St George to feel Westpac heat

St George/Westpac. The troubles at NAB and now ANZ clear the way for Westpac to get control of St George. I said recently it was odd that St George chief executive Paul Fegan was making noises that the Westpac deal isn't a fait accompli. Whether that's because the price that Westpac has fallen or because he's suddenly worked out that he won't be in charge any more, I don’t know. It’s odd because the boards of both companies have agreed it. The market had been pricing St George shares at a premium but, as predicted, they have now fallen to a discount. The discount is between 0.5% and 1%, depending on what the shares do.

I think the chances of anybody else making a bid for St George now are remote – less than 5%. NAB’s massive writedown on Friday was unexpected and its shares got smashed. This morning, the ANZ announced a similarly massive writedown of $1.2 billion and its shares will probably go down. So would either of these entities bid for St George? I just don't see that they can. It's not impossible, but it would seem very unlikely. Commonwealth Bank has said it’s not interested, the NAB I don't think can, and I now don't think the ANZ can, so the most likely outcome is that the Westpac bid goes through.

The ACCC did come out last week and said it had no real issues, so there are no real impediments to Westpac's current deal going ahead. As a result, the St George share price really should trade at a 2–3% discount to the value of the bids to reflect how long it will take and it's still got a little bit further to fall.

Felix Resources. Merger activity in the coal sector is bubbling again: Felix Resources announced this morning (July 28) that it has been fending off takeover bids. Of course we've seen many bids for coal companies.

We've seen several players take strategic stakes in Macarthur Coal: CITIC has been creeping up the Macarthur register, and we’ve got POSCO, a South Korean steel maker, and of course we’ve got ArcelorMittal on the register as well. It’s interesting: Macarthur has slid to below $14 a share even though two of those three players paid $20 a share for their stake. It seems unusual because I would have thought there's a high likelihood that one of them will bid at $20 and do a deal with the other to accept the bid. So it might be seen as an opportunity, but for the moment there’s no bid on the table.

In the past couple of years, we've seen Resource Pacific Holdings and Gloucester Coal receive bids. Coal is a very hot area at the moment so we'll probably know this week whether or not the bids for Felix are genuine. And possibly you'd expect it to be contested because coal companies are highly sought-after.

Felix, a $3.8 billion company, produces both thermal and coking coal: coal for power generation which is both exported and used domestically; and steel-making coal, which is the higher grade. So it's an attractive target.

Origin Energy. Still with the resource sector, gas company Origin Energy is still trading around $16 a share. That's 3% above the hostile $15.50 a share bid from UK-based BG Group. Origin has thrown open its books to a variety of other potential acquirers including Chevron, Texaco and Shell. A number of people might be interested and there’s a rumour that a Chinese resource company is also keen, so it's a pretty contested space.

Origin is trading at just over 3% above the BG Group bid so it's in the ideal risk-return space. The downside is probably no more than 3% but there's considerable upside if it can attract other interest and we'll probably know within about three weeks whether that is the case.

Indophil Resources. I think Indophil Resources is also at an interesting point. The stock is trading around $1.32–1.33, and there are two bids at $1.28. One bid is from Xstrata and the other is a management buyout team funded by a Hong Kong-based group called Crosby Capital. Crosby has been pretty active in Australian resource mergers before; it was involved in a bid for Orchard Petroleum.

It's one of the few genuinely contested bids we have at the moment so I think it's an interesting one. Again, it's trading at around a 3–3.5% premium to the $1.28 bid, so it's not a bad risk-return tradeoff there. And directors of Indophil, a gold and copper miner, have actually said that they think it's highly likely that one of the two parties will increase its bid again.

Just Group/Premier Investments. I said recently I was pretty certain Solomon Lew’s Premier Investments would win the day in its battle for Just Group. Now, midway through last week, Lew improved the bid by increasing the cash component of the bid from essentially $2.10 to $2.30. The scrip component; that is, 0.25 Premier shares for each Just Group share, has been left the same.

Now if you say Premier's worth $7, that means the scrip component is worth $1.75. If you add to that the $2.30, you still come up with a total bid worth $4.05 or $4.06.

