Takeover fever: six potential mega-deals

Tom Elliott’s six potential mega deals

ANZ and Standard Chartered – $59.7 billion

Thanks to Australia’s ‘four pillars’ banking policy, there is no chance ANZ Bank could be taken over by any of its domestic competitors. And, as local earnings growth eventually slows (although Commonwealth Bank’s share price suggests this’ll never happen), chief executives like ANZ’s Mike Smith will start looking overseas for acquisitions.

If the ANZ board is smart, they’ll resist the siren-like call of offshore ventures. As NAB’s troubled UK operations demonstrate, the grass is not always greener on the other side of the fence. The aforementioned record share price of banking market leader CBA demonstrates that local fund managers love domestic franchises with solid cash flows and dividends. If ANZ tampers with this formula, it’ll be punished – much as NAB shareholders have been for quite some time.

Nonetheless, the rumours persist that ANZ has its eyes on Standard Chartered. Earlier this year Citigroup issued a note on the possibility of a tie-up between the London-headquartered ex-colonial bank franchise that has a substantial network across Asia and Melbourne-based ANZ.

Chevron and Woodside (WPL) – $34.5 billion

Last week Woodside decided to abandon pursuit of the Israel-based Leviathan project. Like Wesfarmers, this leaves the oil and gas producer with two choices:

1. Use its now surplus cash reserves to return more funds to shareholders; or
2. Find another big project!

If Woodside goes the ‘safe’ route of returning money to shareholders, it’ll almost certainly become a takeover target. The company’s North-West Shelf projects have created substantial value, yet a management group that stands still for too long eventually gets replaced by a more aggressive competitor.

Chevron or BHP Billiton (BHP) are potential buyers of Woodside, although they’d have to pay more than $50 per share to receive a recommendation from WPL’s board. To read more on Woodside’s current difficulties read David Walker today (click here).

Wesfarmers (WES) and Optus – around $27 billion

As Wesfarmers’ (WES) non-retail earnings fall relative to the size of its Coles acquisition back in 2007, the West Australian conglomerate must decide if it wants to remain just that – a conglomerate. Assuming the answer is yes (which I believe to be the case), then Wesfarmers must now be contemplating a few acquisitions.

A move into the telco space makes a lot of sense. Via Coles, Wesfarmers now has a massive presence in the retail space. Having already offered supermarket customers some insurance products, why not branch out into mobile phones and broadband?

For Wesfarmers to expand in the telco industry, two paths present themselves:

1. Get big quickly and make a bid for the Australian assets of Singtel-Optus (SGT); or
2. Buy a smaller carrier and then grow it. As I’ve written before, iiNet (IIN) is a standout medium sized consumer focused play here.

Because it seems unlikely Singapore Telecommunications is a seller at the moment, iiNet seems Wesfarmers’ most likely target. Having said that, any asset or company is always for sale at the right price, and WES currently has plenty of financial firepower. (To read more, read Wesfarmers: Just not worth it.

Santos (STO) and Origin Energy (ORG) – $15.9 billion

The recent mega gas supply deal between Russia and China should sound a few warning bells for all the coal seam gas to liquefied natural gas (CSG-to-LNG) projects currently being developed around the Queensland port of Gladstone. The three largest companies involved in the Gladstone region are Santos, Origin and British Gas.

Right now these three operators are competing with each other for workers, expertise, financing and gas customers, with the latter now getting harder to find. Eventually they’ll work out that cooperation rather than competition is in their collective best interests. While I doubt there’ll be a takeover at the top level between Santos and Origin, shareholders stand a very good chance of being rewarded by some sort of merger at some stage between their respective CSG-to-LNG projects.

Origin may also have gained more attraction after it surprised the market in snapping up a 40% stake for the Poseidon permits in the Browse Basin offshore north-western Australia earlier this week.

Transurban(TCL) and Canadian pension funds – $14.2 billion

Having recently raised a considerable amount of money to fund its acquisition of the Queensland Motorways group, Transurban is now the premier toll road stock in Australia.

In the past it has received, and knocked back, takeover offers from a consortium of Canadian sovereign wealth funds (including the Ontario Teachers’ Pension Plan).

Due to Transurban’s growing cash flows and long-term asset franchises, I believe these offshore pension funds will eventually bid again for what is a unique Australian-based company with very secure long-term contracts and highly-attractive potential income streams.

To read more on Transurban see Robert Gottliebsen’s Tapping Transurban’s toll stream (May 2).

San Miguel (or Kirin) and Coca-Cola Amatil (CCL) – $7.2 billion

Back in 2008, then locally owned brewer Lion Nathan made a takeover bid for Coca-Cola Amatil (CCL). This ultimately foundered because Lion couldn’t agree terms with CCL’s shareholder with a 30% stake, the Coca-Cola Corporation of Atlanta, and Lion was soon after snapped up by Japanese brewer Kirin.

In more recent times CCL has changed chief executives from long-time incumbent Terry Davis to Alison Watkins. It has also issued a couple of profit warnings, and its share price has been hit hard.

Its core soft drink franchise remains an attractive asset, however, and potential bidders for the company include both San Miguel of the Philippines and the aforementioned Kirin of Japan.

The recent activity around Treasury Wine Estates (TWE) is instructive here, as it has received a $4.70 per share bid from private equity firm KKR just months after the winemaker issued its own set of profit warnings.