Surf's up

PORTFOLIO POINT: The $3 offer for the surfwear brand might form a base for talks that take the price much higher.

Billabong International (BBG). The Billabong board has admitted to what we knew last week: it’s received an indicative, non-binding proposal from TPG Capital to take it over for $3 a share.

The key detail in the proposal documents is the fact that selling the Billabong family jewels won’t nullify the whole proposal.

Last week Billabong sold half of its share in one of the most profitable divisions in the company, US sports watch brand Nixon, valuing it at $464 million. There were some rumours that the takeover proposal was conditional on, among other things, Billabong not selling assets, and that the private equity group would not be so interested in the company after it had diluted its own earnings power by partially selling out of a major brand.

But that’s not the case and I think the sale actually makes Billabong a far more interesting prospect as a takeover target, because it’s propped up the balance sheet and it’s no longer at risk of going bust. If no bid occurs Billabong is still worth something, for the time being at least.

In saying that, the sale of the Nixon brand sends a strong message that it’s on the ropes. Remember, if you need to sell stuff to shore up your balance sheet you sell the best stuff first because they’re the bits you can sell. It doesn’t mean the rest of the brands Billabong owns are as good as Nixon or that their retail strategy is a good idea.

But given Billabong’s 12-month high was $9.07 and it closed Monday at $2.83, will shareholders and founder Gordon Merchant (13% owner of the company) accept $3 a share for their holdings? Yes, it is a 67% premium to where the share price was trading before rumours of a takeover hit the market, but that is also the lowest point Billabong has ever traded.

That $3 might form a base point for negotiation, though, and the real price may get up to $3.50 or $4. Directors have said they’re prepared to talk to other people, so that’s essentially a white flag to anyone to ever thought about buying Billabong, and now they’ve attracted some corporate action and, as we know, that more often than not leads to a change of control.

It’s not without risk, but that risk has been mitigated by the Nixon transaction beefing up Billabong’s balance sheet, and the fact that it didn’t derail the proposal from TPG. (A lot of short sellers were caught in a short squeeze when the Billabong bid appeared out of the blue, to understand what happened in the Billabong short squeeze. See today’s feature by Chris Gosselin).

Ludowici (LDW). It’s really amazing what’s happened here: I was pleased to get an increase in the initial bid from FLSmidth’s $7.20 by Weir Group’s $7.92 offer, but suddenly, bang! There’s $10 on the table just a month after it had been trundling along around $3.50 per share.

The situation is muddy because of the Takeovers Panel inquiry, but FLSmidth’s $10 lob is about 30 times Ludowici’s earnings and there are two reasons why I find this situation particularly impressive. First is the big overbid; it’s a 26% leap from $7.92 to $10 and that’s massive.

Second is that I thought the Takeovers Panel wouldn’t allow FLSmidth to make the offer. You’ll recall that the CEO appeared to say the initial price was the final price, and under Truth in Takeovers law, when you say something is final '¦ then it must be so.

But somehow they’ve managed to argue that they’ve been mistranslated or misunderstood and the Panel gave them an interim order to be able to make the counter offer.

There is precedent for the Panel to decide in favour of more money for shareholders in a target company. When Cemex took over building products company Rinker Group in 2007, the Takeovers Panel did allow a final bid to be increased when it let shareholders who hadn’t sold up towards the end of the process to keep a final dividend. Shareholders who’d already sold had to be compensated.

At the time the Panel said it didn’t want to prevent shareholders from getting the maximum return and it appears to be doing the same thing here: ignoring the Truth in Takeovers rule so shareholders can get more money. What it says is that you can break that regulation if you’re prepared to put more money on the table, which says something about our corporate regulation and, if true, creates questions around whether we can trust this rule.

The facts are that the FLSmidth CEO made a mistake and was surprised when Weir Group turned up with its offer. FLSmidth probably thought it was the only one talking to Ludowici, but it wasn’t. There’s also obviously something in this company that is very attractive to foreign bidders that isn’t showing up in its earnings yet, so you never know. Weir may come back with a higher counter bid.

Further, I don’t think you need to worry that the Takeovers Panel will refuse to let FLSmidth keep that $10 open. You have two bidders with deep pockets and, by and large, it seems that the Panel would prefer to let a competitive auction develop for Ludowici. At $9.75 it’s not as a good a buy as when I first pinpointed it at $6.80, but there is still the possibility of a higher bid.

Austar United Communications (AUN). Austar has set a date for the parishioners to decide on its wedding to Foxtel. It’s chosen March 30, which means it thinks the ACCC will have come out with a decision on the deal and that this decision will be positive for it.

The long-running takeover process to get Foxtel’s $1.52 cash bid for Austar past the competition regulator looks like it could be coming to a close and, with the latter trading around $1.21, it’s also looking very good: you’ve got about 10-15% downside – maximum – and about 25% upside. I’ve always thought the ACCC’s reasons for opposing the takeover were spurious, especially after the Federal Court said its very similar reasons for denying Metcash’s acquisition of the NSW Franklins stores were not based in commercial reality.

If the vote does go ahead on March 30 it will be tied up within days; that’s the beauty of schemes of arrangement. The vote goes ahead, the court approves it, and the stock stops trading within three or four days of that. So assuming the ACCC and the shareholders approve it, it will all be over by the first or second week of April.

