Talking up a coal storm

PORTFOLIO POINT: The exchanges between Macarthur and Peabody make me confident the bid will be lifted further.

Macarthur Coal (MCC). We’re finally starting to see some action in the $4.7 billion bid for Macarthur Coal as the joint bidders – Peabody/ArcelorMittal – went hostile with its bid of $15.50 plus a 16¢ dividend.

It’s negotiation by press release at this stage and the Macarthur board has said it won’t recommend the offer but $16 a share would be acceptable and it wants $18 if BidCo, the subsidiary making the offer, gets over 90% acceptances.

Peabody followed up this development this afternoon by saying that, given Macarthur’s “unwillingness” to negotiate a bid agreement, it was taking the bid to the people or as we call it, going hostile. This is a bit cute of Peabody, as Macarthur said only hours beforehand what it was prepared to negotiate for.

The $15.66 offer is only an increase of 2.17% above the first bid, but the Macarthur board just wants Peabody to pay what they were prepared to last year and the $18 sweetener is a nod to CITIC and POSCO who own a combined 31% – and maybe this is an indication that this is the price at which CITIC is willing to sell its 24%. The board wants a deal and I think the bidders will ultimately agree to $16.

If you’d bought the stock two weeks ago (click here) when it was trading around $15.50, this is a very good deal. Now, when it’s trading at $15.83, it’s merely OK. There’s still 1.07% in it, but only if the $16 offer gets up.

What’s interesting about the Macarthur offer is that because general market sentiment has been so bad over the past few months, markets haven’t been fully pricing bids straight away. This has provided sharp investors some very good opportunities. In the past, when markets were strong, buying into the Macarthur deal would probably have meant paying a premium to get a position in a takeover play like this but because of the poor sentiment you’ve been able to buy the stock at below the bid.

ConnectEast Group (CEU). The minor shareholders of this infrastructure stock are revolting – they aren’t prepared to accept CP2’s bid of 55¢ a share for the company, which has been accepted by the board. I agree that the bid is too low and I think the board is giving the company away: Connect East owns an irreplaceable asset in Melbourne’s East Link freeway.

The problem is that CP2 already owns 35% and is prepared to continue to use the creep provisions until it gets control. That’s why the board folded: because it didn’t really have much of a choice.

Yes, CP2 is doing the sensible thing by making a bid when the company’s share price is weak and, yes, ConnectEast has too much debt, but the shareholders have nothing to lose from holding back just yet. Given that CP2 already has a big stake lifting the bid 5¢ to 60¢ would only really cost them another 3¢ because it doesn’t need to pay itself.

If shareholders can argue a higher price out of a suitor, it’s a sure sign the board has been lazy and not done its job. Given that ConnectEast is trading below the bid at 53.5¢ I think this is another good trading situation where there is firm cash offer on the table, some upside to that offer and the possibility of the bid being raise even higher.

Foster’s group (FGL). And speaking of lazy boards, Merrill Lynch analyst David Errington held Foster’s CEO John Pollaers to account on Friday for not talking to suitor SABMiller. Errington said that while the $4.90 a share bid wasn’t particularly high, that was no reason to not talk to SABMiller at all, especially considering the board’s terrible performance over the past decade. Sure enough, Pollaers came out afterwards and said the board would be happy to discuss the bid.

In this case the company responded to Errington’s provocations but often analysts want things both ways. They want the board to negotiate hard, but to have leverage they’ve also got to be prepared to walk away. The reality is that there will be background talks going on, but publically the board has to say “no”.

Remember that Foster’s recently had a big win against the ATO that will leave it $390 million better off. This leaves the door open for another suitor to come along and use that cash to lift the bid to $5 and add a special dividend of 25¢ and deliver shareholders with a handy 7% increase just like that.

Centrebet International (CIL). While we are on the subject of the ATO, I’ll take the opportunity to wrap an unusual little deal that appeared earlier this year. Centrebet (click here) is trading at $2.06 because people are starting to realise that the company stands a good chance of winning its tussle with the ATO.

