark Read owns 26% of IAS, so clearly the 33¢ will only be achieved if Read agrees. It’s too early to say whether the deal will go ahead, but the price doesn’t seem too bad. I think Centrebet has a good chance of getting 50%, but whether it gets to 90% depends on Read. He may decide to cash in.

Sydney Gas/AGL Energy. AGL Energy now has about 81% of Sydney Gas, so this takeover is pretty much fait accompli. AGL will get to compulsory acquisition I would have thought in a week or so.

Pure Energy/Arrow. One of the better looking cash and scrip bids out there in the oil and gas sector is Arrow Energy bidding for Pure Energy. As I’ve said before, Pure is trading at a discount to the bid. Arrow’s bidder’s statement will be out in the next week or so. The bid is conditional upon 90%; but many people think Arrow will make it unconditional when it gets to 50%. The spread is narrowing because it’s one of the safe trades out there; Pure has accepted it, so it’s friendly. If you can buy Pure and short Arrow – and you do want to be able to short Arrow, given how volatile the markets are – it’s one of the better takeover players out there.

Coca-Cola Amatil/Lion Nathan. In contrast, the spread on the Lion/Coke merger has widened considerably. Two weeks ago, Coca-Cola Amatil was trading at a 4% discount, which didn’t reward investors for the risk in hand from the deal. The spread has now blown out to between 10% and 12%, because there’s a cash and a scrip bid on offer, with slightly different values.

The drums are beating that Lion’s major shareholder, Kirin Holdings, is cooling on the deal, because Kirin’s obligation if the deal goes ahead is to subscribe a lot of cash into Lion Nathan at a price of $11.50 share, which is quite high compared to Lion’s current share price of about $8.

If Kirin is cooling on the deal, I suspect it’s because talks with The Coca-Cola Company in Atlanta aren’t going particularly well. And again, I struggle to see what Kirin could offer Coke Atlanta that would make this worthwhile. The rumour is that if Kirin can somehow present Coke with a massive rationalisation of the Coca-Cola franchise system in Japan, that would be of attraction. I understand there are 10 or 12 different Coke franchises in Japan, and they’d probably prefer it to be like Australia where one company, Coca-Cola Amatil, does the lot. Whether Kirin can achieve that is an entirely different question.

If that’s what Coke wants, could Kirin give it to them? Who knows? But if it can’t, I sense the merger won’t go ahead. The spread on the stock is also telling you that people think there’s a high likelihood it won’t go ahead.

EBI. There’s an interesting situation with Everest Babcock & Brown Investments (EBI), the listed hedge fund of funds, now called Everest Financial Group. The fund’s net tangible assets (NTA) are $2.40-odd, and yet the stock has traded as low as 70¢, and is currently trading just over $1. There are no less than four activist hedge funds, including groups like UK-based hedge fund Laxey Partners and Carrousel Capital, who are saying that they want to run the fund and would either wind it up or manage it better.

Now, it seems a very attractive situation for investors. Presumably if these funds can achieve a good outcome, they’ll make money and they’ll make it for everyone else. It’s just unclear what’s going to happen though. EBI has quite a few investments with underlying hedge funds which have frozen redemptions, and it hasn’t come clean yet on quite what that level of freezing is, although I’ve heard as high as 30%. Second, that fund is heavily geared; I think its debt to asset ratio is over 50%, so for every dollar of equity, there’s a $1.10 of debt. Now, even if the underlying funds are frozen, they still have to repay the debt. So what’s left for equity holders? If it’s got $5 of assets, the equity is supposedly worth $2.50, if you lop off $1.50 (for the 30% of $5 that’s frozen), what’s left is $1. Which is why the stocks is trading where it is.

So, it’s a risky one because we don’t know what the frozen proportion is and my understanding is that if the control of the fund changes, it has to repay the Macquarie Debt Facility, which is large.

So on the face of it, it looks like a huge discount and therefore an opportunity, but that issue of the debt having to be repaid in an environment of funds being frozen makes it difficult. In addition, the soon-to-be former manager, now called Everest Financial Group, has cut ties with the Babcock & Brown part, and it’s got a couple of large shareholders, such as investment and advisory group Wingate Capital, which has 20%, and Wilson Asset Management which holds a similar stake.

Progen. The battle for biotech minnow Progen, rages on '¦ it is now trading at 86¢. It said late last year it was going to wind itself up and just return all the cash to shareholders, and – lo and behold! – it went and did I think a silly deal with Avexa, which is struggling to get cash. So Progen shareholders will get Avexa shares and new biotech opportunities and Avexa will get cash.

Another biotech, Cytopia, has bought not much more than 1% of the company and is putting forward again a different proposal; it’s saying that it’ll allow people to cash out at $1.10 a share, and for those who want to stay, it’ll keep managing it as a biotech.

