Saving face at Spotless

PORTFOLIO POINT: Spotless has finally recommended a bid from private equity suitor PEP, largely due to shareholder pressure on its board.

Spotless (SPT). A deal has finally been done between Spotless and its private equity suitor PEP, and that’s good news. Good news for shareholders, and anyone who bought in around $2.40, that is, but this is certainly no victory for the board.

Despite public statements from chairman Peter Smedley that the board was seeking no less than $2.80 a share, the scheme recommended to shareholders adds up to just $2.71. This is comprised of $2.62 in cash, a 4c per share special dividend 95% franked, and the fully-franked 5c per share dividend already paid to shareholders on April 12.

With an original bid in November 2011 of $2.63, and a rise soon after to $2.68, this has been a five-month battle for an extra 3c – or a bit more than 1%. And 5c has already been paid, so the bid is really $2.66 from this point on. So while the board might try to say 'we’ve extracted extra value’, you would have been better off accepting $2.68 back in November and putting the money in the bank. Similarly, had you taken Blackstone’s $2.50 last year and banked it at 6%, you’d have ended up with $2.65 – or about the bid price now.

I’d say the reason this deal had gone ahead now is down to shareholder pressure on the board. It faces at least a sizable minority – about 40% – and possibly a majority of shareholders that want this bid to go ahead. So a face-saving increase that’s not really an increase lets the deal get through, and that’s good for shareholders who have been waiting and waiting on this deal.

This is also a good example which reconfirms something I’ve consistently said – don’t bet on price increases from private equity. Compared with industry bidders (i.e. other companies), private equity is very disciplined on price.

Spotless closed on Monday at $2.56, a 3.76% discount to the $2.66 effective bid price and a 5.5% discount to the $2.71 total.

PMP (PMP). We know very little about the potential PMP takeover except that they’ve received an unsolicited approach which the board says is in the range of 68-78c a share.

This is a massive premium to where PMP – a printing and print-marketing company – was trading prior to the bid (around 28c), and while the price hasn’t reached that indicated range, it hit a high of 65c on Friday soon after the announcement. This has slid back considerably (closing at 52.5c today), because it’s all a bit vague.

It’s unclear who the bidder is; apparently it’s not Salmat (SLM), the local listed competitor. It could be an overseas group in a similar industry, of which there are a lot, or it could be private equity, but it’s also quite possible this could be a management buy-out with private equity involved. The range of the bid makes me think it may be a management buy-out, and it may be conditional on certain things only management know about.

PMP turned down a takeover in the range of $1.95-$2.15 several years ago, from an unknown private equity suitor. I personally think boards should put bids to shareholders, and that PMP shareholders have been poorly served. Yes, the market has changed and the digital economy is hurting PMP, but these factors were in evidence years ago.

Investors should wait to see who the bidder is before getting into this stock. The price has pulled back from the early surge on the announcement and unless you want to be speculative, you’d want to wait and see if the bid is credible, fully funded and likely to get a board recommendation – not just follow the hype. A lot of bids come to nothing, and you don’t want to be someone who bought in at 60c only to sell at 35c in a few weeks’ time.

Sundance (SDL). Sundance is a good example of a takeover play where you have to look at the bidder. Several months ago, I said 'stay away from it’, because the bid was dependent on funding and mining licenses and a whole lot of things, and it didn’t seem credible to me.

It’s two months on and the bidder still doesn’t have the approvals from the Chinese banks. Sundance looks to have just received a key approval, or near enough, from the Cameroon government, but I wouldn’t go near this one. It’s in iron ore, and iron ore looks to be moving into over-supply in the medium term. We’ve just seen the potential collapse of the Flinders Mines deal (Flinders’ show trial) for example and there’s a fair chance this won’t happen. I think you’re much better off buying Spotless at $2.55 to collect at $2.66 than buying Sundance at 47c in the hope of getting 57c, because you just don’t know what’s going to happen.

Nine Entertainment. There has been all sorts of alarmist press recently that Nine owes $2.7 billion and has to repay it in the next year. While this is technically true, it’s not literally true.

Nine has debt that needs refinancing, and, increasingly, hedge funds are buying that debt as a way of buying into Nine. I believe the last traded price for the debt was 88c in the dollar, so for the investors in Nine – CVC Asia Pacific – their equity looks like being wiped out. There’s another billion dollars of mezzanine debt that apparently Goldman Sachs owns too, and that’s technically wiped out too if debt below that on the hierarchy is traded at a discount. The only rabbit CVC could pull out of a hat is to get a new lender to take on all that debt, and frankly that’s not going to happen.

This is a takeover by stealth – and all the laws that apply to takeovers via equity to do with minority shareholders and such don’t apply to debt. This is no sad thing; it’s going from an offshore private equity company to another group of offshore funds, but it will be interesting times for employees and management.

NB: For disclosure, my wife Elise Elliott works for Channel Nine.

Telstra, iiNet (TLS, IIN). On a final note, some takeover activity offshore is helping to nudge Australian telcos’ share prices higher – noticeably Telstra and iiNet. Vodafone UK’s £880 million bid for Cable & Wireless in Britain, the former owners of Optus, shows some more of the consolidation I was discussing last week. Telcos are fairly global in a business sense, so if you see some action overseas it could easily spread here. Telstra shares have improved 4.7% in the past week, while iiNet’s have gained around 1%.

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

-Takeover Action April 23-27, 2012
Date	Target	ASX	Bidder	(%)	Notes
1/03/12	Accent Resources	ACS	Xingang Resources	60.65
23/04/12	Brockman Resources	BRM	Wah Nam International	83.53
9/03/12	Curnamona Energy	CUY	Havilah Resources	45.4
19/04/12	Hastings Diversified	HDF	APA Group	20.71	Ext to Apr 30
24/04/12	Hydromet	HMC	Simon Henry	24.9
20/04/12	Ideas International	IDE	Gartner Australia	19.9	Pre-bid acceptances
11/04/12	Magma Metals	MMW	Panoramic Resources	12.02	Ext to May 10
26/04/12	Scandinavian Resources	SCR	Hannan's Reward	17.27
18/04/12	Somerton Energy	SNE	Cooper Energy	19	Pre-bid agreement
24/04/12	Thakral Holdings	THG	Brookfield Asset Management	0
4/04/12	UCL Resources	UCL	Minemakers	13.1	Ext to May 8
Schemes of Arrangement
27/04/12	Gloucester Coal	GCL	Yancoal (Yanzhou Coal)	64.5	64.5% holder Noble Group in favour. Vote Jun 4.
10/04/12	Ludowici	LDW	FLSmidth	22	Vote May 31
11/10/11	Sundance Resources	SDL	Hanlong Mining Investment	17.99
Reverse Takeover
17/02/12	Millepede International	MPD	Angline Pastoral Pty Ltd	0	Angline and shareholders to control 67.6%. Vote early May
Foreshadowed Offers
28/02/12	Goodman Fielder	GFF	Wilmar International	5.00-	Press speculation
27/04/12	PMP	PMP	Unnamed party	0	Non-binding indicative offer
6/02/12	Spotless Group	SPT	Pacific Equity Partners	19.64	Non-exclusive due diligence

Source: News Bites