Santos in a huddle

PORTFOLIO POINT: It is in talks with several parties, and the Chinese could come in and push prices higher.

Santos (STO): Talk of consolidation in the gas sector appears to have been confirmed after it was revealed that Santos has entered into negotiations with several parties, one of which is widely tipped to be Royal Dutch Shell. Shell is competing with Korea Gas and Sinopec to buy a stake of between 9% and 20% in the Gladstone project, which is said to be worth about $1 billion.

The question is now whether or not Chinese companies will come in and push the price of these assets higher.

This does not mean that a full takeover of Santos is in the wings – the deal will most likely be done at a project level, which is still good news for Santos and its shareholders. That was certainly reflected in the share price, which rallied almost 10% on Friday and another few notches today to $14.10.

There are currently four separate coal seam gas projects in Queensland; eventually I think there will be just two – it makes more economic sense.

The other big companies in the coal seam gas sector are Origin, which has partnered with ConocoPhillips, and BG. It’s quite possible that BG could partner with Origin and Santos could team up with Shell, paving the way to buy out the other smaller players. It’s an inevitable conclusion as they all use the same process and the scale buys them bigger profits.

The problem was that it would have crippled Santos to develop this by itself; that is why it has to find partners. Obviously big petro-companies such as Shell are the obvious potential suitors in this game.

There are also rumours that Sinopec and PetroChina (PetroChina is the 50:50 partner in the Arrow takeover) might be interested as well as they are eventually going to be customers so it would make sense for them to secure an interest in production. This is definitely a situation to keep an eye on following on from the resolution of the resources profit tax.

North Queensland Metals (NQM): Sticking with resources, Conquest (CQT) upped its bid by 5¢ last week to half a share and 15¢ in an attempt to take on rival bidder Heemskirk (HSK), which saw North Queensland Metals’ (NQM) founding and major shareholder Don Walker accept the bid.

Interestingly though, Heemskirk is NQM's joint venture partner at the Pajingo gold mine near Charters Towers in Queensland. Heemskirk’s offer was higher, at an implied value of 37.2¢ per share, and now NQM's board has excluded Walker from its deliberations following his early acceptance of Conquest’s offer. The stock is currently trading down 4.62% to 31¢ and this is starting to look like an interesting situation.

Sigma (SIP): Aspen Pharmacare came back with a reduced bid of 55¢, down from 60¢, for Sigma last week. Its shares are trading at 45¢, up 1.11%. The bid is still conditional upon due diligence, and it also requires the Sigma board to sign off on it. It also requires Sigma’s financing to stay largely in place, and Aspen to get financing on reasonable terms, so it’s actually not much of a bid. Sigma has a new chief executive now and it has been reported that it is talking to another party, just as we saw happen with CSR last week.

But Sigma has some serious problems: most of its board has resigned; it has a load of debt issues; there are problems with the Pharmaceutical Benefits Scheme; and massive write-offs for all the acquisitions it made that haven’t worked. Sigma is now looking to negotiate with Aspen for an improved deal despite saying it has received at least one expression of interest in its generics business. Sigma also has refused to extend a due diligence period until August 2, as requested by Aspen, and is clearly trying to claw back a bit of ground in these ongoing discussions. Whether it works or not could be another story.

Healthscope (HSP): There are a lot of different rumours doing the rounds about whether the financing is there for the Healthscope bid. I think they’ll probably get one bid, possibly two, by the end of the week. The stock is trading well below the mooted $5.70–5.80 and it’s hard to trust these private equity bids because they are often happy to walk away if they can’t get what they want as they have a number of investments on the go. In my opinion, the Healthscope takeover situation is one to stay away from until the bid is firm. When the bid is firm the stock will be higher; at the moment it’s too conditional and just too dependent on other factors.

UXC Limited (UXC): Another private equity bid landed recently with Archer Capital, which is apparently looking to bid for UXC, the IT services business. No price has been given yet and all they’ve said is that they’re looking at it, but the UXC price has run up from around 45 cents a share to 55 cents in the past week or two. So I would say there is already a fair bit in the price. But I’m wary of Archer’s bids; they don’t always seem to go ahead as we saw when it bid for Boom Logistics and Funtastic.

CSR (CSR): Sadly with CSR, I thought the stock would ultimately get to $2 but the market at the moment is still very cautious and it doesn’t want to buy good news. CSR rallied a bit last week – it went as high as $1.80 – but the problem with the company at the moment is that it hasn’t confirmed what it will do with the money that it gets from the sale of Sucrogen.

If it decided to pay a high capital return of about 70¢ or more, it would be well received by the market. The problem is if it decides to only pay 40¢ and keep some money to invest elsewhere, shareholders will be left wondering what the company will do next. CSR has had some pretty bad investments in the past few years and I don’t think the sharemarket would trust the company just yet. My belief is the stock will go higher if they give back the bulk of the funds after tax and after paying down some debt.

Orica (ORI)/Dulux Group (DLX): Two and a half years ago, Orica knocked back a takeover bid of about $33 a share in 2007 and the share price has never been that high again. Now it has demerged the Dulux paint business, which debuted on the ASX today with a price of $2.54 after trading as high as $2.78.

Meanwhile, Orica has today seen its shares fall 6.11% to $24.10. Dulux could very well be a takeover target in the coming months, perhaps even by Wesfarmers, which will need pricing power in paint to deal with the highly anticipated chain of hardware stores from Woolworths when it launches.

