THE DISTILLERY: The AXA hold-out

BHP Billiton gave us the expected defence, the Reserve Bank's November 2 board minutes fed the bank bashing debate, while figures from the other regulator, APRA were only noticed by one jotter and takes the debate in a different direction. Meanwhile China's market fell sharply, again, Ireland's struggles continued, none of which mattered here this morning. Perhaps they will after the second big sell off in three trading days in shares and commodities. It's February all over again. But let's play a new game; spot the hold-out on the AXA Asia Pacific board. Anyone can play, but none of our Covey played this morning, they were too busy wondering what the hold-out could mean: the views verged from significant to no big deal.

Elizabeth Knight wrote in the Fairfax broadsheets this morning: "The dissenting voice will carry plenty of sway with AXA AP shareholders if he decides to stick to his guns. The information the director requires is about value and, more importantly, potential value, and whether this offer is properly taking account of it. This may be particularly irritating for the remaining directors, the would-be buyers (AMP and AXA SA) and advisers, and even some AXA shareholders, but the questions are appropriate."

Stephen Bartholomeusz said in Business Spectator: "The alacrity with which five of AXA Asia Pacific's six independent directors have recommended the revised bid for their company by AMP tends to magnify the significance of the one hold-out. AXA APH said today that one independent director was seeking further information before determining their position on the proposal. If it were simply a matter of gathering a few extra facts or conducting a bit more analysis in order to present a unanimous position on the bid the majority of independents could have been expected to hold on for a few days before announcing their support for the offer. That they didn't suggests that the hold-out has more substantial reservations and, indeed, may well oppose the offer."

Terry McCrann told his readers in the News Ltd tabloids that he agrees with the odd commentator who say the AXA-AP directors have recommended a bid for their company which is too low. "They've done so because they've not factored in the true – full – value of the extraordinary position AXA-AP has built in Asia, and most especially its utterly unrivalled beachhead in China. Right at the start of the 'China Century'. On one level I'd go further. That they haven't captured a sufficient share – for their AXA-AP shareholders – of the value to the French AXA of being able to get full ownership of what at the moment it has to joint venture with AXA-AP. If there is one overriding message from the saga, it is that AXA is desperate, desperate to get its hands fully on the Asia business."

But veteran Australian market commentator, Bryan Frith is relaxed about the hold-out at AXA AP: "As is usual with schemes of arrangement, the $14.6 billion proposal is conditional on the unanimous approval of the directors, in this case the six independent directors. On that basis, the refusal of one of the gang of six to join the party could threaten to torpedo the offer. But that's highly unlikely, even if the undecided independent opts to recommend rejection. If it were to come to that, then AMP and AXA SA could simply decide to waive the need for a unanimous recommendation and decide it would be satisfied by a majority recommendation, and they would undoubtedly go down that route."

McCrann also said said the Reserve Bank's November board minutes: "put into very specific words what we generally knew, or should have known, anyway. The so-called – incorrectly – 'out of cycle' rate rises from the banks, their top-ups of the official increase, don't actually impose higher rates on borrowers. All it means is that you are getting a rate rise from your bank that you would otherwise have got 'officially' from the RBA. Indeed, as I noted the other day, borrowers end up being – marginally – better off."

Bartholomeusz also said that based on a reading of the minutes of the RBA board meeting on Melbourne Cup Day: "The Reserve Bank's minutes of its Cup Day board meeting have confirmed what any reasonably intelligent observer of the bank – which means few of those politicians currently railing against bank profits – would already have concluded. The RBA expected the major banks to respond to its increase in the cash rate in exactly the fashion that they did and factored that into its decision to increase official rates. The minutes state that the board members noted that lending rates might increase by more than the cash rate but this tendency would not be lessened by delaying a change in the cash rate."

The Australian reported this morning: "The Reserve Bank has exploded the political argument over outsized increases to bank mortgage rates. The RBA said it expected them because of rising funding costs and had taken them into account in its monetary policy settings. In a blow to Julia Gillard, who labelled the banks "arrogant" after the ANZ lifted its mortgage rate above the official increase, and Joe Hockey, who revealed a nine-point banking reform plan in the wake of the rises, minutes of the RBA's Melbourne Cup day board meeting predicted the extra hikes."

