Rough road for Rocklands?

PORTFOLIO POINT: The coal sector remains hot, with the stage set for a bidding war over Rocklands.

Rocklands Richfield PCI Limited (RCI). There’s more takeover action in the coal sector, as a Chinese company called Linyi, a subsidiary of Shandong Energy, has bid 52c a share for Rocklands. But while the stage may be set for a bidding war, investors should not rush in.

What makes this bid particularly interesting is that an Indian company, Jindal, already owns 28% of Rocklands. This would ordinarily be a major hurdle, but the bid is only conditional on 51% acceptance – so even if Jindal refuses, the bid could still go ahead as it is. Often companies will lower the threshold when there are substantial shareholdings involved.

This has all the hallmarks of a bidding war scenario. You’ve got a Chinese company which has 19.9%, an Indian company that owns 28% and a bid on the table. Yet, curiously, the shares are trading well below the bid price, closing at 43.5c today.

This discrepancy is simply because the market has had enough bad experiences with Chinese bidders in recent times, and is sceptical. This bid is subject to both FIRB approval in Australia and regulatory approval in China, and no one really has any idea exactly what these regulatory approvals mean in China.

Normally I’d be saying 'get amongst it’ in this type of situation, but I’d be cautious about going ahead with this one because of the bidder.

Alesco (ALS). The garage door maker’s share price last week dropped below Dulux’s (DLX) $2 a share bid price for the first time since it was announced, as concern rises about possibly triggering the market condition.

As I have mentioned before, Dulux can walk away if the S&P/ASX200 closes below 3,950 points for three consecutive days and with a patch of market weakness, people start to get nervous about the potential for the bid to be pulled.

My view is still that there’s a reasonable chance of a bid increase here, depending on what Alesco’s target statement says on June 12, but this has to be tempered by overall weakness in the market.
A lot of people think it’s compulsory for Alesco to get an independent expert to value it, but it’s not. Such a valuation would carry more weight, but Alesco’s board could just say 'we think the company is worth x’ and be done with it.

The deadline for the initial bid is June 26, but these deadlines are typically extended and there’s no way the bid will be done by June 26, with the target statement coming out June 12.

Investors should look for a specific valuation range, from an independent expert, in that target statement. Once you have that, Dulux will know that if it prices within that range, the target board can’t really say no, and that’s the number to hit to get a recommendation.

Eureka Energy (EKA). It seems as though the bidder here, Aurora Oil and Gas (AUT), is trying to use market weakness and suggestions they want to pull out to scare people into accepting this bid at 45c, but it’s creating a very good buying opportunity.

After Eureka got a $50 million financing package from Macquarie Bank, Aurora said they were looking into ways of possibly pulling out of the bid. However, it is legally impossible to do this. The bid is unconditional and it says so in the original bidder’s statement. It doesn’t say 'unconditional apart from financing’. For an on-market bid, you have to actually be in the market, and that means people sell to you, and you can’t then undo those sales if you suddenly find something you don’t like.

In my view, the Takeovers Panel should declare it unacceptable conduct, because Aurora is stating something which cannot possibly be true.

But, if you buy at 45.5c, where the share price hovered through last week, you’re effectively getting a free call option if Aurora increases its bid, and a hard put option at 45c – a maximum loss of 1%. If this stock had an option market, it would cost more than that, so this is a good deal.

Flinders Mines (FMS).This is a good example of an old saying in broken deals: your first loss is your best loss.

I originally called this a 'sell’ when the share price had fallen from 29.5c to 24c, and on Friday it hit half that, 12c, and is currently at 13.5c.

The Russian courts have adjourned the shareholder action until after the June 30 cut-off date agreed for this deal. The companies still have an appeal that could be heard May 30, but it’s not looking good. I still honestly think, in my heart of hearts, that the Russians have engineered this to get out of the deal – it’s all just too neat.

Having said that, the share price is now below where it was before the bid was announced and all the downside appears factored in. It’s definitely one for the punters, but if the takeover does somehow still get up, you’ve got more than 100% upside here.

