What will BHP do next?

PORTFOLIO POINT: Rio and Woodside figure in speculation about where BHP might cast its acquisitive eye next.

BHP Billiton. The Anglo American/Xstrata tussle is stoking the fires in rumour mills across the country about what BHP Billiton might do next, with another tilt from the miner for arch-rival Rio Tinto not entirely out of the picture.

The two miners are currently working out the details of a 50/50 iron ore joint venture in the Pilbara, which should get the necessary regulatory tick despite the protests of global steel makers, European regulators and the WA government.

BHP is expected to pay about $US4.5 billion to secure the joint venture and the miner still has a lot of firepower on its balance sheet. There are rumours that BHP could bid for Alumina, which is 60% owned by Alcoa. Aluminium prices have been struggling for some time now and if Alcoa desperately needed it the money it might cash out.

Alcoa really calls the shots when it comes to Alumina and it’s unclear just how much benefit BHP will derive from that asset. BHP would have bought several aluminium assets if its initial tilt for Rio Tinto had come through, but it’s important to remember that Rio Tinto came with a lot of other attractive assets, especially iron ore.

Rather than waste time and money on acquiring aluminium pure play like Alumina, it’s far more likely that BHP just has another tilt at Rio Tinto and an opportunity is emerging.

Under British rules, you have to wait a year from an initial bid collapsing, which means that BHP can have another crack at it in four months time in November. Whether hostile or friendly, BHP will do something at some stage, because it has the ability to do so.

The other story doing the rounds at the moment is the possible tie-up between BHP and local energy major Woodside Petroleum. BHP has often been accused of not being serious about its oil and gas division and there are some who say BHP Petroleum should either get bigger or get out of the sector entirely.

BHP’s petroleum business is worth more than $40 billion and accounts for about 20% of the company’s total profits. The company has spent more than $2 billion since 2005 on exploration and development.

With major projects, such as Neptune off the Gulf of Mexico and the North-West Shelf LNG projects in Australia, Woodside will be a good fit to BHP’s petroleum arm, but the problem is that global oil major Shell owns 34% of Woodside.

So if BHP were to bid for Woodside, it would only make sense if it already had an agreement with Shell, but the strategic shareholding is there complicating matters. BHP would be unlikely to swap its existing oil/gas assets with Shell if it came down to that mainly because they are fairly mature and out of the exploration stages.

The only way BHP would get entry into Woodside is if Shell decides it’s not interested in holding on to its stake. A lot will also depend on Shell’s outlook for the oil price. If Shell sees oil going back to $US100 a barrel once the recession subsides, they won’t want to sell Woodside now for $50–60 a share.

Energy Developments. Clean energy company Energy Developments is in a very interesting situation, with a private equity consortium headed by Sydney firm Archer Capital lodging a non-binding bid for the company with an indicative price range $2.40–2.80 a share. The company has also received a separate offer from an international fund manager for its landfill gas power generation interests in Britain and France for about $280 million.

The problem with this offer is that although the assets might be very good, you can’t necessarily apply that sale value across the rest of the firm’s portfolio; and, secondly, what would management do with the cash? They might just pay down debt or just keep it; it doesn’t necessarily flow straight to shareholders, but at least it shows that there is sufficient demand for the assets.

So at the moment Energy Developments has one conditional non-binding bid and, separately, one potential partial sale on the table. The stock is trading below the Archer bid, which is probably reasonable given that the bid is not absolutely 100% yet. But I think the board of this will probably go and put the company up for auction.

A pretty interesting opportunity: you’ve got two groups vying for some good assets, and the board at least has recognised that probably it needs to now try and get the takeover and get the best price possible.

Linc Energy. Brisbane-based coals-to-liquid group Linc Energy has thrown open the sale of its coal assets again, after its long drawn out talks with China's Yanzhou Coal Mining came to nothing.

The company confirmed in February 2009 that it was in discussions to sell its Emerald Coal tenements in Queensland, but with time ticking over and nothing concrete on the table, management has opted to launch a formal sales process.

Market conditions have improved considerably in the past few months so it will be interesting to see if Linc can actually achieve something reasonable this time around. Linc Energy has been trading between $1 and $3 over the past nine months so there could be an opportunity there.

Gloucester Coal. Also in the coal scene, Gloucester Coal shares have continued to fall and are trading at around $5.20–5.40. There are strong indications from the market that after failing to win over all of Gloucester’s shareholders, Hong Kong based commodities trader Noble Group may have to initiate a mop-up bid.

However, on the flipside there are some who expect Noble to just keep Gloucester listed to use it as a vehicle to buy other things. While that option is feasible it’s important to take into account that it will be expensive for Noble to keep Gloucester listed and it will be hard to use it as an acquisition vehicle, mainly because the shares will become very illiquid.

It would seem there are a couple of parties with parcels of Gloucester stake who have not accepted Nobel’s bid so a mop-up bid is highly likely.

Hastings Diversified Utilities. In a similar fashion, Melbourne-based Hastings Diversified Utilities has apparently received a $300 million offer for its Epic Energy pipeline business from private equity player Kohlberg Kravis Roberts and US-based investment management firm Trust Company of the West.

The Hastings board has rejected the offer and has invited a shortlist of parties interested in the Epic Energy business to participate in due diligence investigations. Trust Company of the West put forward its proposal to Hastings earlier this month and it looks like KKR has joined the party but without much success.

