Takeovers help in troubled times

Waving the white flag and accepting that shareholders would be better served by soliciting a takeover offer is not easy for some boards and management teams to do.

Waving the white flag and accepting that shareholders would be better served by soliciting a takeover offer is not easy for some boards and management teams to do.

But for small and emerging companies, this calendar year looks like crunch time and several have already elected to take the cash and depart the Australian Stock Exchange.

One of the main issues smaller companies have had to face up to is the failure of trading volumes to recover following the global financial crisis. While the value of trade conducted in the top 20 stocks on the ASX remained more or less flat since peaking in 2008, the value of trade in the rest of the market has retreated to 2006 levels.

For companies not ranked in the top 100, the dollar value of trade undertaken last year was still close to 50 per cent lower than that achieved in 2007. Companies with a great spread of institutional and retail shareholders have navigated their way through this world without any big impact. But those faced with illiquidity because of block shareholdings or a lack of institutional interest have had to ask the question of whether they should remain listed or consider the three main alternatives: becoming an acquisition target of larger peers, merging with similar sized peers or pursuing a management buyout and delisting.

The formerly sleepy mining equipment maker Ludowici was jolted into life in January with a board-supported takeover offer followed by a hostile tussle between two suitors. As a result, shareholders are now 210 per cent better off than they were at Christmas time, based on the market price. The winning bidder, the Danish group FLSmidth, must now wait until July, with shareholder votes and court hearings required to implement the $325 million takeover.

The ATM network operator Customers has struggled with investor sentiment for the past few years as earnings results could not live up to the hype generated after its profitability surged when regulatory change allowed it to more than double its transaction fees. But its shares have risen 38 per cent after its board received a $173 million cash takeover offer from Canada's DirectCash and recommended it to shareholders. This takeover is also scheduled to be implemented in July.

In both the Ludowici and Customers cases, the acquirer is a larger offshore player with an existing business that it aims to expand.

FLSmidth's strategy is to become a market leader in all major minerals processing segments and it has highlighted coal, copper and iron ore as three priorities. Ludowici's product line allowed FLSmidth to complete its coal offering and improve its copper and iron ore offerings, as well as expanding its exposure to the minerals sector, from which Ludowici generates about two-thirds of its sales.

DirectCash already had an Australian business focused on prepaid cash cards and a deep understanding if the ATM industry, representing its core operation in Canada. DirectCash saw an opportunity to take a leading position in the Australian market, one that it believed had greater scope for growth than its home market.

It seems highly likely that over the rest of the year we will see further interest from offshore businesses that have access to cash. They are likely to seek out smaller businesses to enhance their growth prospects amid a soft macro-economic climate globally. Australia's position relative to Asia, and its exposure to both hard and soft commodities, alongside its legal and political systems, makes it a desirable destination.

But selling to an international player is not going to be the answer for everyone.

The packaging business National Can Industries elected to take one of the alternative paths last month, with the controlling shareholders looking to take it private in a deal valuing the business at $123 million. The Tyrrell family had always retained a strong position, with a 50 per cent stake in the business, but were counter-balanced by the presence of Raphael Geminder's investment vehicle, Bennamon, which had 20 per cent. The result of the decision is a 76 per cent return to shareholders over the past month, based on market prices.

What we have not seen much of yet is the merger of equals. One close approximation is the listing this month of Opus Group, which was achieved via the merger of a private equity-based printing group with the printing subsidiary of listed group McPherson's.

This merger was affected by McPherson's simultaneously spinning off its printing business as a separate listing and the unlisted Opus group agreeing to a share-based combination. Neither business considered their size to be large enough to form the basis of an ASX listing on their own but together they now have a market capitalisation of $50 million and ambitions to achieve cost savings and market share growth by leveraging their combined capabilities.

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