However, given that Wesfarmers owns Bunnings, there might be an issue with it taking over Dulux – a major paint brand – and the ACCC might not like that. But given that Wattyl is also the subject of a bid, the ACCC will have to make a number of decisions on that front soon.

Woolworths (WOW): Speaking of Woolworths, it is rumoured to be eyeing European retailer Carrefour’s assets in South-East Asia. One of the problems Woolworths has is that it’s actually a victim of its own success in Australia.

It has pioneered several supermarket innovations. It’s a big owner of poker machines and has various stakes in bottle shops such as BWS and Dan Murphy’s. All the obvious things for the grocery store owner have been done, and whenever this happens to an Australian company, they tend to start thinking about expanding overseas.

But success in Australia doesn’t always mean success overseas, as we’ve seen countless times before. Harvey Norman expanded overseas and now operates in Ireland and Slovenia, which has been an unmitigated disaster. Just because Harvey Norman is good in Australia, doesn’t mean it will be good somewhere else. Woolworths is the same. Yes, it understands the Australian consumer, but would it understand the Asian consumer?

Billabong (BBG): Surfwear retailer Billabong entered into a definitive acquisition agreement with Canadian surf brand West 49 at the end of June. On Friday, West 49 received a counter-bid from US company Zumiez Inc. I was intrigued to see that West 49 is described as 'Canada’s premier surfwear brand’. I wouldn’t have thought that big part of their lifestyle in the great white north, but there you go. West 49 was going to be a small acquisition for Billabong and I don’t think it makes a huge amount of difference to them either way. Billabong appeared to have moved on pretty quickly, though, as earlier today it was announced it has reached a conditional agreement to acquire the 10-year-old Californian brand RCVA.

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

-Takeover action, July 5-9, 2010
Date	Target	ASX	Bidder	(%)	Notes
7/07/2010	Adelphi Energy	ADI	AWE	90.47
6/07/2010	Ammtec	AEC	Campbell Brothers	9.99
8/07/2010	CBH Resources	CBH	Toho Zinc	85.62	Unconditional.
5/04/2010	Centennial Coal	CEY	Banpu Public Company	19.90
8/07/2010	Corporate Express Australia	CXP	Staples	89.26
6/07/2010	Dexion	DEX	GUD	5.02
8/07/2010	DMC Mining	DMM	Cape Lambert Resources	92.96
7/07/2010	Gloucester Coal	GCL	Noble Group	92.54
2/06/2010	Mesa Minerals	MAS	Mineral Resources	53.04
3/06/2010	North Queensland Metals	NQM	Conquest Mining	19.90
5/07/2010	North Queensland Metals	NQM	Heernskirik Consolidated	0.00
8/07/2010	Padbury Mining	PDY	Fe Ltd	0.00	Seeks to replace board.
13/05/2010	Rey Resources	REY	Gujarat NRE Minerals	12.00
30/06/2010	Shield Mining	SHX	Gryphon Minerals	19.90
7/07/2010	Sigma Pharmaceuticals	SIP	Aspen Pharmacare	0.00
5/07/2010	Tandou	TAN	Guinness Peat	24.95	Closed.
4/06/2010	Wallace Absolute	WAB	Armidale Investment Company	0.00
25/06/2010	Vesture	VES	Prudential Investment Company of Australia	0.00
Scheme of Arrangement
22/03/2010	Arrow Energy	AOE	Royal Dutch Shell and PetroChina	0.00	Vote July.
9/06/2010	Aurox Resources	AXO	Atlas Iron	0.00	Vote August.
14/12/2009	AXA Asia Pacific Holdings	AXA	AMP and AXA SA	53.93	Revised scheme rejected.
4/06/2010	AXA Asia Pacific Holdings	AXA	National Australia Bank	0.00	Considers part divestment to satisfy ACCC.
12/05/2010	Jetset Travelworld	JET	Stella Travel Services Holdings	0.00	Stella to hold 50%. Vote August
4/05/2010	Lihir Gold	LGL	Newcrest Mining	0.00	Vote July
15/04/2010	Macarthur Coal	MCC	New Hope Corporation	0.00	Rejects upped offer.
18/05/2010	Macarthur Coal	MCC	Peabody Energy	0.00	Unable to recommend further offer
3/05/2010	MacarthurCook Industrial Property	MIF	HRPT Properties	24.42	Vote July
1/07/2010	Mosaic Oil	MOS	AGL Energy	12.80
6/07/2010	Sylvastate	SYL	Whitefield	0.00	Same CEO.
12/05/2010	Transurban	TCL	Canada Pension Plan Investment Board, CP2, Ontario Teachers Pension Plan Board	0.00	Revised proposal rejected.
28/06/2010	Wattyl	WYL	The Valspar Corporation	0.00
25/05/2010	Westpac Office Trust	WOT	Mirvac Group	0.00	Vote July.
Foreshadowed Offers
3/06/2010	Astra Capital	AKR	Taverners No 2 Unit	--	Incomplete proposal.
3/06/2010	BOOM Logistics	BOL	Archer Capital, McAleese Group	10.47	Indicative scheme proposal.
3/05/2010	Centrebet	CIL	Unnamed party	0.00	Discussions continue.
20/05/2010	Healthscope	HSP	Private equity consortium	0.00	Revised scheme proposal received.
31/05/2010	Healthscope	HSP	Unnamed party	0.00	Indicative proposal.
9/06/2010	Redflex Holdings	RDF	Macquarie Group	0.00	Indicative proposal.

Source: News Bites