Wattyl bid fails to move investors

PORTFOLIO POINT: The revised bid for Wattyl is well above the market price, could attract a counter-offer, and means good news for Orica shareholders too.

Wattyl: Wattyl's board has unanimously recommended that an offer from US paint firm Valspar go ahead. The bidder has offered $1.67 a share – considerably higher than the first approach of about $1.30 – but the shares are only trading around $1.60.

The offer from Valspar is a good price and it appears to be well above most market expectations for Wattyl, which is a solid if unexciting company. The deal needs to be approved by the ACCC and perhaps that is why the stock is trading below the bid price. Wattyl received a bid from Taubmans many years ago and the ACCC said no. Valspar is not represented in the Australian market thus far, so there shouldn’t be an issue there.

At this point I think there is a chance of a counter-bid. There has been some talk of another company, possibly from India, that may also be interested in Wattyl and could put together a better offer.

At $1.60, shareholders could make 7¢ or 4.4% by the time the deal is completed in about three months time. Assuming there are no FIRB delays, this equates to an internal rate of return of 17.5%. The deal is friendly and therefore shouldn’t hit any hurdles, so buying at $1.60 with the possibility of further upside makes a lot of sense.

This deal with Valspar also has implications Orica, which owns Dulux. Orica is going for a demerger of its explosives and paint businesses and whatever the market thought Dulux might be worth, it’s probably a bit more now. Once the Wattyl deal goes through, assuming the bid is successful, then Dulux would be the only way to get further exposure in the paint business in Australia. So it’s good news for Orica shareholders too.

Boral: It has been reported that materials company Boral is also considering a demerger. Boral has a selection of very diverse businesses that could benefit from being offloaded on to the market. But this is normally dependent on having healthy and functioning capital markets, and at the moment they appear quite volatile. I’m not certain about a demerger releasing value for Boral shareholders.

If it can sell some assets though, that’s always great, depending on what it does with the cash and by separating, the company has increased the likelihood of a takeover. But with Boral, it’s not quite so clear that any of its divisions are preventing the others from being appropriately valued.

CSR: Bright Food Group completed its due diligence on its proposal to buy CSR’s sugar assets over the weekend and by all everything went well. However, the weakness in the sugar price has prompted Bright to lower its offer price from $1.75 billion to $1.65 billion.

The CSR board will try and hold Bright to its original offer. If CSR can get $1.75 billion, it would probably sell the Sucrogen business and that would be a good move as it would enable CSR to pay down some debt and tax and return the balance of the money to shareholders, but we won’t know the outcome for a couple more weeks.

But the market is divided on whether a demerger or a straight sale would be better for shareholders. A demerger would have no immediate capital gains implications for shareholders, but if it did demerge and someone took over Sucrogen, there would be a CGT issue.

Meanwhile, rumours that Bright Food is also interested in Fosters’ wine division have been deflected by the company. This makes sense as I can’t really imagine a Chinese food company owning any of Fosters’ wine brands. Again, it's probably in the best interests of both companies to pursue a dual track strategy where they canvass various possibilities at once.

Alinta Energy: Altina Energy is said to have received several takeover bids over the past week. Among the interested parties reported to be interested are Canada’s ATCO, France’s GDF Suez, BHP Billiton, Saudi Arabian group ACWA Power International, Arcapita and a consortium of APA Group, Japan's Marubeni and Origin Energy. The company hasn’t done brilliantly lately and is loaded up with a lot of debt so it would really be best to wait this one out and see if a bid can be firmed up.

Healthscope: There was bad news for Healthscope shareholders last week as CVC Asia Pacific, pulled out of the bidding process. CVC had been paired up with KKR. Apparently the bid from the other consortium, featuring TPG, Carlyle and Blackstone, is still proceeding but the bidding tension is now fading away and as a result the share price has fallen about 10% – from $5.62 to $5.13. Importantly, what we have here is an indicative bid, not a firm offer. The US healthcare company Tenet – which was another early bidder – has also pulled out of the race. This doesn’t mean that a takeover is not going ahead, but it does make Healthscope’s future a little shaky.

Indophil: This company is in all sorts of trouble this week. Originally, the stock had looked a very safe trade: Indophil owns 37% of the big Philippine gold and copper deposit called Tampakan. Chinese company Zijin had bid for Indophil at $1.28 a share, but the bid was taking far too long and the stock was starting to fall because it needed three layers of provincial and national Chinese government approval. As it turns out, the bidder was also partly owned by a provincial Chinese government.