UK bookmaker Sportingbet made a $2 bid at the end of May for Centrebet, but shareholders would also be paid out the winnings from a case against the tax office in which the company is claiming $90.7 million in overpaid taxes. Recent comments suggest that payout could be 80–90¢ a share.

This is another situation where the market was too nervous to fully price the whole package and you had a chance to get set. Anyone who bought the stock a month ago when it was still trading under the bid should be very happy with themselves now.

Charter Hall Office REIT (CQO). The rebel shareholders have lost and the current management of Chart Hall Office will stick to the asset liquidation plan. Orange Capital, Point Lobos and Luxor Capital were trying to roll the external manager and replace them with Bill Moss, the man who, ironically, founded the office property investment trust in the first place.

But the move was voted down at the special meeting last week and the manager is going to continue with its promise to sell the US assets and return capital to shareholders; it would probably have upset that process if a new group was installed at this point. I said that no matter what happened, the outcome would be good shareholders: while the asset sale won’t give a major short term bump to Charter Hall Office’s share price, shareholders will get a special dividend out of the proceeds and I think that qualifies.

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

-Takeover action, July 25-29, 2011
Date	Target	ASX	Bidder	(%)	Notes
24/06/11	Auzex Resources	AZX	GGG Resources	8.50	Ext to August 4.
22/07/11	ConnectEast	CEU	CP2	35.01
28/07/11	Crescent Gold	CRE	Focus Minerals	45.80
18/07/11	Mintails	MLI	Seager Rex Harbour	37.33
28/07/11	NSX	NSX	Financial & Energy Exchange	41.95	Unconditional.
08/07/11	QMastor	QML	Triple Point Technology	0.00	Shareholders with 11% reject.
12/05/11	Sphere Minerals	SPH	Xstrata	75.29	Unconditional.
21/07/11	Territory Resources	TTY	Noble Group	90.51
29/07/11	Viento Group	VIE	Mariner Corp	8.90
Schemes of Arrangement
22/07/11	Austar United Communications	AUN	Foxtel	0.00	ACCC raises competition issues.
25/07/10	Caledon Resources	CCD	Guangdong Rising Asset Management	0.00	Approved.
22/03/11	Cash Converters	CCV	Ezcorp	33.00	Offer for controlling 53%.
27/07/11	Cellestis	CST	Qiagen Australia	19.90	Vote August 3. FIRB clearance.
13/07/11	Centrebet International	CIL	Sportingbet	0.00	Vote August 17.
15/06/11	Conquest Mining	CQT	Catalpa Resources	0.00	Vote September.
27/06/11	DKN Financial	DKN	IOOF Holdings	18.49	Vote September.
18/07/11	Eastern Star Gas	ESG	Santos	20.90
28/06/11	Valad Property Group	VPG	Blackstone	0.00	Vote August 1
Backdoor Listing
08/02/11	Millepede International	MPD	Cool D'Fine	0.00	Marine HVAC provider.
Foreshadowed Offers
27/05/11	Accent Resources	ACS	Unnamed party	0.00	Possible friendly takeover.
11/07/11	Bannerman Resources	BMN	Sichuan Hanlong	0.00	Conditional proposal
14/06/11	Big Air Group	BGL	Vocus	0.00	AFR report. Big Air says "No offer".
21/06/11	Foster's Group	FGL	SABMiller	0.00	Unsolicited conditional offer.
25/05/11	MacarthurCook Property Securities	MPS	P-REIT (BlackWall)	0.00
11/07/11	Macarthur Coal	MCC	Peabody/ArcelorMittal	0.00	Conditional proposal
06/06/11	Pulse Health	PHG	Unnamed party	0.00	Expression of interest.
09/05/11	Spotless Group	SPT	Unnamed private equity group	0.00	Indicative offer rejected.
18/07/11	Sundance Energy	SDL	Hanlong Mining Investment	0.00	Proposed scheme.

Source: News Bites