The Takeover Front

It’s all happening on the takeover front. Yesterday there was a big bid for APA Group from the Hong Kong based, CK Infrastructure, but there’s lots of takeovers going on at the moment so I thought it was a good idea to check in with Tom Elliott, the 3AW Drive presenter, but also Chairman of Beulah Capital. They run a couple of takeover funds and Tom is the longstanding expert on investing in takeovers and he still does it, so let’s hear what he’s got to say about the current round of takeovers. 

Here's Tom Elliott, the Chairman of Beulah Capital. 

Tom, am I right in thinking there’s a lot of takeovers going on at the moment?

Yes, there are quite a few.  I mean, just today we’ve had this big one where Hong Kong’s CK Cheung has announced an $11 a share bid for the Australian Pipeline Trust.  There was a bid for Santos on the table, that’s pulled back but I reckon they’ll eventually come back.  Investa Office Fund has had a bid, so yeah, there’s a lot of bids happening right now.

How do you think investors should play this?  I mean, for example, with the APA one, the Pipeline Trust one, is this one of those situations where it’s a good idea to buy now, now that the stock has jumped to reflect the price on the grounds that there may be an auction or not?

There’s a chance of getting a higher bid, it’s hard to see who else might bid for Australian Pipeline Trust.  CKI has obviously got the whip hand because they already own Investra and Duet which they bought about a year ago.  They’re clearly wanting to get a bit of a – well, it might be a pipeline monopoly in Australia.  The problem really is going to be Canberra in this one because they’re going to have to get Foreign Investment Review Board approval, and even though CKI has previously received that approval for Investa and Duet, the Nervous Nellies up in Canberra might wince a bit at doing it a third time.  But look, it’s not an agreed offer yet so they could pay a little bit extra for this.

In general, are you still of the view that it’s a good idea to buy into companies after the first bid has been announced?

Generally, it is.  You’ve got to be careful these days.  We’re seeing a lot more conditional bids, bids that are conditional upon due diligence, on board approval, on regulatory approval, so you’re probably seeing more bids falling over.  The Santos one was an interesting example of that, I’m not convinced the board made the right decision in rejecting that one but reject it they have.  But generally speaking, buying within a few days of the first bid is a good idea.

I mean, as you say, the problem is that so many bids, if not all of them these days, they say it’s indicative non-binding.  When did this start?  I mean, when I was a young reporter there was always somebody came in and made a bid, that was it.

I actually blame the rise of private equity, because a lot of bids now are either wholly or partly funded by private equity and what they do, they sort of do a certain amount of due diligence and they say, ‘Okay, we’re interested in this.’  And they go public but they then want permission to really go in and examine the company’s books at length.  And so, they make an indicative non-binding bid because they’re not entirely sure.  When you have strategic bidders, who know the industry or know the target, they just bid and say, ‘We know this company, we’re going to bid for it.’  But when you have private equity funded bids the private equity firms want to get inside the data room before they’ll make a final decision.  I reckon that’s what’s changed about bids or takeovers in general.

What do they find out that’s not public?  I mean, suddenly they’ve got inside information, haven’t they?  What sort of things do they find out that shareholders don’t know?

They find that contracts with key customers aren’t very long-dated.  They find contingent liabilities that for one reason or another haven’t made it onto the balance sheet and they might fear about class action law suits they didn’t know about.  They might interview staff and find that the company culture’s not very good.  I mean, there’s any number of things they look at and they don’t disclose those things publicly.  They just say, we couldn’t reach agreement and they walk away.  I’m not saying that happens all the time, most the time it does not happen, but the increase in the conditional bids in my view is due to the increased presence of private equity in our market. 

The best way to play it for an investor then would be to identify a company that’s going to get a bid and then buy it and then sell as soon as the first indicative non-binding offer’s made, that is the holy grail.

