The Distillery: Dick Smith bravado

One jotter argues Dick Smith’s IPO is overvalued, while another sees Saputo’s ‘sweetened’ WCB bid as anything but, and could get messier.

Commentators typically have to look far and wide for fodder as the year winds down but, with the IPO market set for a big finish to the year, there should be plenty of stories worth chasing as Christmas approaches. The eagerly anticipated float of Dick Smith Holdings is one such example, with the release of its prospectus provoking a concerned assessment from one scribe.

Over at Gina Rinehart’s coal joint venture in Queensland, developments have led one commentator to note that the consortium is also not short on ambition.

Elsewhere, one jotter discusses the seemingly never-ending wrestle for control of Warrnambool Cheese and Butter and finds it could soon get a little messy, if it isn’t already.

First to Dick Smith, where Fairfax’s Elizabeth Knight is not convinced about the float’s worth. Could a company essentially bought from Woolworths for $94 million a year ago now be worth $520 million?

“The more nimble specialists with plenty of incentive to heap attention on consumer electronics are going to do it better than companies like Woolworths, Myer and David Jones and discount department stores like Target, Big W and Kmart. But a turnaround of the magnitude suggested by the value of the Dick Smith IPO is not plausible. Even if one takes into consideration better supply chain, IT and inventory management, new product releases and more focused management...”

Knight makes a strong point, though admittedly Woolworths did sell on the cheap and its shareholders have the right to feel somewhat aggrieved. Regardless, the question for investors is: can you see value in a company that is operating in such a structurally challenged sector?

On that score, it’s very hard to dispute Knight’s viewpoint, but in a market this hot, there will still be plenty of willing buyers.

In other company news, Saputo has lobbed a further revision to its offer for Warrnambool Cheese and Butter, which has The Australian’s John Durie pondering whether it really is an ‘improved’ deal.

“The argument is, with the dividends off the table, what was being spruiked as a $9.56 a share bid is now worth at best $9.20 a share with the final 20 cents coming only if Saputo Jr gets more than 50 per cent acceptances. Murray Goulburn Co-operative and Bega Cheese noted the effective price cut, given the 56 cents a share in franking credits has effectively disappeared, and noted there was not a closing date or a declaration of a final bid from the Canadians. A trip to the Takeovers Panel is a virtual certainty.”

According to Durie, the Takeovers Panel will be called in given the changes can be viewed as a downward revision to the offer, though it appears unlikely it will result in any problems for the Canadian dairy giant that is desperate to wrap things up before Christmas. It appears the battle will continue into the New Year, however.

Elsewhere, Aurizon and GVK Hancock – the joint venture partnership of Gina Rinehart’s Hancock Prospecting and Indian conglomerate GVK – has announced a “capital-lite solution to their shared infrastructure conundrum”, according to the Australian Financial Review’s Matthew Stevens.

“Over the longer term, the GVK Hancock plans remains hugely ambitious. Assuming the Kevin’s Corner and Alpha projects deliver to the proponent’s expectations, peak production will eventually hit 60 million tonnes annually and that, folks, is a hell of a lot of coal. Consider that Australia’s biggest individual coal mines run at circa 15 million tonnes per annum, the capacity of the existing Abbot Point terminal is 50 mtpa and the capacity of Queensland’s coal network is 270 mtpa.”

In other words, the project promises to be a game changer regardless of when it finally gets the go-ahead.

Also in resources, The Australian’s Barry Fitzgerald notes the mining resurgence in Britain and Europe, with Australian firms, somewhat ironically, showing the way.

“Long happy to consume but not produce, Britain and mainland Europe now see virtue in having a mining industry ... Having turned their backs on mining decades ago, firing up a long forgotten ‘dirty’ industry more fittingly done by colonials is proving to be a slow process. But at the micro level at least, it is happening. And the funny thing is that the former masters of the world are having to pin their hopes of a mining revival on the can-do abilities of companies from the former colonies.”

Closer to home, the potential lifting of sanctions on Iranian oil and the gas boom in America could threaten the economics of Australian LNG projects, Business Spectator’s Stephen Bartholomeusz notes. However, there’s no reason to panic just yet.

“A sharp decline in the oil price, or the prospect of a flood of LNG out of North America, might impact LNG projects still on the drawing boards and give their promoters pause for thought. However, none of the promoters of the projects currently under construction in offshore Western Australia or at Gladstone in Queensland is publicly or privately displaying any real concern. That’s partly because the economics of their projects are stronger than they’ve been given credit for and partly because the fundamental supply-demand backdrop appears so favourable.”

Still, there must be a few nerves in management ranks given the heavy bets placed on the sector in recent years.

Meanwhile, Fairfax’s Adele Ferguson believes a new Macquarie Equities report, which discovered companies with directors holding stock had significantly better returns, is a great contribution to the ongoing debate about executive remuneration. Shareholders have every reason to push for boards to “put their money where their mouths are”, Ferguson says.

Finally, the AFR’s Chanticleer columnist, Tony Boyd, labels Australia’s innovation scorecard as “grim” and says it provides reason to halt Coalition plans to slash key ALP-initiated programs, while Boyd’s colleague David Bassanese also makes a case for the worth of certain Gillard government programs. In Bassanese’s case, this relates to big spends such as the Gonski education reforms and DisabilityCare. The budget may be in trouble, but that doesn’t mean key social policies should be ignored.