St Barbara's ambit move

PORTFOLIO POINT: If it snares Catalpa, it would create Australia’s second-biggest gold producer, but counter-bids are likely.

Catalpa Resources (CAH): The most important development over the past week was St Barbara’s hostile $350 million bid for Catalpa, in a move that would create Australia’s second-largest gold producer.

The bid is half-cash, half-scrip, and the fact that half of the $1.92 a share offer will be paid up front with cash means St Barbara can easily afford to increase it, or throw some more shares into the mix. In my estimation, it also has a very strong chance of receiving a counter-bid.

Catalpa has subsequently complained that St Barbara struck while the share price was weak, after a period where Catalpa had been having operational issues, so the 41% premium was not as good as it should be. But this is a back-handed compliment. Buy low, sell high. Isn’t that the way the game is played?

Really, this is a very good outcome for both parties: Catalpa has recommended its shareholders do nothing and it will go out and find another bidder, and it will easily get a better bid from St Barbara itself which hasn’t declared the offer final. St Barbara, on the other hand, needs to buy more production in order to catapult itself into the next rung up of mid-tier miners.

It makes a lot of sense for these two companies to be combined, as when Newcrest took over Lihir a massive gap was created in terms of production between that company and the next ones down. Catalpa is not the only target available to St Barbara, but at an almost $300 million market cap it’s definitely the right size and it has good reserves. It’s trading up near the bid, closing Monday at $1.68, and the market is expecting a higher offer.

Brockman Resources (BRM): Wah Nam’s bid for Brockman Resources (and FerrAus) just goes to show that sometimes money and sense don’t go together. How a Hong Kong limousine company managed to get a majority stake in Brockman by Friday, with 51.99% acceptances into the $700 million scrip bid, beggars belief. If you still own shares in Brockman sell on the market now and get out while you still can.

Clearly what has been happening here is that shareholders loyal to Wah Nam, or who agree with whatever vision it has, have been buying Brockman shares and selling into the all-scrip deal. If they’re Wah Nam-controlled then it’s illegal because the limousine company would have to reveal they were associates.

Brockman chairman Barry Cusack obviously suspects this is the case because he is lobbying for an ASIC investigation into the fact that as of Friday, of all the acceptances only 0.12% had been from Australian and New Zealand shareholders. There has been a lot of turnover in the stock and I would expect and hope that its Australian shareholders getting out.

The deal is worth 30 Wah Nam shares for every Brockman share, but what shareholders get is a stake in an illiquid company that at this stage is only listed in Hong Kong. This now means it’s highly likely that FerrAus will recommend its shareholders accept Wah Nam’s $220 million bid for it, too. Wah Nam owns, as of Friday 17.95% of FerrAus and is offering six shares for every one held in the miner.

This is not a normal bid and there’s more to this story than meets the eye, but as yet we don’t know all the details.

Nufarm (NUF): Last week Japanese company Sumitomo Chemical Company bought 4.5 million shares from chairman Doug Rathbone for $23.8 million, raising the ire of other shareholders over the 11% premium paid and questions about Sumitomo’s motives.

It’s highly likely Sumitomo will make a bid for Nufarm, but Australian investors expecting an imminent offer will want to look at their history books first. Japanese companies have a tendency to sit on large stakes for years before deciding whether to make a bid, and owning permanent strategic holdings in similar businesses is not unusual. For example, when Kirin took over Lion Nathan in 2009 it had been sitting on a 46% stake since 1998, while Dai-Ichi Life bought a 29% of Tower Australia in August 2008 and took until December to lob the $1.2 billion bid. Japanese companies operate on a different time line: they like to form long-term relationships and often a takeover is the end of the process, not the beginning.

So it doesn’t necessarily follow that just because Sumitomo owns 20.17% of Nufarm a takeover offer is coming soon. They might also decide to test the business for a couple of years to see whether it’s worthwhile paying up for the whole thing. Having said that, at $4.78 at the close on Monday, Nufarm is considerably cheaper than the $14 Sumitomo paid for its stake this time last year, so it might be a good time for them to edge up. But I wouldn’t be buying into Nufarm on that basis right now.

