Waiting for the knockout bid

BHP Billiton/Rio Tinto. BHP’s three-for-one bid for Rio Tinto is share-based and it's immediately triggered a range of action among share traders. We’ve seen a lot of hedge funds going long in Rio Tinto and short in BHP. What this ultimately does is protect them from overall market movements. This has created what we saw at the close of trade on Friday: BHP was almost 2% lower and Rio Tinto was at a 2–3% premium to the value of the bid. Rio Tinto’s gain has actually been a lot more moderate than I would have expected given the manner in which Rio’s board has comprehensively rejected the bid. Rio closed up 7% at $140.50 today, November 12; BHP was down almost 2% at $41.68

It’s pretty clear that the Rio Tinto board is looking for a bigger premium. The question for BHP is: how do they do this? Do they increase the ratio? Do they raise some cash? There is a rumour around that BHP is seeking to raise about $60–70 billion to sweeten the deal. It’s not impossible that we will see a counter-bid for Rio Tinto. But the number of groups that could do it are small. There’s Xstrata and maybe Anglo-American. (See Tim Treadgold’s feature today, BHP and Rio: China sees red).

There are such compelling arguments for this bid to succeed. It absolutely makes sense to combine these companies and the synergies would be just enormous. If you include the shares listed in both Australia and the UK you will end up with a $400 billion company. It will be about the seventh-biggest company in the world. I think the most likely outcome is that BHP sweetens its bid so, I believe BHP shares could stay under some pressure because of the expectation it will have to pay more. At this point it’s hard to say just how much more. The valuations have been as low as $130 and as high as $190. So somewhere in between these two figures – more than $150 – is the most likely. For retail investors, I’m going to suggest two different strategies.

In the short term you buy Rio Tinto, but in the longer term I think you might be better off buying BHP. In the short term we are likely to see an increased offer for Rio, which will push it higher. During this period, BHP’s price will be likely to come under pressure but eventually it will reap the benefits of the merger. BHP’s price is likely to remain a little depressed by the short selling but ultimately if the takeover makes sense they go up.

Coles/Wesfarmers. Coles shares had their last day's trading on Friday, so if you are a Coles shareholder now what you get today is you get one ordinary Wesfarmers share and you also get a thing called a Wesfarmers partially protected share, whose trading code is WESN. Now these new Wesfarmers equities are interesting because they have a built in price protection, if Wesfarmers rises then so do the partially protected shares. If Wesfarmers falls then the partially protected share will retain its value.

So given that the Wesfarmers share price has come off in the last few days, and given that the market is soft at the start of the week, you should see these partially protected shares trade at a premium to the ordinary shares. Now the big indexes and institutions won’t hold these and most people won’t understand their true value. If you see these trade at any sort of discount you should buy them. They are a superior security to the ordinary Wesfarmers shares.

Symbion. Primary has finally revealed itself and launched a $4.10 cash offer for Symbion, the health services company that has been in merger discussions with Healthscope. Primary is going to have to undertake a capital raising of its own by issuing more of its own shares for cash for the bid. Now as we know, Primary blocked a scheme of arrangement that Healthscope put forward earlier this year.

As these two predators fight it out, Healthscope is proceeding with Plan B, which is to break up the company and sell some of it to private equity and divest other parts and keep some of it itself. The problem with the Healthscope revised deal is it requires various forms of relief and permission from the Australian Taxation Office, whereas the Primary deal is a nice clean $4.10 cash offer. Healthscope closed today, November 12, at $5.36.

The Primary bid is below where Symbion’s shares are trading but it’s a very clever deal because it’s a simple one to understand and it doesn’t require the tax office, for example, to approve it, so it’s an interesting situation: You’ve got two groups that both want the asset but neither is able or prepared to just offer a knockout price so it’s an unusual one. Normally when you get two groups that want something you see the share price for the target company go up. That’s not what we’ve seen and I think I’ve alluded to this a number of times before. Although Primary has made a cash bid, it’s actually lower than where the shares have been trading. But Primary has the ability to block anybody else’s bid. I don’t see that there’s an easy way to make money for anyone from Primary's Ed Bateman. I think the fact that neither shareholder is able to rally up its bid too much suggests that, to be honest, the company perhaps just isn’t worth much more than this.

