St George end game looms

St George/Westpac. The Australian Shareholders’ Association has come out after St George's market update last week and said that St George is doing so well that Westpac should pay a higher price. It’s interesting that the ASA is doing the job of the St George board, which has accepted the bid, whereas the association is saying it needs a higher price.

I disagree with the ASA on this: I think if you look into what St George has done, it has given the best possible result in the context of the fact that it doesn't expect to be an independent company for much longer. It hasn't provisioned very well; for example; it's got an exposure to Allco and has said, 'Allco is still paying off interest so why would we provision that debt?’ Well, look at Allco's share price: that tells you why you should provision its debt because its shares are telling you there's a very high chance that Allco isn't going to be around much longer. So St George has avoided committing to future funding, not taken provisions and it may have done various other things to try and make its cash profit look as good as possible.

I think, reading between the lines, the bid will go ahead. In fact, the real risk is possibly that Westpac still might decide not to do it but I don't think that's going to happen. St George shares at one stage last week traded at a 4% discount to the Westpac bid, which is the lowest they've traded since the bid was announced. After the announcement last week, St George shares snapped back to only about a 1–1.5% discount.

Really, it's a difficult one to trade because the chance of another bid is very low, and the chance of deal failure is realistic; hence, are prepared to make 2–3%, which is your maximum profit, at the risk of losing? If Westpac walked away from this, I think St George's shares would fall 15–20%. So that's your downside, and it's not an easy trade. Still, if you're confident the deal's going ahead you might be prepared to just make a couple of percent.

Leighton Holdings/Hochtief. Would Leighton Holdings (LEI) do a reverse takeover of German construction firm Hochtief? Leighton has been a very successful company and it’s been outshining the European parent for years, so the prospect of a reverse takeover is always there and it is in the air at the moment because Leighton chief Wal King has been presenting strong results again.

But if I were Leighton Holdings, would I be buying into Europe right now? No. So it might do it just because it's worried that Hochtief might have to flog its 55% stake in Leighton to some other buyer, which is quite possible.

But does it make sense for Leighton to be investing backwards into Europe? It's already exposed to Europe but Europe's not going particularly well, especially the UK. If I were a Leighton shareholder I would rather that someone bid for Leighton than have Leighton go and stop a potential bid happening. This is where managers of companies often confuse their own interests with the interests of their shareholders: they think a takeover would be very destabilising for the business, but actually a takeover from the shareholders' perspective would be a good thing. So if Leighton does it as a takeover defence, I'd say that's a negative for the company. More exposure to Europe, less chance of a takeover '¦ not a good thing.

BankWest/Commonwealth Bank of Australia. There’s been talk recently that Commonwealth Bank might bid for BankWest, which is owned by HBOS. Would it? Maybe. I’d be surprised if CBA really wanted to. I just don’t think banks need to chase after customers at the moment. Still, if it’s a sale at the right price and it’s an uncontested option, then someone may want to buy it. It’s knocked a bit off CBA’s share price today (down $1.56 today to $42.14), which suggests that people don’t think it’s a good idea.

Without even knowing the price, the feeling at the moment is that you don’t have to pay up to buy other banks. So I’d surprised if CBA did move on BankWest because I don’t think they need to, which is not to say they won’t do it.

ABN-Amro Australia/Commonwealth Bank of Australia. First NAB was going to buy ABN-Amro and it didn't, and then CommBank was still going to buy it and it didn't. CommBank has had a rare success with its own brokerage, CommSec, which it started out of the blue. CommSec has made a few acquisitions, for example, paying $373 million for rival online stockbrokers IWL last year.

Generally speaking, it's not a good idea for commercial banks to buy stockbroking and investment banking firms, and the reason CommBank walked away from the deal was that it sees the immediate future of stockbroking and investment banking outfits as being not so great.

Origin Energy/BG Group. BG Group has offered $15.50 a share for energy group Origin Energy, and Origin shares have been averaging $16 over the past few weeks, which is about 3 and a bit percent above the bid. Origin releases its target statement this week and, curiously, has said that although it has commissioned an independent expert’s report from Grant Samuel & Associates, it won't release the report as part of the target statement, which I find very odd.

