PORTFOLIO POINT: Watch out for increased mergers & acquisitions activity in 2013, and infrastructure stocks are likely to be prime targets.
Thanks to everyone for your support throughout the year. My regular column on the takeover activity of the week is below, but above I talk to Eureka Report managing editor James Kirby on video about the bigger picture for the coming year – and which sectors and businesses could see some heightened takeover activity in 2013. Solid infrastructure stocks are attractive in the current environment, and Transurban is a standout choice in this area.
There are opportunities in the few remaining Australian branded beverage stocks, and the second-tier telcos with the coming of the National Broadband Network. Plus I also consider some particular takeover scenarios that may well come in the play in the year ahead.
Whatever happens, I think low interest rates and a tough environment for organic earnings growth will see more companies looking to buy scale on the Australian sharemarket in the new year – watch the video above to find out more.
There’s not much information yet on Billabong, other than that the company is currently in a trading halt pending the announcement of “a possible change of control proposal”.
Media reports have suggested former director Paul Naude has made a $1.10 offer for the company, but a statement has not yet been released at time of publication. It is now roughly four weeks into the six-week period during which Naude has to find financing for his proposed management buyout of the company.
Have things deteriorated to the point where $1.10 is now acceptable for Billabong? I think this one is 50-50 on whether the board accepts it, and I don’t think it would succeed without board approval. It will come down to founder Gordon Merchant as well, and what price he’s happy with.
Billabong last traded at 98c. I think it will likely trade close to the (rumoured) bid when it reopens, but my initial reaction would be to wait. There have just been too many bids fall over here to jump in straight away.
There were some interesting comments reported over the weekend from Ashok Jacob, who runs Ellerston Capital – a fund with quite a big position in GrainCorp and one of the funds who sold some of its stake to Archer Daniels Midland to kick off this whole process.
Now, Jacob’s a good negotiator, and he felt that the board had done the right thing knocking back the first bid, but now felt they should be engaging with ADM. Of course he’s talking his book, he stills owns a big chunk of it so he obviously wants the bid to go ahead, but I think what he’s saying is the board needs to sit down and talk in order to get a better offer. At the moment the GrainCorp board is just saying “not high enough”.
Having said that, I think private discussions probably are happening and I still think there’s a very good chance ADM will come back with a higher bid. Most people are saying roughly $13 a share, which is about 9.5 times EBITDA and at the bottom end of comparable multiples paid for agricultural businesses.
ADM do already own 19.9%, so they’re about as committed as they can be at this stage, but I would like to see the GrainCorp board enter into discussions, and, frankly, I suspect that process has begun.
At $12.30 where GrainCorp closed today, the shares are trading above the bid – but only by about 1%. My fund’s taken partial profits, just to be prudent, but my gut tells me it’s still a buy at this price. It’s not as good as it was when I first recommended picking it up several weeks ago before the 35c of dividends, and it’s definitely riskier, but I still think there’s something there.
Australand Property Group (ALZ)
As I wrote last week, GPT Group is apparently bidding for a large part of Australand’s business, including its investment portfolio and commercial and industrial assets.
Despite the fact it wasn’t a full bid, and there was uncertainty, I suggested it was probably a speculative buy and I’m pleased to say this week the share price has jumped up a lot. Australand closed today at $3.37, but I would now say it’s getting a bit too high to buy in at this time.
GPT has now said a number of times it’s committed to this process, and now the big issue is Australand’s largest security holder – CapitaLand. I think there are now private discussions going on behind the scenes, to see what it would be prepared to accept, because CapitaLand owns 59% of Australand and obviously it’s pointless having a bid without talking to them.
Simply put, any bid should at least get to net asset value (NAV). With a stated NAV of around $3.48, that’s why, when this bid first emerged, and the stock was only trading around $3.20, I thought it was a buy just because of the discount. I think this one still has a little further upside but it’s gone from a ‘buy’ to a ‘hold’ for me. There’s still uncertainty, it’s not a full bid anyway, and the gap to valuation has narrowed quite substantially.