BC Iron (BCI): Regent Pacific has finally had its wish granted after BC Iron CEO Mike Young cancelled Regent’s takeover offer on the back of an independent report recommending he do so.

Regent initially wanted to drop the bid worth $345 million, or $3.30 a share, but was then forced to reinstate it, even though the contract gave them quite a few loopholes to get out of it. And remember that Regent Pacific isn’t your typical Chinese company that pulls out of a bid when things get a bit hot: it’s listed in Hong Kong but it’s run by Australians and is effectively an Australian investment body focusing on resource companies because that’s what they perceive the Chinese want.

Interestingly, BC Iron’s share price hasn’t fallen that much (it closed Monday at $2.90) and is in fact higher than the $2.85 it closed at a week ago, because people are looking at the business’ fundamentals and liking what they see.

Which leads us to think that perhaps Ukrainian-owned majority shareholder Consolidated Minerals, with 21.2%, thinks this too. Regent’s excuse for pulling out of the bid was that Consolidated Minerals would reject the offer, and even though we don’t know for sure, that assumption was probably correct. Consolidated Minerals has been using creep provisions under the Takeovers Act to move up the register and they wouldn’t be buying those shares just to accept Regent’s bid.

The question is could Consolidated Minerals bid for BC Iron now? We always thought it was a potential counter-bidder but from what I’ve heard it doesn’t have the cash. Ukrainian billionaire Gennadiy Bogolyubov engaged in a very hostile and contested bidding war for Consolidated Minerals in 2007, paying, I think, too much for the company, and it’s been having problems expanding the Woodie Woodie manganese mine in Western Australia.

Oaks Hotels & Resorts (OAK): It looks like Thai company Minor International’s 52¢ a share bid for the struggling Oaks business is the winner after Retail Foods Group (RFG) left its run too late. RFG lobbed a higher bid for Oaks (with which it shares two directors, incidentally) of $94.7 million or 54.5¢ a share, but it was conditional on ASIC overturning the sale of a 34% stake by PricewaterhouseCoopers to Minor.

Unfortunately, thanks to a quirk in the law, Minor won with its lower, $90 million takeover offer. This is because while takeover rules are meant to work in the best interests of shareholders – meaning usually the higher offer would win out – PwC had entered into a legal process in the receivership dealings for Oaks founder Brett Pointon. The process stated that PwC would accept the best unconditional offer. Minor’s offer was initially conditional on gaining 90% acceptances, but it lowered this to 50% and as it owned 20% of the company already, just by accepting the offer PwC made it unconditional.

RFG made a major miscalculation leaving its run too late, but I think their shareholders will be pleased because RFG deals with fast-food franchises. People have said the Oaks model lends itself to franchising, but Oaks is running resorts and hotels – it’s not quite the same as running a takeaway shop.

Lynas Corp (LYC): I don’t like related party transactions and it’s good that the deal Lynas struck to sell the Crown rare earths deposit to Forge for $20.7 million cash was scuttled. Essentially, the deal was to sell the deposit very cheaply to Forge, a company chaired by the Lynas CEO Nick Curtis, but two shareholders – Seek chairman Bob Watson and software millionaire Mark Suhr – made a counter bid to frustrate that deal.

There are two things wrong here: the first is the related-party transaction. The problem is that there are almost always one or two powerful people within the company who control the board agenda and ram things through, telling the directors that their way is the best option to sell an asset quickly and get back to looking after the core business. Then the related party deal gets passed on to shareholders as a fait accompli, but investors, especially institutional ones, are getting more savvy about what is going on and they’re starting to act on their concerns.

The second issue is the fact that Watson and Suhr still want to buy the deposit. If they are prepared to put their hands up to buy it, the board should conduct an auction to clearly see the level of demand for it. Boards forget sometimes that their first duty is to look after shareholders’ interests, and accepting a lower bid for an asset – or not working to find out whether it could attract a higher bid – shows they’re not doing their job. The board could conduct an auction or demerge the asset and float it, just to ensure the value is fully realised.