But the Just Group rejected the bid again, so the chances now of Premier getting to 90% are slim. I think they'll probably get to 50% because I think several institutions who are on the register at Just will accept. Premier already has about 26%, so it needs another 24%.

The bid is final so it can't be lifted again. It's also probably not going to be extended unless Premier gets 50% by August 6. Assuming Premier gets to 50%, it controls the company. That might prompt the Just Group board to reconsider their position. It’s an interesting situation,

Funtastic/Archer Capital. Another takeover we've spoken about is Funtastic, with private equity firm Archer Capital looking at an 80¢ a share bid. The due diligence period was extended and over the past week the stock has been trading around 56¢. The silence is deafening, and sort of suggests the deal is off.

It’s hard to know what to do here. The upside of the deal, if it’s on, is quite substantial. At 56¢, there's probably 10¢ of downside and 25¢ of upside. On that basis, it’s not a bad speculative punt but my sense is that the chance of the bid going ahead is probably fading. But we just don't know.

Ridley/Graincorp. The Ridley/Graincorp takeover fell over last week because Ridley was at one stage trading at almost a 35–40% premium to the bid. Interestingly, Ridley is still a customer of Graincorp, so although it was a hostile bid, they’ve said it’s a relatively amicable parting. The big issue is whether someone else will have a crack at Ridley. Maybe. I mean Graincorp may come back but the market's reaction to Graincorp's bid was to push its shares down and Ridley's shares up, so that sort of suggests that it will be difficult for Graincorp to do it.

We're seeing more players moving into the so-called soft commodity space. And there was a report that Glencore, which has always been known as a metals trader, might be moving into these areas. All these agricultural base stocks are of interest but it's been a difficult area as well. Futuris tried to sell its stake in AACo and wasn't able to get the price it wanted. AWB has its issues although some say it's a takeover target. I think it's a bit wait-and-see at the moment.

Ausdrill/Macmahon. Ausdrill was always trading at a premium to the Macmahon offer and then about two weeks ago the price started sliding and it’s now trading at a discount. On that basis, it's a share-based offer so the only safe way to play it is buy the target, which is Ausdrill, and short sell Macmahon. The fly in the ointment is that the managing director of Ausdrill, Ronald Sayers, has been topping up his own holding by paying cash in the market. He owns about 15% of the company now and generally at higher prices than where the stock is currently trading, so I don't think he would accept the current bid.

Macmahon could increase its offer by 5–10% and might just get it over the line. So this has gone from one that was too expensive to now trading at quite a reasonable discount, but I stress there is risk with this one that the deal may fall over, just as it did for Graincorp and Ridley. If the chief executive won’t accept the deal and he owns 15%, it might be hard for the deal to proceed.

Orica. We also look at demergers a fair bit. They're not the same as mergers although they often result in mergers because when companies demerge then often people who might have been interested in the demerged entity then go and bid for it. Today we've seen that Orica's raised money and it's going to split its explosives business from its consumer paints business. Whether that attracts a takeover offer remains to be seen. Of course, Orica infamously knocked back a private equity bid a year ago of $32 a share and it's now raised money at $22.50.

As a general comment, as someone who operates in the takeover space, I think boards that just knock back bids without putting them to shareholders ought to be punished. Shareholders are a relatively sophisticated bunch who can decide for themselves if they want to accept a bid. For boards just to knock bids back and then, in this case, a year later go back to shareholders and raise money at a 30% discount, it’s wrong.

Will the private equity bidders come back with Orica? It’s hard to say because the private equity landscape has changed a great deal since then. They may not be able to find the funding necessary. Orica could attract a bid once it demerges.

Seven/WAN. Under the Takeovers Act, if you own 20% of a company you can increase your stake by 3% every six months. Kerry Stokes has done that with West Australian Newspapers, and he actually paid over-the-odds to do it. He clearly wants WAN but I don't think he's going to make a hostile bid. He’s a patient investor, so he’ll just keep buying and buying and buying. Personally, I think it's more of an ego thing. I'm not convinced that it's such a great investment at these prices but for Kerry Stokes, who is a native of Perth, I think it would be a big thing for him to own the major daily newspaper in Western Australia. Will he make a full hostile bid? He might not have to. I think he might get control of it by doing what he's doing at the moment.

