Sundance bid far from over

PORTFOLIO POINT: Hanlong has bid for Sundance, the Whitehaven takeover is off the table, and the Future Fund has made an offer for the Australian Infrastructure Fund.

Sundance (SDL)

After months of rumour and wrangling, this morning we learned that Hanlong and Sundance have finally agreed on a bid at 45c a share. While shareholders will grab this, and should grab this, with both hands, I’d still be staying away.

This is a little bit better than 40c, but not as good as the original 50c or the 57c increased bid price that was apparently too much for China’s National Development and Reform Commission. The revised offer values Sundance at about $1.4 billion.

It’s actually an OK outcome. It’s not great, but at least a deal has been done and it all hasn’t just fallen apart.

The stock has been suspended for the better part of a month now, and since well before that I’ve been saying to stay away. It resumed trading today, and while it jumped a little to close at 36c I suspect it will continue to trade at a reasonable discount to the bid. This is because people are suspicious as to whether Hanlong will actually complete the deal, and even with a 1% break fee I think if the iron ore price fell further in the next few months they’d come back with an even lower price or just walk away.

The timeframe for completing the deal is still several months, and so even if it is trading at a reasonable discount my view is still not to touch it – it just can’t be trusted.

Whitehaven (WHC)

And speaking of deals that can’t be trusted, Nathan Tinkler’s bid for Whitehaven Coal has fallen through.

There’s a bit of a war of words going on with him and the company now, saying ‘the profit wasn’t very good’ – well, they’re his assets in there, so he can hardly say that. It just proves the reality at the moment is that it’s hard to get finance for these things.  Whether it was because he couldn’t get enough debt or perhaps, more likely, he couldn’t convince enough current equity holders to go along with him, it hasn’t happened.

As for Whitehaven now, I’d still stay away from it. The stock has fallen to about $3, but the company has a bigger problem now with what this does to Tinkler’s fortune. Some people may recall during the financial crisis that a lot of short selling hedge funds targeted companies where they thought the substantial shareholders had margin loans over their shares. Tinkler, from what we understand, has borrowed quite a lot of money against his stake – by some estimates the value of the stake could now be pretty much equal to the debt against it. My view is that Whitehaven’s share price will be under pressure now as people try to test where Tinkler is forced to sell his stake, which would then push it even lower.

I would not be buying Whitehaven in anticipation of a recovery in its share price or Tinkler being able to come back.

Australian Infrastructure Fund (AIX)

There’s some better news, of sorts, with the Australian Infrastructure Fund, where the Future Fund has made an unusual bid for all of its assets.

As I understand it, the Future Fund is not supposed to take over whole companies, so the deal is the equivalent of a takeover, but it’s not structured that way. Curiously, that means it’s not as good an outcome for shareholders.  The Future Fund is going to pay the equivalent of $3.22 a share for all of the company’s assets – so AIX gets that cash and then after all the costs of the deal it pays that cash, plus any other cash it has, to unit holders. This could all take quite some time because the Future Fund has to complete its due diligence, buy the assets, then the company has to basically wind itself up and distribute the cash.

At first the share price rose quite high after this was announced – up to into the mid-$3.20s – but people have now worked out that there could be some capital gains tax payable and it closed today at $3.09.  There are a lot of estimates around, but it looks like the deal could be only worth $3.20 to shareholders, up to maybe $3.25.

If we’re pessimistic and say this deal takes five months to complete, say through to Christmas, then I would say a 5% discount is warranted. That means if the deal is worth at most $3.25, a 5% discount on that is 17 cents and therefore $3.08 is a about the right price.

Thakral Holdings (THG)

Brookfield has lifted its bid for hotel and commercial property owner Thakral, from 70c to 81c if 90% of acceptances are reached.

Readers may remember I said in this instance it was worth breaking my own rule never to buy more than 3% above the bid price. Immediately following the initial bid at 70c the stock traded at about 74-75c, but I still thought it was worth buying because Brookfield almost certainly had to increase.

This bid has now been accepted by the board, and while it’s still a little below the net tangible asset value it’s close enough and a nice increase on what people would have paid. If you’d bought in at 75c that’s about an 8% gain.

Hastings Diversified Utilities Fund (HDF)

After several rounds of bidding, PPA has pulled out of the process and APA should secure the bid.

Interestingly the HDF share price has actually gone up since then (closing today at $2.59) because now there’s certainty about the bid. PPA can still legally come back, but they won’t. They’ve said it’s got too pricey and as the APA share price will probably recover now that increases the value its mostly-scrip bid for HDF shareholders. All in all it’s been a reasonable result. It would have been nice to get another round of bids, but as it is, the share price of HDF has gone up anyway, so in a sense it doesn’t matter.

We’ve got into that $2.60 mark – and remember you were able to buy this one a fair bit below that for quite some time.

Billbong (BBG)

Looking to future takeovers, Billabong’s result came out this morning with a net loss of $275.6 million – which isn’t great.

It’s not as bad as it could have been, but it’s not great, and there was no word in it as to the progress or lack thereof of a takeover. I think the company’s stalling, wanting to give time to the new CEO, but I don’t really know how much longer they can stall. Either they really engage TPG or they tell them to walk away.

I would still stay away from Billabong – I just can’t think of any good reasons why the bid is not proceeding at the moment.  But I can think of bad ones. The stock closed today at $1.36. In the absence of a bid, it will be back down at $1.10 or thereabouts and the bid’s only $1.45. Your downside is bigger than your upside, on a bid that I would say is a 50-50 chance at best.

Fairfax (FXJ)

Finally, I read some weird stories last week about Gina Rinehart trying to sell down her stake; and it is odd.

The conspiracy theory is that she’s doing it to push the price down, to actually buy more shares. The other theory is that she’s got her seat on the board and now doesn’t need to own such a big stake. I suspect it’s more the latter, but good luck trying to flog 5%.

It’s been terribly handled – once you make it known that you want to sell 5% of a company and then you don’t succeed, the share price has a big overhang on it. She should have done a deal with an investment bank. So I don’t really understand what’s going on here. Maybe it is a conspiracy, but I can’t see why you would do that. To force down the price of something you already own is not a good idea.

Notwithstanding all that, a lot of people are saying that Fairfax is entering break-up territory. If it sold its remaining 51% of Trade Me (TME), Fairfax could wipe out almost all of its debt. Then there’s a view that maybe Rinehart would happily just buy the AFR; I don’t know why people think that, but that’s a view. The AFR as a separate newspaper is probably saleable, but forget the kind of Wall Street Journal multiple Murdoch paid a few years ago.

Enterprise value (including debt) to EBITDA is currently around 4x, but if it sold the Trade Me stake and paid down debt it would only be on couple of times. That’s what’s starting to make a break-up look attractive and I think that’s something the board will look at.

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