WestSide story

Rumours of takeover activity at the small end of the CSG sector are a reminder that there may be bigger things to come.

PORTFOLIO POINT: A bid for WestSide Corp by fellow coal seam gas minnow Liquified Natural Gas, if it came to pass, could signal consolidation at the big end of town.

WestSide Corp (WCL). As the start date for the Gladstone and Curtis Island LNG projects creeps closer, rumours of a deal between two coal seam gas (CSG) minnows is evidence of further consolidation in the sector.

Liquefied Natural Gas Ltd (LNG) had to admit last week that it had made an indicative, non-binding conditional proposal to Bowen Basin CSG explorer WestSide Corp, which amounts to 65c a share. It’s still one for the speculative pile, but a distinct possibility given the need for gas among those big four projects on the Queensland coast.

Given LNG CEO Maurice Brand is “confident” of getting a friendly deal done – despite WestSide undertaking a capital raising of $25.4 million to pay for production expansion, which it said was organised before the approach was made – there could be some money to be made, with WestSide trading at 44.5c.

LNG needs to source more gas in order to make its $US1.1 billion Fisherman’s Landing production facility viable. It needs to be able to put 1.5 million tonnes of gas a year through the train and therefore needs a resource of about 45 petajoules per annum for the next 20 years. So far, takeover opportunities have been frustrated by Shell (which took over Fisherman’s Landing partner Arrow) and PetroChina (which took over potential replacement partner Bow Energy after talks fell apart in September 2010).

This is still consolidation at the smaller end of town, but I think some kind of consolidation between the four giant projects – run by BG Group, Origin Energy and ConocoPhillips, Petronas and Santos, and Shell – is inevitable, simply because it will be easier to source the amount of gas they need from combined resources, rather than competing against each other to fill the massive demand for gas each facility will require.

Add in to the mix rising oil prices and heightening demand for LNG, and you have a situation highly favourable to more industry consolidation. Even Qatar, a country with immense oil resources, is apparently interested in the Queensland gas sector, with a “Doha-based executive close to the [Qatar Petroleum International] fund” quoted in the Australian Financial Review saying that it’s keeping an eye on the stakes coming up for sale, such as one in BG Group’s $US16 billion Curtis Island project.

Echo Entertainment Group (EGP). The derivatives deal James Packer did with Deutsche Bank to grab a 10.1% stake in Echo wasn’t a way to hide his dealings, but murmurs over the weekend make it seem unlikely that this kind of swap deal is going to be tolerated in takeovers by ASIC.

ASIC chairman Greg Medcraft would like the disclosure law to be based on an economic, rather than legal, interest. Packer’s deal meant that although Deutsche was the legal owner of the Echo shares, it was Crown getting the benefit or loss of any share price rises or falls.

Normally, the only reason why you’d do a derivative deal is to get around having to disclose a holding. In the old days, they had a thing called warehousing, where different entities would 'own’ the shares and ostensibly you wouldn’t control them, but in reality, you did. That isn’t allowed anymore, so now people use swap agreements instead.

I don’t think Packer was trying to hide his dealings from the market by using the loophole that said he didn’t have to report an economic interest; this was just a good way to build a position without ramping the share price too high. Look at it this way: had Deutsche let it be known they were buying shares for someone, everyone would have assumed it was Packer and that the long-expected takeover was on – sending the share price skyrocketing. Because Deutsche was theoretically acting for itself, people didn’t think there was anything in it and it was easier for Packer to build a position, admittedly at a cheaper price than otherwise.

Should we worry about people having economic interests without legal share ownership in takeovers? Yes and no. Yes, because it is subverting the intention of the law, but no because it doesn’t really change what happens in a takeover bid. A company could build an economic stake greater than 19.9% (the shareholding limit before a bid must be made or shareholder approval sought), but it wouldn’t get past the regulator.

The thing about changing the rules so a suitor can’t build a large stake before launching a bid is that people will find ways around it. As it is, disclosure rules are all over the place. When I was involved in takeovers, we had a large fund that we managed but was owned by someone else. On one occasion, we took a 5% stake in a target company during a takeover, which we reported, and which was also reported by the fund custodian (UBS) and the owner, because that’s what the rules said we had to do. Uninformed people looked at this and thought three different entities had bought 5% each.

So although ASIC may start looking much harder at derivative deals in potential takeover targets by possible suitors, changing the rules will only make people find new ways to get around it.

GrainCorp (GNC). James Packer has interests in far more than just casinos, and there’s an interesting link between him and what I think is the hottest speculative takeover target in Australia right now: GrainCorp.

Ellerston Capital lifted its stake in the grain handler from 5.16% to 6.24% last week, after rumours that giant commodities trader Glencore was sniffing around Canada’s Viterra put GrainCorp back on the map as a speculative takeover target. Ellerston is a subsidiary of Packer’s unlisted family company, Consolidated Press Holdings, but it’s not a Packer creature as such; other people can invest in Ellerston funds.

Still, I think the reason Ellerston has increased its holdings of GrainCorp shares is partly because they see it as a good buy, and partly because they see the takeover potential. It underlines the fact that it’s run by a very smart group of people – and I’m not just saying this because they’ve done something I happen to agree with. I think they’re looking at GrainCorp on its own merits: there are a limited number of these companies; GrainCorp has good relationships with growers; it has a huge amount of infrastructure, such as grain silos to store grain next to railways and ports; and it is a very big player.