And if things couldn’t get any worse, the provincial government where the asset lies made a bizarre decision to ban open-pit mining. So Indophil has got this asset that it is not going to be allowed to develop, leading to the Chinese pulling out. The stock has been suspended, so if you own it you’re stuck. It will probably start trading again some time in July, but Plan B is to try and get another bidder. However, with all these regulatory issues, that’s going to be difficult.

DMC Mining: There was a bidding battle going on with DMC Mining over the past week. Chinese company Mei Jing and Cape Lambert Iron Ore, an Australian company, were going head to head, each with bids of 53¢. Now the Chinese have decided not to increase their bid and have pulled out. What this says to me is we still need to be very wary of takeover bids where Chinese bidders are involved because they have added a whole new element to the bidding process and are proving very difficult to second-guess.

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

-Takeover action, June 21-25, 2010
Date	Target	ASX	Bidder	(%)	Notes
25/06/10	Adelphi Energy	ADI	AWE	51.20
26/05/10	Ammtec	AEC	Campbell Brothers	0.00
21/06/10	CBH Resources	CBH	Toho Zinc	61.21	Recommended offer for 49.9%
22/06/10	Corporate Express Australia	CXP	Staples	85.68
21/05/10	Dexion	DEX	GUD	0.00
25/06/10	DMC Mining	DMM	Cape Lambert Resources	60.23	Offer extended.
23/06/10	DMC Mining	DMM	Meijin Energy Group	0.00	Not to proceed.
6/04/10	Gloucester Coal	GCL	Noble Group	87.70	Fall back offer in case Macarthur bid blocked.
25/06/10	Indophil Resources	IRN	Zijin Mining Group Company	39.18	Terminated.
2/06/10	Mesa Minerals	MAS	Mineral Resources	53.04
3/06/10	North Queensland Metals	NQM	Conquest Mining	19.90
13/05/10	Rey Resources	REY	Gujarat NRE Minerals	12.00	Extended to June 11.
20/05/10	Tandou	TAN	Guinness Peat	22.25	Rejects new offer.
4/06/10	Wallace Absolute	WAB	Armidale Investment Company	0.00
25/06/10	Vesture	VES	Prudential Investment Company of Australia	0.00
Scheme of Arrangement
22/03/10	Arrow Energy	AOE	Royal Dutch Shell and PetroChina	0.00	Vote July.
9/06/10	Aurox Resources	AXO	Atlas Iron	0.00	Vote July.
14/12/09	AXA Asia Pacific Holdings	AXA	AMP and AXA SA	53.93	Revised scheme rejected.
4/06/10	AXA Asia Pacific Holdings	AXA	National Australia Bank	0.00	Considers part divestment to satisfy ACCC.
12/05/10	Jetset Travelworld	JET	Stella Travel Services Holdings	0.00	Stella to hold 50%. Vote August
4/05/10	Lihir Gold	LGL	Newcrest Mining	0.00	Vote July
15/04/10	Macarthur Coal	MCC	New Hope Corporation	0.00	Rejects upped offer.
18/05/10	Macarthur Coal	MCC	Peabody Energy	0.00	Unable to recommend further offer
3/05/10	MacarthurCook Industrial Property	MIF	HRPT Properties	24.42	Vote July
12/05/10	Transurban	TCL	Canada Pension Plan Investment Board, CP2, Ontario Teachers Pension Plan Board	0.00	Revised proposal rejected.
25/05/10	Westpac Office Trust	WOT	Mirvac Group	0.00	Vote July.
Foreshadowed Offers
3/06/10	Astra Capital	AKR	Taverners No 2 Unit	--	Incomplete proposal.
3/06/10	BOOM Logistics	BOL	Archer Capital, McAleese Group	10.47	Indicative scheme proposal.
3/05/10	Centrebet	CIL	Unnamed party	0.00	Discussions continue.
20/05/10	Healthscope	HSP	Private equity consortium	0.00	Revised scheme proposal received.
31/05/10	Healthscope	HSP	Unnamed party	0.00	Indicative proposal.
9/06/10	Redflex Holdings	RDF	Macquarie Group	0.00	Indicative proposal.
21/05/10	Sigma Pharmaceuticals	SIP	Aspen Pharmacare	0.00
19/05/10	Sino Strategic	SSI	CY Foundation Group	0.00	Offer unlikely to proceed
25/05/10	Wattyl	WYL	Overseas corporation	0.00	Scheme proposal.

Source: News Bites