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

-Takeover action May 9-13, 2011
Date	Target	ASX	Bidder	(%)	Notes
12/05/11	Anchor Resources	AHR	China Shandong Jinshunda Group	83.78
07/04/11	Auzex Resources	AZX	GGG Resources	8.50	Ext to May 16.
12/05/11	Brockman Resources	BRM	Wah Nam International Holdings	46.38
09/05/11	ChemGenex Pharmaceuticals	CXS	Cephalon	66.56
12/05/11	EDT Retail	EDT	EPN Investment Management	52.39	Expert says not F&R.
27/04/11	Equinox Minerals	EQN	Barrick Gold	0.00	See Foreshadowed Offers.
13/05/11	FerrAus	FRS	Wah Nam International Holdings	17.95	Ext to May 16.
22/03/11	Frankland River Olive Company	FLR	Toscana (WA)	61.00	Recap bid by related company.
24/02/11	Laguna Resources	LRC	Kingsgate Consolidated	69.90	Recommended off-market offer announced
14/04/11	Mintails	MLI	Seager Rex Harbour	38.78
13/05/11	NSX	NSX	Financial & Energy Exchange	25.14
03/05/11	Oaks Hotels & Resorts	OAK	Minor International Public Company	54.30
09/05/11	Oaks Hotels & Resorts	OAK	Retail Food Group	0.00
11/05/11	Odyssey Gaming	ODG	eBet	6.06	Ext to May 18. See Foreshadowed offers.
09/05/11	Rabinov Property Trust	RBV	Growthpoint Properties	4.72	Closes May 31.
06/05/11	Riversdale Mining	RIV	Rio Tinto	73.28	Ext to May 20.
12/05/11	Rocklands Richfield	RCI	Jindal Steel & Power	52.91
12/05/11	Sphere Minerals	SPH	Xstrata	75.29	Unconditional.
11/05/11	White Canyon Uranium	WCU	Denison Mines	64.92
Reverse Takeover
19/04/11	Eftel	EFT	ClubTelco	0.00	Vote June 23. ClubTelco to hold 75% if approved.
Schemes of Arrangement
29/04/11	Amadeus Energy	AMU	Eden Petroleum Investments 2010	0.00	Vote mid-July, subject to tax review.
11/05/11	BC Iron	BCI	Regent Pacific Group	19.90	Terminated by BC Iron.
22/03/11	Cash Converters	CCV	Ezcorp	33.00	Offer for controlling 53%.
18/04/11	Cellestis	CST	Qiagen Australia	19.90	Vote late June.
04/04/11	iSoft	ISF	Computer Sciences Corp	0.00	Vote June 17.
22/03/11	Mantra Resources	MRU	ARMZ Uranium Holding Co	0.00	Vote June.
09/05/11	Redflex Holdings	RDF	Carlyle Group-Macquarie Group	0.00	Not approved.
12/05/10	Tower Australia	TAL	The Dai-ichi Life Insurance Company	29.00	Delisted.
01/04/11	Transfield Services Infrastructure	TSI	Ratchaburi Electricity Generating Holding	43.80	Associated interest. Scheme for 80% interest.
29/04/11	Valad Property Group	VPG	Blackstone	0.00	Vote early July.
Backdoor Listing
08/02/11	Millepede International	MPD	Cool D'Fine	0.00	Marine HVAC provider.
Foreshadowed Offers
02/03/11	Austar United Communication	AUN	Foxtel	0.00	Talks with controlling holder.
30/12/10	Berkeley Resources	BKY	OAO Severstal	0.00	Talks continue.
12/11/10	Caledon Resources	CCD	Guangdong Rising Asset Management	0.00	Possible scheme. FIRB-approved.
13/05/11	Catalpa Resources	CAH	St Barbara	0.00	Proposed scheme.
11/04/11	Odyssey Gaming	ODG	Unnamed third party	0.00	Potential offer.
09/05/11	Spotless Group	SPT	Unnamed private equity group	0.00	Indicative offer rejected.

Source: News Bites