Just a short note – I’ve been saying for several weeks now that I think POSCO and Noble could still return with a bid for Arrium, but in that time, the share price has actually gone up and briefly exceeded 88c a share. That was the value of the second bid that POSCO and Noble put on the table.
Whether this is a reflection of people thinking the bidders are still there, or whether it’s just an improved outlook for Arrium, is hard to say. What it tells you, however, is that a bid of 88c certainly would not succeed. The iron ore price has firmed, there’s been quite a lot of press about the mining consumables business as a growth segment, and it all adds up to mean that a serious bidder would probably have to pay more than $1 a share or there’s no point.
Fairfax (FXJ), TradeMe (TME)
Lastly, Fairfax has finally done what I thought it would and should do and sold out of Trade Me.
Some people think it’s a dumb decision; that if Fairfax want to get into the 21st century, they shouldn’t be selling their good digital businesses. But Trade Me is confined to New Zealand – where there’s a small population and slowly growing economy, and the company already dominates its sector. Trade Me’s growth appears to be slowing, as far as I can tell. It wipes out the bulk of Fairfax debt as well. Either way, the market reaction has been fairly muted and the stock closed today at 51.5c.
As far as takeovers go, I think Trade Me is probably a target. It would have been a real target if Fairfax had sold its stake to one buyer, but it’s been split up now. I still think the eBays, Amazons and Googles of this world would have a serious look at Trade Me, simply because New Zealand is a pretty good market. It’s a small market for big players like those, but it’s a good market, and it’s one they don’t currently do well in. Why not buy it? They could buy it in their sleep.
I think Fairfax has done the right thing. What they will do with all their new-found wealth, who knows?
Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.
Takeover Action December 10-14, 2012
|23/10/2012||Clearview Wealth||CVW||Crescent Capital Management||62.70|
|5/12/2012||Discovery Metals||DML||Cathay Fortune||13.78||Unconditional.|
|30/11/2012||Globe International||GLB||Mariner Corporation||0.00||Board rejects offer|
|30/11/2012||L&M Energy||LME||New Dawn Energy||77.85||Incl lock-up agreements|
|7/12/2012||LinQ Resources Fund||LRF||IMC Resources||67.39||FIRB approves. Ext to Dec 31|
|15/10/2012||Mintails||MLI||Seager Rex Harbour||40.33|
|13/12/2012||Neptune Marine||NMS||MTQ Corp||69.08||Unconditional|
|29/06/2012||Real Estate Capital Partners USA Property Trust||RCU||Woolley GAL II||32.81||Incl 30.99% associates' holdings|
|1/10/2012||United Orogen||UOG||Iron Mountain Mining||78.55||Unconditional|
|15/11/2012||Wentworth Holdings||WWM||Australian Renewable Fuels||19.81||Pre-bid|
|25/10/2012||Wilson HTM||WIG||Mariner Corp||0.00|
|Schemes of Arrangement|
|23/11/2012||CGA Mining||CGX||B2Gold Corp||0.00||Vote Dec 24|
|29/11/2012||Cortona Resources||CRC||Unity Mining||0.00||Vote Dec 21.|
|6/12/2012||Endocoal||EOC||China Yima Coal/Daton Group||0.00||Vote Feb. FIRB approves|
|20/11/2012||Integra Mining||IGR||Silver Lake Resources||0.00||Vote Dec 19|
|6/12/2012||Skywest||SXR||Virgin Australia||0.00||SCI, Singapore, approves|
|5/12/2012||Sundance Resources||SDL||Hanlong Mining Investment||17.99||Vote Feb 1|
|13/11/2012||Texon Petroleum||TXN||Sundance Energy Australia||0.00||Vote Feb|
|13/12/2012||WAM Capital||WAM||Premium Investors||0.00||Court approves|
|4/12/2012||Graincorp||GNC||Archer Daniels Midland||19.90||Revised indicative offer|
|12/12/2012||Westside Corp||WCL||Unnamed party||0.00||Due diligence extended to Dec 21|
|26/10/2012||WHK Group||WHG||SFG Australia||0.00||Discussions|