Sun setting on Sundance bid

PORTFOLIO POINT: With Hanlong advising Sundance it won’t meet the deadline for finance approval, expect a fall in the Sundance share price when it resumes trading.

Sundance (SDL)

This deal has run the gamut this year from full of potential, to completely undesirable, to almost done, and now back again to avoid. Placed in a trading halt this morning, the company has released a statement regarding Hanlong’s financing – and the picture does not look pretty. Anyone still riding this rollercoaster should seriously consider selling.

There was actually some good news earlier this week, but the deal looks to be in serious trouble after today after Hanlong advised Sundance it would not be providing the credit approved term sheet from the China Development Bank by the December 13 due date. This is very bad, and the stock will suffer when trading commences on Wednesday.

Sundance shares last traded at 39c on Friday, on the 45c bid, but I would expect them to fall sharply on this announcement. A fall to 30c – or 23% – could be on the cards this week, and while I would say much lower than that is too low if this delay means the bid falls apart, watch out.

The problem hinges on the fact Sundance needs government approvals from two countries, Cameroon and Congo. It looks like this week they got the Cameroon government approval, or a step towards it. The specifics of the release are slightly unclear – the ‘Mbalam Convention’ still needs endorsement from the National Assembly – but the wider point is it was seen as positive and the share price rose on the news. However, they’re still waiting on Congo approval, and both have to happen prior to the takeover going through.

Then, this morning, Sundance went into a trading halt. Early in the afternoon, the company released a statement saying CDB wants to review the Cameroon Convention and the anticipated Congo permit before it will provide Hanlong with funding, and Hanlong has requested to extend the timetable as a result. Sundance has not agreed to this extension yet, and news reports suggest the deal is close to falling apart.

In one sense I would say the chance of Sundance getting these approvals is reasonably strong, because – and this goes for much of Africa in general – Chinese investment in the mining sector there is hugely important. I would be very surprised if governments like these stood in the way of a well-known Chinese company. I’m not suggesting it can’t happen, but these governments will know they need Chinese capital and that China is a big part of their economic future.

However the financing is crucial. This delay is a very bad sign for the deal and what may be going on behind the scenes, and investors should look to get out of this where they can.

Discovery Metals (DML)

Two very interesting things happened in the Cathay Fortune offshore private equity bid for Discovery Metals last week. In light of the moves, and the subdued share price, I think it looks like a decent buying opportunity – but investors should wait for the moment.

Firstly, the company said it has some production problems in Botswana. There was a problem with one of the open pit developments there, and deepening has been suspended pending a geotechnical investigation. Discovery says it’s still reviewing what this will mean, and is trying to say it’s not that important. It’s hard to say; it may not be a major problem but you never know. It’s certainly something to watch.

More importantly, the hostile $1.70 cash takeover bid is still on and the Discovery board has rejected it. However, the board’s own independent expert, KPMG, has come out and said the stock is worth $1.74-$2.11. That means the lower end of the acceptable range is less than 3% higher than the bid. That says to me that all the bidder had to do here is lift its bid by 4c or 5c and it’s very hard for the board to knock it back.

In addition, the bidder has reiterated a number of times in its statements that the bid is “full and fair”. “Full and fair” does not mean it’s the final bid. “Full and fair” – in the takeover world language – is used when you’re keeping your options open. So I’d say all Cathay Fortune has got to do is chuck five cents on the table and this deal is going through.

So, I think it’s fundamentally a good deal. However, the share price dropped roughly 3.5% today to close at $1.60 and I think this is a sign the market is worried the Botswana announcement could scare the bidder away. You’ve got a hostile bidder, you’ve got a bid that’s within easy distance of a well-recognised independent expert’s range, and that adds up to a good buy in the $1.60s, but I think it would be prudent to wait until the full extent of the production problems (and what they might mean for the bid) to be known.

Arrium (ARI)

There’s no fresh news with Arrium, but the share price is suggesting something is going on.

I keep hearing that POSCO is still in deep discussions with both levels of government, South Australia and federal, and that it has spoken about the Arrium deal a couple of times in the present tense, not the past tense.

There could be a translation issue, but I don’t believe it is. I think it’s still being looked at, and I note the Arrium share price has been above 80c all week. It rose from the 70s back up into the 80s and has stayed there. So there’s nothing specific, but I really do believe there are negotiations behind the scenes and, given the iron ore price has stayed firm, I believe there’s still a very good chance POSCO will come back with some sort of revised offer – possibly prior to Christmas.

Australian Infrastructure Fund (AIX)

Just to add brief note on this deal, which I discussed in more detail last week, the stock will go ex-dividend either December 20 or 21, the last Thursday or Friday before Christmas, and if you really want to buy this you should do so before then.

I think really the lowest this is going to trade at is $3.14, and the returns I quoted last week are based on that, and I would say it’s seen as a safe deal with the potential for upside. The small differences in upper and lower threshold of payment amounts really come down to estimated cash flows and franking levels, and the difference in annualised return comes in a large part from the distance between the ‘best case’ June 30 payment and the ‘worst case’ December 31 payment.

Mark Carnegie & Co

Mark Carnegie, along a range of other investor collectives, has become involved in a few interesting situations recently – reportedly taking small stakes in Qantas (QAN) and Brickworks (BKW), as well as having a look at Fairfax (FXJ).

Firstly, there’s Qantas. As I wrote last week, this is not a takeover so much as a ginger group trying to tell the company what to do. But it was interesting that Qantas pulled its funding from Tourism Australia, because TA is headed up by former Qantas CEO and Alan Joyce confidante Geoff Dixon. That shows the airline is taking this seriously, and sees the group as a real threat – at least to management.

Then there is a similar group having close look at Fairfax. It’s reported that Carnegie, John Wylie and Ron Walker (who used to be Fairfax chairman), are looking at, again, buying a stake and then trying to influence the company rather than making a full bid.

Then it’s also been reported Carnegie has taken a small stake and some options in the Brickworks and Washington H Soul Pattinson (SOL) cross-holding situation where the two companies own large stakes in each other. That system is designed to make both companies effectively takeover-proof, but I agree with Mark Carnegie that it has been destructive of value. It’s been in place so long it will be hard to change – but shareholder groups do seem to be wielding more power lately.

It’s interesting that this sort of activism may become the way that takeovers now work. Instead of buying a whole company, you buy a stake and influence the company instead, all while making a profit. A lot of funds do this in America, but Australian funds have historically been quite passive – if they don’t like something about a stock, they just sell it.

Carnegie’s been getting into these sort of activist roles, and what he’s able to do I believe is round up capital for specific deals. Now, it’s a harder thing to do and it’s not as definite, but if you like the work of Mark Carnegie and are inclined to follow shareholders then you’ve got three potential deals here: Qantas, Fairfax and Brickworks/Soul Patts. Investors could follow Carnegie into any of these, and essentially for no more than he is paying, you can ride the coattails of what he’s trying to achieve. But there are no guarantees.

Graincorp (GNC)

*Soon after we published the Monday December 3 edition of Eureka Report, Archer Daniels Midland lifted its offer for Graincorp.

As forecast several weeks ago, ADM has allowed shareholders to keep the recent 35c of dividends – and on top of that has increased the bid from $11.75 to $12.20 – a rise of 3.8%.

ADM already owns roughly a quarter of the company, though it is still unclear whether the exclusivity provisions from the initial bid still stand.

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