Now the only thing I’ve heard is that Progen might not actually have that much cash; it does have the cash sitting there, but there are certain grants it has received from both the US and Australian governments, which it’ll have to repay if it’s no longer doing biotech research. So these are contingent liabilities that might mean that the $1.10 is not $1.10; it could be 70¢ or 80¢ or 90¢.

So again it’s one of those ones that on the face of it looks like an interesting investment, but when you start digging into it, you’ve got a board which desperately wants to keep being a biotech, as opposed to paying money back to shareholders, and you’ve got this rumour of these contingent liabilities which means there isn’t as much cash available as people thought. So stay away from it for now, but keep an eye out.

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

nTakeover Action January 26-30, 2009
Date	Target	ASX	Bidder	(%)		Notes
16/01/09	3D Oil	TDO	Drillsearch Energy	19.90
29/01/09	Amazing Loans	AZD	IEG Holdings	58.00
05/01/09	Broadcast Production Services	BKR	Prime Media Group	77.11		Offer for the balance. Ext to Feb 20.
20/01/09	Espreon	EON	Vectis	19.73		Closing Feb 13.
13/01/09	Espreon	EON	SAI Global	0.00
29/01/09	Fusion Resources	FSN	Paladin Energy	92.00
20/01/09	GoldLink IncomePlus	GLI	Emerald Capital	52.71		Closed. Holding depends on Panel finding.
27/01/09	Incremental Petroleum	IPM	TransAtlantic Petroleum	20.19		Ext to Feb 27.
22/09/08	Murchison Metals	MMX	Sinosteel	0.00		Cleared by FIRB to move to 49.9%
09/12/08	Perilya	PEM	Zhongjin Lingnan	0.00		Proposed placement for 50.1%
22/12/08	Pure Energy	PES	Arrow Energy	19.90
29/01/09	Sydney Gas	SGL	AGL Energy	80.85
nScheme of Arrangement
24/07/08	Australasian Resources	ARH	Resource Development International	66.37		Resource Devel associated with Clive Palmer who holds 66.37%.
24/11/08	Australian Wealth Management	AUW	IOOF Holdings	0.00		Vote March.
22/12/09	Avexa Pharmaceuticals	AVX	Progen Pharmaceuticals	0.00		No vote date set. See Foreshadowed Offers.
12/01/09	International Goldfields	IGC	NKWE Platinum	0.00		To complete March 31.
04/11/08	Island Sky Australia	ISK	Salton Inc	0.00		No vote date set.
19/12/08	Jackson Minerals	JAK	Scimitar Resources	0.00		No vote date set.
05/12/08	People Telecom	PEO	M2 Telecommunications Group	0.00		No vote date set.
21/01/09	Scarborough Equities	SCB	Bentley International	0.00		Vote Feb 20.
nBackdoor Listing
06/11/08	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	0.00		Agreement signed, subject to EGM.
07/11/08	Metminco	MNC	Hampton Mining	0.00		To acquire 51% of unlisted Hampton. Change of control.
nForeshadowed Offers
27/01/09	APN News & Media	APN	Several unnamed parties	39.00		Independent News & Media's 39% not for sale.
23/10/08	Babcock & Brown	BNB	Unnamed parties	0.00		Expressions of interest.
22/12/09	Babcock & Brown Power	BBP	Several unnamed parties	0.00		Non-binding indicative submissions.
28/10/08	Becton Property	BEC	Several unnamed parties	0.00		Due diligence starts.
30/01/09	Coca-Cola Amatil	CCL	Lion Nathan	0.00		Media report that offer still possible.
05/12/08	Felix Resources	FLX	Several expressions of interest	0.00		Confirms ongoing interest.
16/10/08	Jackgreen	JGL	Unnamed parties	0.00		Received approaches.
07/11/08	MDS Financial	MWS	Unnamed parties	0.00		Rejects offer for Market Data. Other discussions continue.
28/11/08	OM Holdings	OMH	Consolidated Minerals	11.00		Seeks ConsMin intentions.
28/01/09	Progen Pharmaceuticals	PGL	Cytopia	5.00		Cytopia associates seek merger meeting. See Scheme above.
14/11/08	Redflex Holdings	RDF	Unnamed parties	0.00		Unsolicited indicative proposals.
27/01/09	Tolhurst	TNL	Patersons	0.00		In-principle agreement.
27/01/09	Ventracor	VCR	No party as yet	0.00		Seeking expressions of interest. No Abiomed offer expected.
30/12/09	Vision Group	VGH	Several unnamed parties	0.00		Non-binding conditional offers.

Source: NewsBites