THE DISTILLERY: Billabong waves

Jotters pick apart the latest bid for Billabong, while one is bemused by Fortescue's plan to sell some assets.

Billabong International, Fortescue Metals Group and Fairfax Media all made potentially company-changing announcements yesterday. The merits of each declaration are debated in this morning’s edition of The Distillery, along with the context with which two of the companies kept the market informed.

Fairfax’s Adele Ferguson says the Billabong board has a difficult time ahead of it considering a bid driven by one its directors, with three previous proposals falling as hard as the clothing maker’s share price.

"It will be an interesting test of the board's mettle, including that of new chairman Ian Pollard, who is in a situation of not wanting to keep the market in the dark too long, not wanting to appear too supine given the proposal comes from an insider, yet not wanting to scare him away given the company's previous track record with takeover proposals. While $1.10 might seem a tad on the light side – a 12 per cent premium to its latest closing price before it was placed in a trading halt – the dilemma for the board is that it is a 48 per cent premium to the price the shares were trading at before Naude announced he was investigating a management buyout.”

The Australian Financial Review’s Matthew Stevens agrees that the headline price isn’t compelling, but it’s the disclosure practices of the company that left some people utterly confused.

"Billabong took about an hour to respond after a story was published on afr.com saying an offer valuing the company at $527 million was on the table. Billabong shares traded as much as 7 per cent higher before the company placed the stock into a trading halt shortly after noon. At that stage it was around 4 per cent higher at 98 cents. The company had still not responded on Monday night, except to say its shares were trading on an ‘uninformed basis’. The fact the market was left trading blind for an hour has raised concerns about the length of time the company took to respond.”

The Australian’s Barry Fitzgerald is similarly bemused by the disclosure practise of an ASX-listed player. Fortescue Metals Group informed the market yesterday about its intentions for its port and rail assets, but chief executive Neville Power covered that in a Bloomberg interview on December 5.

"The only difference in yesterday's ASX filing was that it has actually started a ‘process to consider the potential sale of a minority interest’ in the rail and port assets, held by its wholly owned The Pilbara Infrastructure. What has changed between December 5 and yesterday? Power was not saying so yesterday but industry talk is that before and after December 5, and up until yesterday, Fortescue had been looking for a buyer for the whole lot. But there have been no takers, as Fortescue was demanding more control over TPI than just being a customer would warrant.”

Regardless, Fairfax’s Elizabeth Knight explains that Fortescue is effectively buying some debt relief with long-term operating costs.

"While selling a part of infrastructure will bring cash through the door and improve the shape of the balance sheet, it will mean that Fortescue will need to pay for the use of these assets in perpetuity. As a rule of thumb, experts say, investors are prepared to pay up to 1.5 times what is referred to as the regulated asset base. Based on Fortescue's book value, the entire infrastructure business is worth about $US9-10 billion, putting the upper limit on 40 per cent of that at about $US4 billion. Thus the deal will be a financing transaction. Fortescue is looking to enter into a long-term contract with whichever party buys the 40 per cent of the infrastructure assets.”

The Australian Financial Review’s resources reporter Jamie Freed similarly writes quite accurately that Fortescue had a choice between paying down debt with its port and rail assets or keeping operating costs low for the long-term.

Meanwhile, The Australian Financial Review’s Chanticleer columnist Tony Boyd says Fairfax Media chief executive Greg Hywood, his boss, has "little choice” but to offload the company’s $600 million stake in Trade Me.

"If he did not sell it and slash a big portion of the company’s $900 million in debt, the year ahead would have been consumed with the 2014 debt refinancing deadline. From about June next year, the market would have been obsessed with that debt refinancing as if it were a guillotine. There would have been talk of a Fairfax equity issue or calls for the Trade Me stake to be sold, or stories about the company’s market capitalisation slumping below its debt levels. All the doom and gloom conversations surrounding companies such as Ten Network and APN News and Media would have been visited on Fairfax just as the company was focusing on the next phase of its transition from print to digital. This phase includes the switching of the publication of The Sydney Morning Herald and The Age from broadsheet to compact format as well as the introduction of a ‘freemium’ pay wall.”

Elsewhere, The Australian’s Richard Gluyas says ANZ Bank chief economist Warren Hogan, who’s just made a big call about the Reserve Bank, is paying his dues to Westpac Bank chief economist Bill Evans, who called the start of the RBA’s cutting phase.

And finally, The Australian’s Barry Fitzgerald writes quite tellingly that the notion that funding channels are cut off to junior miners is a bit of an exaggeration.