This could mean one of two things: that the independent expert's report hasn't come up with a valuation that they want; or the Origin board is very confident that the independent expert's report will support its rejection of the BG bid.

Now, it’s highly unlikely the independent report has not come up with a valuation the Origin board wants. In a hostile bidding environment, I've never seen an independent expert's report that actually disagrees with the target’s board. This is something to be aware of in takeovers.

Origin has said that it will release the report once it has concrete information on the status of its asset selloff program. Origin is trying to get a joint venture partner for its coal seam methane assets, so this suggests it is very confident that the independent expert's report will support its rejection of the BG bid.

I think Origin should release the report. If it’s waiting for a deal to be done, the independent expert's report doesn't matter because the deal will be the thing that underlies the value. We'll read the report with interest but really what we're looking for there is for Origin to do a deal or to announce the deal with a joint venture partner and then we might see BG Group coming back and upping its bid.

Funtastic/Archer Capital. I said not long ago this was a difficult one because the stock was trading around 60¢ and the takeover bid is for 80¢, so the downside could be that the shareprice falls to 40¢. Funtastic shares last traded at 49¢, before going into a trading halt late last week. The company did not say why, but presumably it’s about the deal. It could be that the deal is going ahead, but if it does not you’d think the company would announce it. It's also possible the deal is just off. The third possibility is that the deal is still on but at a reduced price. I’m not certain, but I think it’s most likely that the deal is off.

QBE/PMI Australia/IAG. The decision by QBE to pay $1 billion for the Australian arm of PMI shows that QBE is still in the market to buy things. QBE tried to buy IAG, but the IAG board rejected the deal. Whether the PMI deal means QBE will come back and have another crack at IAG is hard to say. QBE might make a series of smaller acquisitions. Insurance company valuations have been down because investment markets are down but it affects all of them relatively equally because they invest their money in similar ways but some are better run than others. When investment markets are low, it’s often a good time for stronger insurance companies to go and buy out their competitors. Warren Buffett’s Berkshire Hathaway, for example, has been quite active in trying to buy out reinsurance businesses in the US.

As for IAG, the board really has to prove that rejecting QBE’s bid was a good idea. Remember the bid at the time was worth about $4.60 a share, and IAG shares are now trading around $3.90. The board has probably got until June next year to prove it made the right decision.

Boral. Boral may be a target. Boral made a bid for Adelaide Brighton in 2003 and might have another go at that. Mexican cement giant Cemex is selling off some of the assets it bought as part of its $17 billion Rinker takeover, but again it's a real straw hats in winter situation. Building stocks are at an absolute low point so for one builder to buy another one is difficult. Boral's major markets are now overseas, primarily in the US. I think until the home market stabilises you won’t see any big deals.

Premier Investments/Just Group. Finally, Premier's bid for Just Group has succeeded. Premier now has unconditional acceptances for slightly over 67%. The board of Just Group has told shareholders to accept the bid because, of course, when they get to 90% you get an extra 15¢ per Just share. So really what's happening now is if you're a Just shareholder you'll get some cash and you'll get Premier shares and in a sense you'll still have exposure to the Just Group because Just will be the major operating asset within Premier. Premier's share price has actually slid a bit. I wouldn't say it was being propped up during the bidding process but before the takeover went over 50% it always stayed above $7 and now it's fallen to $5 something. Don't be surprised if it even goes a little bit lower because some Just shareholders won't want to hold Premier scrip.