David Jones (DJS). There has been speculation recently that David Jones could be a takeover target, and some are suggesting a similar approach to the sale of Myer – where property assets are sold off and the retail business floated.

It’s hard to know if this would be achievable in the current climate. In Myer’s case, the retail market was in better shape, the property market was in better shape and so was the market for IPOs. I think the environment for David Jones to do a similar thing just isn’t there.

As I mentioned last week, a lot of the fat for private equity to trim has honestly been taken care of by most retailers already.

My view on buying prospective takeovers is to only buy something you would be happy to otherwise own if there was no bid, and I’m not convinced David Jones fits that description.

Qantas (QAN). The thing to remember here is the Qantas Sale Act prevents foreign ownership of more than 49% of Qantas. Alan Joyce has decided to split the company up, and the question is: could you conceivably sell part of it or separately list part of it?

I suppose so. I don’t think the Qantas Sale Act contemplated the company being broken up into bits, but I think if Joyce tried to do this he would run into some political opposition. Qantas is in a privileged position, but it has to stay on the right side of the government and I’m not sure the company would be able to restructure with a takeover in mind.

Sundance (SDL). Finally, a deadline of sorts has been put on the 57c-a-share bid for Sundance by Sichuan Hanlong, and they’re now talking mid-November. That’s six months away, and I think it’s very unlikely. The parties here say they’re “hopeful” but I wouldn’t bet on it, and just wait this one out and watch.

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

-Takeover Action May 21-25, 2012
Date	Target	ASX	Bidder	(%)	Notes
1/03/2012	Accent Resources	ACS	Xingang Resources	60.65
30/04/2012	Alesco	ALS	Dulux Group	19.96
18/05/2012	Brockman Resources	BRM	Wah Nam International	86.45	Closing Jun 14
10/05/2012	Coalworks	CWK	Whitehaven Coal	17.30
24/05/2012	Curnamona Energy	CUY	Havilah Resources	65.08
30/04/2012	Eureka Energy	EKA	Aurora Oil & Gas	2.79
2/04/2012	Genesis Resources	GES	Clancy Exploration	0.00
15/05/2012	Hastings Diversified	HDF	APA Group	20.71	Closing Jul 15
24/05/2012	Hydromet	HMC	Simon Henry	82.02
24/05/2012	Ideas International	IDE	Gartner Australia	91.80	Pre-bid acceptances
23/05/2012	Magma Metals	MMW	Panoramic Resources	68.80	Ext to May 10
17/05/2012	Real Estate Capital Partners USA Property Trust	RCU	Woolley GAL II	28.93	Associate holding
21/05/2012	Rocklands Richfield	RCI	Shandong Energy	19.90	Pre-bid agreement with chairman
21/05/2012	Scandinavian Resources	SCR	Hannan's Reward	95.35
24/05/2012	Somerton Energy	SNE	Cooper Energy	30.20	19% pre-bid agreement
24/04/2012	Thakral Holdings	THG	Brookfield Asset Management	0.00
22/05/2012	UCL Resources	UCL	Minemakers	15.76	Ext to May 22
Schemes of Arrangement
27/04/2012	Gloucester Coal	GCL	Yancoal (Yanzhou Coal)	64.50	64.5% holder Noble Group in favour. Vote Jun 4
10/04/2012	Ludowici	LDW	FLSmidth	22.00	Vote May 31
30/04/2012	Spotless Group	SPT	Pacific Equity Partners	19.64	Vote late Jul
11/10/2011	Sundance Resources	SDL	Hanlong Mining Investment	17.99
Reverse Takeover
23/05/2012	Millepede International	MPD	Agline Pastoral Pty Ltd	0.00	Agline and shareholders to control 67.6%. Approved
Foreshadowed Offers
28/02/2012	Goodman Fielder	GFF	Wilmar International	5.00-	Press speculation
21/05/2012	PMP	PMP	TMA Group	0.00	Non-binding indicative offer

Source: News Bites