Sundance Resources (SDL). Sundance is frustrating and interesting. They’ve decided to extend the takeover period with suitor Sichuan Hanlong, which is mildly positive as Hanlong is hanging in there and not walking away. But on the other hand, Hanlong is still waiting on Chinese approvals and financing for the 52¢ a share bid and Sundance still needs the nods from the Congo and Namibia.

As a result, the stock has wallowed a bit but this hasn’t made it more attractive than it’s been in the past. Stay away from this one just yet, it’s still in the danger zone; we don’t know if Hanlong has the money or will get it; we don’t know if they’ll get all the approvals they need; and it’s in Africa where legal and governmental processes can be notoriously unpredictable.

Gloucester Coal (GCL). When Yanzhou’s offer for Gloucester was first announced the coal miner’s shares shot up to just over $10 each. They’ve fallen back to $8.19 now which makes it a far more interesting proposition.

Details around the bid are going to remain sketchy for a bit longer, because the Foreign Investment review Board (FIRB) hasn’t given the OK yet and this is delaying the release of the takeover documents, and it’s not a clean cash bid. You apparently get $4 in cash and $6 worth of Yanzhou shares in an Australian listed entity that are guaranteed by some mechanism to remain above a certain price.

Just the fact that the shares have drifted off through lack of interest makes them look like a good buy again. It’s one for investors with a higher tolerance for risk but I’m moderately certain that the deal will proceed in some shape or form.

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

-Takeover action, February 13-17, 2012
Date	Target	ASX	Bidder	(%)	Notes
15/02/12	Accent Resources	ACS	Xingang Resources	54.84
14/02/12	African Iron	AKI	Exxaro Australia	66.59	Pre-bid acceptance
17/02/12	Anvil Mining	AVM	Minmetals Resources	90.00	Compulsory acquisition
15/02/12	Brockman Resources	BRM	Wah Nam International	72.70
06/02/12	Contango Capital Partners	CCQ	Contango Micro Cap	74.10	Ext to Feb 20
03/02/12	Extract Resources	EXT	Taurus Minerals	42.74	Kalahari offer unconditional
16/12/11	Gold One International	GDO	BCX Gold Investments	82.80	Unconditional
15/12/11	Hastings Diversified	HDF	APA Group	20.71
16/02/12	Living and Leisure	LLA	Merlin Entertainments	95.54
08/02/12	Magma Metals	MMW	Panoramic Resources	9.34
18/07/11	Mintails	MLI	Seager Rex Harbour	37.33
16/02/12	MSF Sugar	MSF	Mitr Phol Sugar	88.72	Unconditional
16/02/11	Razor Risk Technologies	RZR	TMX Australia	92.45
15/02/12	Signature Metals	SBL	LionGold	30.98	Ext to Mar 16
12/05/11	Sphere Minerals	SPH	Xstrata	75.29	Unconditional
13/02/12	UCL Resources	UCL	Minemakers	13.10
Schemes of Arrangement
12/12/11	Aston Resources	AZT	Whitehaven Coal	19.99	Vote late Mar
10/02/12	Austar United Communications	AUN	Foxtel	0.00	Vote Mar 30
29/08/11	Auzex Resources	AZZ	Bullabulling Gold	0.00	See GGG Resources - 50/50 merger
13/02/12	Charter Hall Office REIT	CQO	Macquarie Capital consortium	0.00	Vote Mar 15
15/02/12	Flinders Mines	FMS	Magnitogorsk Iron and Steel Works	0.00	Vote Mar 30
29/08/11	GGG Resources	GGB	Bullabulling Gold	0.00	See Auzex Resources - 50/50 merger
20/01/12	oOh!media	OOH	Champ III Funds	19.60	Vote Feb 27
11/10/11	Sundance Resources	SDL	Hanlong Mining Investment	17.99
Backdoor Listing
05/01/12	Consolidated Steel	CGQ	CFT Holdings (HK)	0.00	Approved
Reverse Takeover
17/02/12	Millepede International	MPD	Angline Pastoral Pty Ltd	0.00	Angline and shareholders to control 67.6%. Vote early May
Foreshadowed Offers
27/09/11	Bannerman Resources	BMN	Sichuan Hanlong	0.00	Conditional proposal. Talks continue
17/10/11	Customers	CUS	Unnamed party	0.00	Non-binding discussions
23/12/11	Gloucester Coal	GCL	Yancoal (Yanzhou Coal)	64.50	64.5% holder Noble Group in favour
08/12/11	Endocoal	EOC	Unnamed parties	0.00	Unsolicited approaches
16/02/12	Ludowici	LDW	FLSmidth	22.00	Indicative 22% support for proposed scheme
10/02/12	Ludowici	LDW	Weir Group	0.00	Indicative proposal
05/10/11	New Hope Corp	NHC	Unnamed parties	0.00	Proposals invited
06/06/11	Pulse Health	PHG	Unnamed party	0.00	Expression of interest
06/02/11	Spotless Group	SPT	Pacific Equity Partners	19.64	Non-exclusive due diligence

Source: News Bites