Speculators jump into Hastings

HEDGE funds and other speculators bought heavily

By InvestSMART · 21 Jul 2012

By InvestSMART ·
21 Jul 2012

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HEDGE funds and other speculators bought heavily

into takeover target Hastings Diversified yesterday, anticipating a bidding war after the Australian Competition and Consumer Commission gave APA Group the green light to pursue the company.

APA launched a cash-and-scrip offer for Hastings Diversified, a pipeline owner, valuing it at about $2.10 late last year.

Its offer has been eclipsed by a bid from Pipeline Partners Australia, a consortium of Canadian and local investors, offering $2.35.5 cash a share.

In heavy trading yesterday, Hastings Diversified shares were pushed to a new high of $2.525, before closing at $2.485, up 13.5?, with more than 34 million shares changing hands. That is equal to more than 6 per cent of the capital.

Late on Thursday, the ACCC allowed APA's bid to proceed, as long as it disposes of the Moomba-Adelaide pipeline. Analysts speculated that the pipeline is worth about $400 million, although UBS told clients it could be worth as much as $550 million.

Analysts with UBS and Citi estimate APA could raise its offer to as high as $2.50 and still make the deal work for its shareholders.

"We think that APA could increase the cash component of the bid by another 40? [per share], implying a value of just over $2.50," Citi wrote in a research note. "This assumes the existing scrip ratio and APA share price of $5 per share."

Separately, Deutsche said Pipeline Partners Australia could "easily pay about $2.45 for Hastings Diversified".

"This also applies to APA; we estimate APA can pay up to around $2.60", based on the revenue outlook, Deutsche said.

Concern that it could overpay saw APA shares marked down yesterday, shedding 12? to close at $4.96, due to worries that future cash flows and shareholder dividends might be hit.

APA is expected to raise its offer next week, in return for access to the company's books for a detailed assessment.

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Frequently Asked Questions about this Article…

Why did Hastings Diversified shares jump suddenly and what drove the heavy trading?

Hedge funds and other speculators rushed into Hastings Diversified after the ACCC allowed APA Group to pursue a takeover, sparking expectations of a bidding war. A competing cash bid from Pipeline Partners Australia also lifted interest. Shares hit a high of $2.525 and closed at $2.485—up about 13.5%—with more than 34 million shares traded, equal to more than 6% of the company’s capital.

Who are the bidders for Hastings Diversified and what offers have been made so far?

APA Group launched a cash-and-scrip offer that valued Hastings at about $2.10 late last year. That offer has been outpaced by a higher cash bid from Pipeline Partners Australia, a consortium of Canadian and local investors, which put forward roughly $2.35 a share. Analysts expect further moves from both sides.

What did the ACCC decide about APA Group’s bid and how does that affect the takeover?

The ACCC allowed APA Group’s bid to proceed on the condition that APA disposes of the Moomba–Adelaide pipeline. That asset constraint affects the valuation and structure of any APA offer because analysts estimate the pipeline could be worth about $400 million to as much as $550 million.

Could APA increase its offer for Hastings Diversified and how high might it go?

Yes. Analysts at UBS and Citi have said APA could raise its offer to around $2.50 and still make the deal work for shareholders. Citi noted APA could increase the cash portion by about 40 cents to imply a value just over $2.50 (assuming the existing scrip ratio and an APA share price of $5). Deutsche has even estimated APA might be able to pay up to about $2.60 based on revenue outlooks.

Can Pipeline Partners Australia still improve its bid for Hastings, according to analysts?

Yes. Deutsche Bank commented that Pipeline Partners Australia could “easily pay about $2.45” for Hastings Diversified, indicating the consortium may have room to increase its cash offer in a bidding contest.

How did takeover speculation affect APA Group’s own shares and why does this matter to investors?

Concerns that APA might overpay for Hastings saw APA’s shares marked down about 12%, closing at $4.96. For everyday investors, this matters because a bidder’s share price can fall if the market thinks an acquisition will hurt future cash flows or shareholder dividends.

What does the large trading volume in Hastings shares indicate for everyday investors?

More than 34 million Hastings shares traded—over 6% of its capital—signalling strong speculative interest and the market’s expectation of a takeover bidding war. High volume during takeover activity often means prices can be volatile, so investors should be prepared for rapid moves and watch for formal bid updates.

What should investors watch next in the Hastings Diversified takeover battle?

Key things to watch are whether APA officially raises its offer (it’s expected to make a move next week in exchange for access to Hastings’ books), any revised cash or scrip terms from either bidder, how the ACCC’s disposal condition is handled (the Moomba–Adelaide pipeline), and analyst valuations from UBS, Citi and Deutsche. These factors will influence share prices and the prospects of a successful takeover.