I’m surprised GrainCorp has lasted this long without a meaningful bid being made for it. AWB was bought by Canada’s Agrium in 2010 and ABB Grain by Viterra in 2009, yet I always thought GrainCorp was the superior business.

Ludowici (LDW). UK suitor Weir Group has pulled out of the bidding war for local company Ludowici, after the Takeovers Panel sacrificed the Truth in Takeovers rule to the allure of cold cash.

Last week, I said there was a small chance that Weir might better Danish rival FLSmidth’s $11 per share offer, after the Panel rapped the latter over the knuckles for implying that its $7.20 offer was final, but allowed later offers to stand.

But Weir decided to take its $10 a share offer off the table and leave, possibly feeling that FLSmidth had deeper pockets, but definitely and understandably aggrieved with what looks like a mid-game rule change.

Ludowici is now trading at $10.85 (a 1.36% discount to the bid) and there’s no reason to think FLSmidth’s offer is going away. It’s a great result for Ludowici shareholders, but not for Australian takeover rules.

The Takeovers Panel was caught in a tight spot: between adhering to the Truth in Takeovers rule after FLSmidth’s CEO Jorgen Huno Rasmussen let slip that the company wouldn’t lift the offer just to entice the target’s shareholders to sell, and getting the best deal for Ludowici shareholders.

I think the Panel should have stuck to its rule, because we may have done ourselves some damage here. Weir Group, for example, will probably think twice before investing in the Australian market again.

Adhering to rules set up ahead of time is crucial. Now we’ve created a precedent that some companies could potentially use to say their 'final bid’ is not as final as it once seemed. Moreover, what will be interesting next time is if a native English speaker tries the “we didn’t quite understand what we were saying” excuse.

Brockman Resources (BRM). Remember in November 2010 when Hong Kong limousine company Wah Nam International made a double punt for WA iron ore miners FerrAus and Brockman Resources? FerrAus may have slipped away, via a deal with neighbour Atlas Iron, but Brockman has slipped (kicking and screaming) into the suitor’s arms.

Wah Nam renewed its offer in December with $1.50 cash and 18 securities for every Brockman share, which is slightly higher than the 30 shares per Brockman security it initially offered and slightly better, because it includes cash.

The Hong Kong company has 73% and having just waived the 80% minimum acceptance condition, is confident of reaching 90% and moving to compulsory acquisition, despite a group of 'rebel shareholders’ holding out in the hope that they may rescue the miner from its inevitable fate.

The question is whether remaining shareholders should hang in there and hope for a late deal that’s better than what is on the table now, or whether they should get out. My feeling is the latter, because you don’t want to be stuck in a minority situation with an owner that may have a different view of doing things to you, and may or may not decide to take out the final shares that they don’t own.

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

-Takeover Action, March 5-16, 2012
Date Target
ASX
Bidder
(%)
Notes
1/03/2012 Accent Resources
ACS
Xingang Resources
60.65
16/03/2012 African Iron
AKI
Exxaro Australia
99.37
De-listed
15/02/2012 Brockman Resources
BRM
Wah Nam International
72.70
15/03/2012 Extract Resources
EXT
Taurus Minerals
54.11
Kalahari offer unconditional
16/12/2011 Gold One International
GDO
BCX Gold Investments
82.80
Unconditional
15/12/2011 Hastings Diversified
HDF
APA Group
20.71
15/03/2012 Living and Leisure
LLA
Merlin Entertainments
97.40
29/02/2012 Magma Metals
MMW
Panoramic Resources
12.02
15/03/2012 Signature Metals
SBL
LionGold
59.49
Ext to Mar 16
22/02/2012 UCL Resources
UCL
Minemakers
13.10
Schemes of Arrangement
9/03/2012 Aston Resources
AZT
Whitehaven Coal
19.99
Vote Apr 16
10/02/2012 Austar United Communications
AUN
Foxtel
0.00
Vote Mar 30
21/02/2012 Auzex Resources
AZZ
Bullabulling Gold
0.00
See GGG Resources - 50/50 merger. Vote Mar 22
15/03/2012 Charter Hall Office REIT
CQO
Macquarie Capital consortium
0.00
Approved
15/02/2012 Flinders Mines
FMS
Magnitogorsk Iron and Steel Works
0.00
Vote Mar 30
21/02/2012 GGG Resources
GGB
Bullabulling Gold
0.00
See Auzex Resources - 50/50 merger. UK court hearing Mar 8
6/03/2012 Gloucester Coal
GCL
Yancoal (Yanzhou Coal)
64.50
64.5% holder Noble Group in favour
11/10/2011 Sundance Resources
SDL
Hanlong Mining Investment
17.99
Reverse Takeover
17/02/2012 Millepede International
MPD
Angline Pastoral Pty Ltd
0.00
Angline and shareholders to control 67.6%. Vote early May
Foreshadowed Offers
28/02/2012 Goodman Fielder
GFF
Wilmar International
5.00-
Press speculation
16/02/2012 Ludowici
LDW
FLSmidth
22.00
Indicative 22% support for proposed scheme
14/03/2012 Ludowici
LDW
Weir Group
0.00
Indicative proposal withdrawn
6/02/2012 Spotless Group
SPT
Pacific Equity Partners
19.64
Non-exclusive due diligence

Source: News Bites