Brambles. There was an interesting announcement made to the ASX last week by Asciano. The company came out and said that it had no current intention of making a tilt at Brambles, either on its own or in concert with another company. Now Brambles has been rumoured to be a takeover target for a while, ever since Brambles itself revealed that Asciano had a 4.3% stake in the company.

What’s happened since then is that Brambles price has risen and Asciano’s share price has gone down. Now that could reflect the fact Asciano’s position as a bidder who might be about to take on a lot of debt. Now since the statement was released Asciano has gained about 7% and Brambles eased about 1%, which is certainly good for Asciano if they do intend on making a scrip bid for Brambles at some point in the future. They’re certainly not selling their 4.3% stake so I think we could expect to see a bid in the next six months

Nufarm. Doug Rathbone, who owns 17.6% of Nufarm, has apparently been quietly shopping his stake (and therefore the whole company) around for the past six months and he’s finally got a bidder by way of ChemChina. The bid is $17.55, of which 30¢ is a dividend and the remainder is capital. The stock is actually trading at a discount to the bid after trading as high as $17.45. In terms of the potential for a counter-bid, there is an Israeli company that might be interested, Makhteshim Agan Industries. The only thing is, is that the bid at the moment is subject to due diligence so it’s not a formal bid just yet.

Now even though farming and agriculture haven’t had the best year there is a theory that the next boom will be in soft commodities and agriculture and therefore companies like Nufarm will become highly sought after.

Tom Elliott, a director of MM&E Capital, may have interests in any of the stocks mentioned.