Well, that’s the holy grail.  We still have a fund that does that and we look at strategic shareholdings or previous bids.  For example, one of our better trades recently was Investa Office Fund, which had a bid in the past but the bid had not proceeded and then the stock had fallen back and it’s a real estate fund.  The stock had fallen to about 18% discount to its net asset value and sure enough the bidders have come back with a slightly improved offer.  That’s one where there are criteria like where someone’s taken a strategic shareholding in the company or there has been a previous and unsuccessful bid that you can buy into it after that bid on the reasonable assumption that eventually the bidder will come back.

What other indications are there that a bid might be on the way?  I suppose, as you say, the strategic shareholding is the main one.

The strategic shareholding is the best one because that’s someone already playing their hand a bit.  For example, the interesting one there is Automotive Holdings Group, which hasn’t performed well recently as a stock, but AP Eagers which is another big car dealership group keeps upping its stake and they now own 26% of it.  So it’s pretty certain that eventually AP Eagers and Automotive Holdings Group will move to form a sort of giant super dealership of car dealers in Australia.  In some cases, you just have industry structures which are being contracted. 

Up until a couple of years ago there was a lot of merger activity in the telco space.  What’s interesting now though is that telcos are now fighting each other to get customers rather than merging with each other and you’ve seen the share prices of TPG and Vocus and Telstra of course and Amaysim all fall because they’re not making much money with all this market competition.  I think eventually they’re going to get more rational and start operating like a cartel again and they’ll start buying each other rather than fighting each for customers.  But at the moment, for example, in the telco space the industry activity is very competitive and not very conducive to profits, but eventually I think that will change.

Is there an industry at the moment that you’re looking at where they are likely to start buying each other?

Well, in fact we’re now re-looking at the telco industry, that’s the reason I brought it up.  We did quite well out of it a few years ago and then we watched all the valuations fall.  We think that eventually there is money to be made in this space.  I think another interesting one is iron ore at the moment.  You’ve got a three-way tussle for Atlas Iron and you’ve got Mineral Resources is bidding, Gina Rinehart has just bought a 20% stake, Fortescue Metals we think is in there as well.  That’s a sign that there’s further merger activity to come.

Could result in a stand-off in Atlas and nothing happens.

Absolutely it could.  I mean, Gina Rinehart might say, ‘Look, I’m keeping my 20% and stuff the rest of you.’  And so no one else can actually own it and then there’s a question of whether there’s some sort of side deal she does with the company.  By the way, this existence of side deals for major shareholders is something that’s always troubled me.  It goes on when someone takes a blocking stake and gets some sort of an advantage for doing so and that’s not supposed to happen but it does happen. 

The other one, given the Australian Pipeline Trust bid that we talked about earlier, looking at what we might call the regulated utility space, other examples are Transurban which has had bids in the past and always knocked them back and is now reaching near all-time highs in terms of its share price, but I still think that’s one that could go a bit higher.  Spark Infrastructure which is a bit like these gas pipelines but it owns a big network of poles and wires, and that’s been a bit weak recently.  There’s clearly buyers for what I call the regulated utility space in this country.

Everyone thought Fairfax would get a bid when it hived off Domain or Domain would get a bid and nothing’s happened there.  What’s your view about that?

That’s a difficult one because of course the CEO of Domain, Anthony Catalano, who’d essentially built that business a couple of times just up and resigned.  I think the market’s a bit nervous now saying, ‘Well, what if he goes and starts Domain mark two by himself?’  Now, I’m led to believe he’s not doing that, he’s doing something else in the real estate space.  Would someone want to buy Domain now?  They probably would, to be honest.  Now that Catalano’s gone, someone else might look at it and think that they can run it better. 

The big issue for Domain and its main competitor, Realestate.com.au, is just simply the health of the real estate market.  The fact that prices have started to fall in housing, particularly in Sydney and Melbourne, is actually quite good for those classifieds businesses.  When houses sell themselves, you don’t need to advertise them as heavily.  But when the estate agents are having to work a bit harder, you actually need the Domains and the Realestate.com.au’s to help sell properties.  I think, Alan, that one’s still firmly on our list of stocks that might get taken over.  As for the rest of Fairfax, no, I don’t think so.

Great to talk to you, Tom.  Thanks a lot.

Thanks, Alan.

That was Tom Elliott, the Chairman of Beulah Capital.