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

nTakeover Action July 21-25, 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.
10/07/08	Ausdrill	ASL	Macmahon Holdings	0.00		Extended to August 15.
29/05/08	Bellamel Mining	BMM	Norton Gold Fields	0.00
24/07/08	Bemax Resources	BMX	National Titanium Dioxide (Cristal)	96.85		Compulsory acquisition.
11/03/08	Challenger Infrastructure Group	CIF	Consensus Business Group	0.00
18/06/08	GoldLink IncomePlus	GLI	Emerald Capital	0.00		Seeks 45%.
24/07/08	Herald Resources	HER	Bumi Resources	82.67		Extended to July 30.
04/06/08	Herald Resources	HER	Antam and Shenzhen	19.39		Recommended offer. Extended to June 5. FIRB approval received.
17/07/08	Indophil Resources	IRN	Xstrata	2.16		19.99% pre-bid acceptance withdrawn.
20/06/08	Indophil Resources	IRN	Crosby Capital, Alsons Group, CEO Laufmann	0.00
24/07/08	Intermet Resources	ITT	Hillgrove Resources	40.66
14/07/08	Just Group	JST	Premier Investments	24.76		Extended to August 15.
25/07/08	Midwest Corporation	MIS	Sinosteel	54.01		Extended to August 25.
17/07/08	Mineral Securities	MXX	CopperCo	28.54
11/07/08	Olympia Resources	OLY	Territory Resources	73.53
24/06/08	Origin Energy	ORG	BG Group	0.00
24/07/08	Ridley Corp	RIC	GrainCorp	19.17
03/07/08	Rio Tinto	RIO	BHP Billiton	0.00		Early termination of Hart-Scott-Rodino anti-trust waiting period.
24/07/08	Roma Petroleum	RPM	Queensland Gas	38.50		Incl 19.2% pre-bid acceptance.
11/07/08	Roma Petroleum	RPM	Bow Petroleum	10.20
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
01/07/08	Arc Energy	ARQ	Australian Worldwide Exploration	0.00		Vote 5 August.
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.
22/07/08	CBH Resources	CBH	Perilya	0.00		Scheme terminated.
16/07/08	Great Artesian Oil & Gas	GOG	Drillsearch Energy	0.00		Vote July 28. Shareholders with 32% support scheme.
11/06/08	Independent Practitioner Network	IPN	Sonic Healthcare	71.50		Proposed move to 100%. Independent directors recommend scheme.
17/07/08	Macquarie Capital Alliance Group	MCQ	Macquarie Advanced Investment Co	0.00		Vote August 28.
09/07/08	Sapex	SXP	Linc Energy	19.42		No vote date set.
26/05/08	St George Bank	SGB	Westpac Banking Corp	0.00		Vote November 6.
24/07/08	Uranium King	UKL	Monaro Mining	0.00		Court approves scheme.
nBackdoor Listing
18/07/08	Hawk Resources	HFC	New Standard Energy	0.00		Hawk shareholders approve acquisition of NSE.
23/06/08	Mark Sensing	MPI	TMA Group	82.00		No vote date set. TMA would have 82% on completion.
nForeshadowed Offers
01/07/08	Espreon	EON	Vectis Group	19.80		Proposed scheme acquisition. Due diligence starts.
11/07/08	Funtastic	FUN	Archer Capital consortium	18.80		Due diligence exclusivity extended.
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.
24/06/08	Perilya	PEM	CBH Resources	0.00		Alternative proposal. Also rejected by Perilya.
16/06/08	Staging Connections	STG	Several parties	0.00		Non-binding proposals. Due diligence proceeding.
01/05/08	Warehouse Group	WHS	Woolworths	0.00		Offer clearance stayed until 48 hours after appeal judgement.
01/05/08	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		Offer clearance stayed until 48 hours after appeal judgement.

Source: NewsBites