And the paper's economic editor, Michael Stutchbury said: "The Reserve Bank has blown the populist bank-bashing debate out of the water. The minutes of its November 2 board meeting show that it increased its cash rate by 25 basis points knowing that the private banks were likely to slug their mortgage borrowers more again. That means the Reserve Bank is comfortable with the big four banks lifting their mortgage rates by more than its own cash rate hike. The Reserve Bank is taking this "into account" in targeting the interest rates paid by borrowers, which it figures are needed to keep inflation under control as the mining boom builds up. If the big four banks did not increase their lending rates by more than the official cash rate, the Reserve Bank would probably increase its cash rate more in coming months. This means Labor, the Coalition and the Greens are competing to rush through laws to bring the banks to heel on the basis of a complete furphy about them exploiting their market power to gouge borrowers."

But there's now another argument, did bank funding costs really rise as much as claimed? APRA figures suggest otherwise, as Peter Martin reports in the Fairfax broadsheets this morning: "The big four banks have fattened their margins while complaining about being squeezed, new figures reveal. As parliament prepares to debate legislation forcing banks to lift rates by no more than the Reserve Bank, figures from the Australian Prudential Regulation Authority indicate the average rate paid by the big banks on money they borrowed rose by less than the official cash rate. The figures show that while the Reserve cash rate rose 1.36 percentage points between the June quarters of last year and this year, the average rate paid by the big banks rose 0.88 points. The lower rate would have been because rates on some of the funds banks borrowed went up more slowly than the Reserve cash rate." Will the other papers pick up this story?

In or out of Korea? Despite reports yesterday saying it had lost, the ANZ reckons it's still in with a chance in buying the Korea Exchange Bank, according to John Durie in The Australian yesterday: "A rival bidder, Korean retail bank Hana Financial, has signed only a non-exclusive memorandum of understanding with Lone Star, which has a 51 per cent in KEB. The deal is at a higher price than was being considered by ANZ and also comes amid reports Hana was more interested in buying the government shareholding in Woori Financial, which is worth some $US6.1 billion. Hana can't do both deals, so maybe it is trying to leverage a better price for that option and at the same time trying to create an auction to force ANZ to pay a higher price. ANZ certainly still thinks it is the race for KEB and is obviously keen on the deal." The ANZ however has cancelled an update due on November 26 on the deal and other banking matters.

Veteran BHP watcher at The Australian, Matthew Stevens says: "In his debut, new chairman Jac Nasser yesterday delivered a vigorous defence of BHP Billiton's global quest for growth by acquisition. In the immediate wake of confirmation that BHP had spent $US350 million ($356 million) on its frustrated bid for Potash Corp of Saskatchewan, Nasser indicated that the global Australian's predatory instincts were an essential part of its corporate DNA and it would continue to hunt for companies that owned tier-one assets that fitted its strategic mission, and whose acquisition would add to shareholder value."

And Fairfax's veteran BHP watcher, Barry Fitzgerald: "Three merger and acquisition failures with an expenses bill of more than $US800 million has not deterred BHP Billiton from pursuing game-changing acquisitions. It told shareholders at its annual meeting in Perth yesterday it had an obligation to pursue large-scale transactions where it believed shareholder value could be created."

The AFR says: "Murray Goulburn Co-operative has flagged a three-way merger with Warrnambool Cheese & Butter and Bega Cheese as a means of achieving industry rationalisation and improving returns to farmers." Seeing the Warrnambool company has already rejected Murray Goulburn, it looks like a proposal designed to die.

Fairfax's Insider, David Symons says this morning: "It's no coincidence that Telstra shares hit a record low of $2.56 on the same day that Vodafone launched its new ''Infinite'' mobile cap plans. The ramifications for Telstra could be immense. The market assault from Vodafone comes just as large numbers of early adopters of smart phones are up for grabs. The iPhone 3G was launched in Australia in July 2008, and the first customers are now coming off 24-month contracts."

And John Durie wrote this morning that Skilled Group, the labour hire company, has a second chance with changes in management, board and the mining boom: "If there was ever a time for contract labour concern Skilled Group to excel, it must be now. The continued resources boom and a decidedly two-speed economy are screaming out for labour flexibility. Skilled's recent appointment of the Shell-trained former TPG and Coles executive Mick McMahon also promises a new era of financial discipline for the 46-year-old company. It comes after a board renewal program that saw veteran investment banker Vickki McFadden appointed as chair and Leighton's Peter Gregg joining the board, along with Max Findlay, the former boss of rival Programmed Maintenance."