It’s still early days in this tussle but the key point to take from here is that like so many infrastructure stocks, there are quality assets out there but in many cases it’s the structure and the debt associated with these companies that is the problem.

Interest in these stocks is beginning to pick up and shows that the markets for assets are still functioning. What it doesn’t mean is that people are all of sudden happy to buy truckloads of debt.

Eircom Holdings . Eircom Holdings, formerly known as Babcock & Brown Capital, has received an incomplete, non-binding and indicative proposal from Singapore Tech & Telemedia (STT) for its Irish Telecoms holding company, Eircom. It’s a move that could scuttle the plans of former Babcock & Brown executives Robert Topfer, John Shin and Warwick Bray who had been eyeing the former Babcock satellite’s assets.

Eircom has about $1.05 in cash per share and the stock has been trading at about $1.10, and has already received a $175 million proposal from Topfer, Shin and Bray through their vehicle, Taemas Bridge, in April 2009.

If Singapore Tech & Telemedia makes a formal bid for Eircom and there is some indication that they’re prepared to bid about $30 million above the surplus capital then they will be the first party prepared to pay a premium for those assets. Taemas Bridge effectively was only ready to fork out just the capital and take the assets. This might have seemed compelling a couple of months ago but now Singapore Tech & Telemedia is in the box seat.

The bid from Taemas was at $1.05, shareholders can get $1 cash plus 5¢ worth of equity; with the STT offer there is at least an upside of another 40¢-odd. There’s potential for a bit of a bidding war here, and the good thing is from a share price perspective, you’ve got that cash underpinning the price so it won’t fall far.

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

nTakeover Action June 22-26, 2009
Date	Target	ASX	Bidder	(%)		Notes
22/06/09	Arana Therapeutics	AAH	Cephalon	91.85
24/06/09	Bonaparte Diamond Mines	BON	Minemakers	84.99
23/06/09	Bonaparte Diamond Mines	BON	Union Resources	5.04		Bonaparte advises against Union offer
23/06/09	Broadcast Production Services	BKR	Prime Media Group	77.34		Offer for the balance. Ext to Aug 28.
19/06/09	Consolidated Rutile	CRT	Unimin Australia	98.78		Unconditional.
20/05/09	Dioro Exploration	DIO	Avoca Resources	14.95		Dioro board rejects offer.
16/06/09	Drillsearch	DLS	Beach Petroleum	13.20		Drillsearch rejects offer.
07/06/09	Energy Development	ENE	Archer Capital	19.99		Call option by largest shareholder.
16/06/09	Fermiscan Holdings	FER	Polartechnics	21.08		3-for-2 off-market.
16/06/09	Gloucester Coal	GCL	Noble Group	87.71
11/06/09	GRD	GRD	AMEC	0.00		Still non-binding.
11/06/09	Great Australian Resources	GAU	Sylvania Resources	19.90		Accepts increased offer.
27/03/08	Heartware International	HIN	Thoratec Corp	0.00		Subject to approvals.
29/05/09	Hutchison Telecommunications	HTA	Vodafone	52.30		ACCC greenlights offer
25/06/09	MacarthurCook	MCK	AIMS Securities	34.84
04/03/09	Murchison Metals	MMX	Sinosteel	5.85		Cleared by FIRB to move to 49.9%
22/06/09	North Australia Diamonds	NAD	Legend International Holdings	38.52		North Aust board rejects offer.
16/06/09	Pacifica Group	PBB	Bosch Group	76.60
09/06/09	Queensland Ores	QOL	Metallica Minerals	70.92		Offer closed.
17/06/09	Rey Resources	REY	Gujarat NRE Minerals	0.00		Rey rejects offer.
22/05/09	Royalco Resources	RCO	Anglo Pacific	20.10		Royalco board rejects offer
11/05/09	SA Metals	PPD	Sylvania Resources	12.89
11/06/09	Target Energy	TEX	Blaze Asset	5.14		Offer increased and extended. Target still rejects.
17/06/09	Terrain Minerals	TMX	Iron Mountain Mining	15.23		Terrain board rejects offer
Scheme of Arrangement
19/05/09	ABB Grain	ABB	Viterra	0.00		Vote September.
16/06/09	Buru Energy	BRU	Arenite	0.00		Offer withdrawn.
29/04/09	Chalice Gold Mines	CHN	Sub-Sahara Resources	0.00		Vote July 1.
03/06/09	International All Sports	IAS	Sportsbet	0.00		Vote late September.
11/05/09	Lion Nathan	LNN	Kirin Holdings Company	46.00		Vote Sept/Oct.
24/06/09	Lion Selection	LST	Catalpa Resources	0.00
17/06/09	Macquarie Communications Infrastructure	MCG	Canada Pension Plan Investment Board	0.00		FIRB clears. Vote June 30.
17/06/09	NSX	NSX	New Zealand Stock Exchange	0.00		Offer withdrawn.
12/06/09	UCMS Group	UMS	Aegis BPO Services Australia	0.00		Vote July 16.
03/06/09	Uranio	UNO	Manhattan Resources	0.00		July 20.
Backdoor Listing
30/03/09	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	43.68		Approved.
19/06/09	Metminco	MNC	Hampton Mining	34.66		To acquire 51% of unlisted Hampton. Extended to July 8.
28/05/09	Dia-B Tech	DIA	Pallane Medical	0.00		$15m capital raising launched.

Source: NewsBites