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

nTakeover Action August 11-15, 2008
Date	Target	ASX	Bidder	(%)		Notes
27/07/08	Abra Mining	AII	Hunan Nonferrous Metals	72.18		Started with 17.8%. Seeks 70% of shares not owned. Ext to August 1.
16/06/08	Anzon Australia	AZA	Roc Oil	0.00		Concurrent with and dependent on Anzon Energy UK scheme offer.
05/08/08	Ausdrill	ASL	Macmahon Holdings	0.31		Extended to September 16.
14/08/08	Bellamel Mining	BMM	Norton Gold Fields	22.64
11/03/08	Challenger Infrastructure Group	CIF	Consensus Business Group	0.00
14/08/08	GoldLink IncomePlus	GLI	Emerald Capital	21.21		Seeks 45%.
30/07/08	Herald Resources	HER	Bumi Resources	84.20		Offer closes.
04/06/08	Herald Resources	HER	Antam and Shenzhen	19.39		Recommended offer. Extended to June 5. FIRB approval received.
15/08/08	Indophil Resources	IRN	Xstrata	2.16		Extended to August 15.
20/06/08	Indophil Resources	IRN	Crosby Capital, Alsons Group, CEO Laufmann	0.00
13/08/08	Intermet Resources	ITT	Hillgrove Resources	81.28
14/08/08	Just Group	JST	Premier Investments	65.15		Extended to August 15.
07/08/08	Midwest Corporation	MIS	Sinosteel	58.44		Extended to August 25.
11/08/08	Mineral Securities	MXX	CopperCo	83.89
11/07/08	Olympia Resources	OLY	Territory Resources	73.53
14/08/08	Origin Energy	ORG	BG Group	0.04
14/08/08	Ridley Corp	RIC	GrainCorp	19.27
03/07/08	Rio Tinto	RIO	BHP Billiton	0.00		Early termination of Hart-Scott-Rodino anti-trust waiting period.
13/08/08	Roma Petroleum	RPM	Queensland Gas	75.77		Incl 19.2% pre-bid acceptance.
05/08/08	Roma Petroleum	RPM	Bow Petroleum	7.84
26/06/08	Tower	TWR	Guinness Peat Group	35.00		Started with 19.7%, seeking further 15.3% to reach 35%. Received 36.37% acceptances.
nScheme of Arrangement
24/07/08	Australasian Resources	ARH	Resource Development International	66.37		Resource Devel associated with Clive Palmer who holds 66.37%.
05/05/08	Bravura Solutions	BVA	Ironbridge Capital	0.00		No vote date set.
07/08/08	Independent Practitioner Network	IPN	Sonic Healthcare	71.50		Vote September 11.
07/08/08	Macquarie Capital Alliance Group	MCQ	Macquarie Advanced Investment Co	0.00		Vote August 28. FIRB clearance received.
09/07/08	Sapex	SXP	Linc Energy	19.42		No vote date set.
13/08/08	St George Bank	SGB	Westpac Banking Corp	0.00		Vote November 6. ACCC clearance.
nBackdoor Listing
23/06/08	Mark Sensing	MPI	TMA Group	82.00		No vote date set. TMA would have 82% on completion.
nForeshadowed Offers
04/08/08	Asciano	AIO	TPG Capital consortium	0.00
01/08/08	Espreon	EON	Vectis Group	19.80		Proposed scheme acquisition. Vectis drops price from 70.5c to 65c
28/07/08	Felix Resources	FLX	Several expressions of interest	0.00
08/08/08	Funtastic	FUN	Archer Capital consortium	18.80		Due diligence exclusivity extended. Discussions continue.
15/08/08	JB Hi-Fi	JBH	Woolworths	0.00		Unconfirmed media reports that takeover talks collapsed.
28/07/08	Mortgage Choice	MOC	Count Financial	4.90		Acquires "strategic stake".
01/04/08	Mount Gibson Iron	MGX	Shougang Concord	0.49		Takeovers Panel reverses 19.73% acquisition.
19/06/08	Pelorus Property	PPI	Pelorus unlisted funds	0.00		Group merger planned.
16/06/08	Staging Connections	STG	Several parties	0.00		Non-binding proposals. Due diligence proceeding.
31/07/08	Warehouse Group	WHS	Woolworths	0.00		NZ Appeal Court sets aside High Court clearance.
31/07/08	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		NZ Appeal Court sets aside High Court clearance.

Source: NewsBites