nTakeover Action November 5-9, 2007
Date	Target	ASX	Bidder	Hldg (%)		Notes
3/09/07	Auspine	ANE	Gunns	60.80		Unconditional.
12/07/07	Avantogen	ACU	Chopin Opus One LP	84.98		Diluted from 87.62%.
27/08/07	Becker Group	BKR	Prime Television .	76.04		Unconditional. Extended to July 26.
23/10/07	Beyond International	BYI	Mariner Financial	19.90
14/10/07	Consolidated Minerals	CSM	Territory Resources	0.01		Offer expires.
2/11/07	Consolidated Minerals	CSM	Pallinghurst Resources/AMCI	5.46		$3.30 recommended cash offer. Extended to November 16.
18/10/07	Consolidated Minerals	CSM	Palmary Enterprises	14.78
10/09/07	Golden China Resources Corp	GCX	Sino Gold Mining	16.90		Lock-up agreement and pre-bid agreements.
15/10/07	Golden West Resources	GWR	Fairstar Resources	19.81
8/11/07	Gujarat NRE Resources	GUJ	India NRE Minerals	73.28		Closing November 30.
9/11/07	Jubilee Mines	JBM	Xstrata	17.50		FIRB approval received.
8/11/07	Kimberley Diamond Co	KIM	Gem Diamonds	72.54		Closing November 26.
8/10/07	Lighting Corporation	LCL	Gerard Lighting	16.45
29/10/07	Mackay Permanent Building Society	MPB	Wide Bay Australia	14.07		Revised offer.
10/10/07	Midwest Corporation	MIS	Murchison Metals	2.80
7/11/07	Multiplex Group	MXG	Brookfield Group	92.15		To be suspended from November 12.
12/10/07	New Privateer Holdings	NPH	Magellan Financial	36.03
6/11/07	Nova Energy	NEL	Toro Energy	89.47		Suspended.
8/11/07	PCH Group	PCG	Cape Plc	26.73		Extended to November 29.
28/02/07	Queensland Gas	QGC	TCW/Societe Generale	0.00
7/11/07	Resource Pacific	RSP	New Hope Corporation	0.00		Revised offer.
17/10/07	Sydney Attractions Group	SAQ	Village Roadshow	19.96		Extended to November 17.
7/09/07	travel.com.au	TVL	Webjet	19.90
15/10/07	travel.com.au	TVL	Wotif	19.95
7/11/07	Unwired Group	UNW	Seven Network	43.20
nScheme of Arrangement
9/11/07	Adelaide Bank	ADB	Bendigo Bank	0.00		Vote November 11. ACCC not to oppose. Treasurer approves proposal.
29/10/07	Anzon Australia	AZA	Arc Energy	53.10		Anzon Energy , with 53.1%, will vote in favour. Vote January 2008.
8/11/07	Beyond International	BYI	Navis Media	<5.00		Ceases to hold in excess of 5%.
25/10/07	Bolnisi Gold NL	BSG	Coeur D'Alene Mines Corp	19.99		Vote December 4.
9/11/07	Coates Hire	COA	National Hire Group, Carlyle Group	0.00		Vote December 11.
9/11/07	Coles Group	CGJ	Wesfarmers	12.10		Vote November 7. ACCC not to oppose scheme. Offer enhanced.
17/10/07	Colonial First State Private Capital	CFI	SunSuper Superannuation Fund	18.75		Court approves scheme.
8/11/07	Elkedra Diamonds	EDN	Vaaldiam Resources	0.00		Suspended.
24/10/07	Home Building Society	HME	Bank of Queensland	0.00		Vote November 30.
9/11/07	IWL	IWL	Commonwealth Bank of Australia	13.96		Court approves scheme.
19/10/07	Mackay Permanent Building Society	MPB	Bank of Queensland	0.00		Vote November 21. APRA approval granted.
6/08/07	Oriel Communications	OCO	FCP Brencorp	0.00		75% acquisition proposed. No vote date set. Implementation agreement signed.
8/10/07	Panbio	PBO	Inverness Medical Innovations	0.00
29/10/07	Perseverance Corp	PSV	Northgate Minerals Corp	0.00		Vote mid-January.
26/10/07	Symbion Health	SYB	Healthscope	11.10		Revised scheme. Vote November 30.
2/10/07	Viking Industries	VKI	Provik shareholder consortium	28.38
10/10/07	Visiomed Group	VSG	Clinical Cell Culture	0.00
nForeshadowed Offers
26/09/07	Atlas Group	AHS	Unnamed parties	0.00		Balron offer rejected. Other discussions continue.
9/11/07	Auckland International Airport	AIA	CPP Investment Board (Canada Pension Plan)	0.00		CPP proposes 40% partial offer.
5/11/07	Blue Energy	BUL	Sydney Gas	0.00		Discussions.
12/06/07	Great Southern	GTP	Unnamed party	0.00		Expression of interest.
2/07/07	Great Southern	GTP	Unnamed parties	0.00		Interest from other partes - following previous expression of interest.
27/06/07	Health Corporation	HEA	Unnamed party	0.00		Non-binding terms sheet.
5/11/07	Nufarm	NUF	China National Chemical Corp	0.00		Non-binding proposal.
9/11/07	Rio Tinto	RIO	BHP Billiton	0.00		Offer rejected.
17/10/07	SkyCity Entertainment	SKC	Unnamed party	0.00		Conditional approach. Due diligence started. Extra party undertakes due diligence.
24/09/07	Style	SYP	Unnamed party	0.00		Confidential approach from international private equity.
29/06/07	Warehouse Group	WHS	Woolworths	0.00		NZ Commerce Commission declines approval of an offer. Woolworths appeals to NZ High Court.
29/06/07	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		NZ Commerce Commission declines approval of an offer. Foodstuffs appeals to NZ High Court.
nBackdoor Listing
26/09/07	Mark Sensing	MPI	Sonofax Holding	63.00		Share sale agreement expected October. Vote due November.