Why BHP will have to up the ante

BHP Billiton/Rio Tinto. What we are looking at the in BHP Billiton/Rio Tinto merger is what we call the spread. This is the difference between the two share prices is a scrip bid. They way we look at the spread is just simply take the Rio price divided by three times the BHP price because that’s the current bid that’s on the table. That spread has been as narrow as 2% on the first day of the bid to as high as 15% and it’s gone back above 10% at the moment. That means Rio is trading at a 10% premium to the current bid. Now what the market is saying there is that BHP will just have to pay more.

At this stage of negotiations you have to look at small signs and read between the lines with the language of official releases, but it appears Rio is now primarily talking about price. They’re not saying, 'We can’t be taken over’. They’re simply saying, 'We don’t think the bid offers the right value for our shareholders’, and that’s actually positive. It’s in Rio’s interest to draw this out because Rio believes that its value will become more apparent. Now the question is: how much more? Who knows? One analyst said anywhere up to $185 a share was possible, while others are saying $150–160. (Rio closed today - Dec 3 - at $146.90.)

Auspine. The Tasmanian timber company Gunns, which has been in the news because of its planned new pulp mill, has launched a mop-up bid for a company called Auspine. Now Gunns’ bid for Auspine was $6.15, but managing director and majority shareholder Adrian de Bruin refused to sell. What’s been interesting is that de Bruin had been steadily buying stock in Auspine. As I predicted on August 27 (click here), de Bruin has managed to cut a new deal for $7 a share, which is 14% premium to the first offer. And this is a win for Gunns as well because a $7 bid for the entire company is three times more expensive that a $7 bid for one third of a company.

The point to note here is that when bids are made and don’t succeed, a lot of the time the bidder will eventually come back for another tilt. Another example of this to look out for is AXA Asia Pacific. Now AXA’s French parent made a bid about three years ago because it has a good line into one of the biggest growth markets in the world, Asia. It’s unlikely that they would just forget about it. Carter Holt Harvey – taken out by Graeme Hart – was another example. By the same token, sometimes when the bid re-emerges it’s not as high as the first bid. Years ago, AMP made an unsuccessful tilt at GIO. When GIO went through a rough patch some time later, the mop up bid was less than the first offer. So even unsuccessful bids can have a pay off.

Nylex. Nylex has been one of the most abysmal companies on the ASX over the past decade. Its market capitalisation has gone from in the billions to only about $100 million. Now you’ve got to be careful looking at Nylex because they had, I think, a 30 for 1 consolidation a while back. Share were worth about 6¢ and now they are $2.38. Now the only thing about this bid, is that it’s a private equity bid that’s subject to due diligence. They’ve got until late January to formally launch the bid. The indicative price is $2.65, so there is a good spread there because of the uncertainty.

Nylex’s main business is producing garden hoses and water-saving devices, which is a hot sector to be in because of the drought and the emerging consciousness surrounding environmental issues. But the company has also hung on to its business that makes car parts, which is a bit of a dead end. Another situation is that comparable is the ChemChina bid for Nufarm. It’s bid is $17.50 a share and the stock is trading a bit below $17 because the bid still subject to financing. Given the problems with credit markets, there is some uncertainty about whether that financing will be locked in.

Sky City. One of the things about continuous disclosure laws means company directors and executives have to disclose any information as it becomes available that might have a material impact on the share price. Now that’s made takeovers interesting because when a company has an approach that’s not a firm bid, the question is should they or shouldn’t they announce it? Continuous disclosure would say, 'Well, that is material and therefore it should be disclosed’. So in the case of Sky City, they did. Twice. But despite the two expressions of interest, they still don’t seem to have a firm bid on the table. It seems that their due diligence timeframe has expired as well. Now the rumour is that there’s apparently one party left in the race, so they’ve extended the due diligence period but as a result, the stock has lost a lot of momentum and has eased back from about $4.65 to $4.15. I believe that a bid will emerge for Sky City in time but that the price won’t be as high as had been anticipated.

Viking. Viking, which operates the Brisbane Marine Industry Park, is not a particularly large company but there is a $1.09 bid on the table that has been approved by the board. It will go through a couple of months and you’ve been able to pick up shares at between $1.04 and $1.05 for the past couple of weeks. They touched $1.06 last Friday, but even then it’s a good buy because a 3% return over two months annualised is 18%. So if you looking to make some solid money from niche opportunities that are trading at a discount, then you may want to look at Viking.

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

nTakeover Action November 26-30, 2007
Date	Target	ASX	Bidder	(%)		Notes
16/11/07	Auckland International Airport	AIA	CPP Investment Board (Canada Pension Plan)	0.00		CPP proposes 39.53% partial offer.
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.
19/11/07	Beyond International	BYI	Mariner Financial	22.25
26/11/07	Consolidated Minerals	CSM	Pallinghurst Resources/AMCI	5.46		$3.30 recommended cash offer. Extended to December 27.
26/11/07	Consolidated Minerals	CSM	Palmary Enterprises	15.29		Closing December 7.
28/11/07	Golden China Resources Corp	GCX	Sino Gold Mining	16.90		Extended to December 11.
27/11/07	Golden West Resources	GWR	Fairstar Resources	22.69		Offer withdrawn.
23/11/07	GoldLink Growth Plus	GLC	Tidewater Investments	9.15
30/11/07	Gujarat NRE Resources	GUJ	India NRE Minerals	96.91		Compulsory acquisition.
29/11/07	Jubilee Mines	JBM	Xstrata	18.10		FIRB approval received.
29/11/07	Kimberley Diamond Co	KIM	Gem Diamonds	89.04		Closing November 26.
30/11/07	Lighting Corporation	LCL	Gerard Lighting	19.00		Closing December 14.
29/11/07	Mackay Permanent Building Soc	MPB	Wide Bay Australia	42.37		Revised offer.
10/10/07	Midwest Corporation	MIS	Murchison Metals	2.80
12/10/07	New Privateer Holdings	NPH	Magellan Financial	36.03
29/11/07	PCH Group	PCG	Cape Plc	71.58		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.
29/11/07	Sydney Attractions Group	SAQ	Village Roadshow	30.82		Extended to December 14.
26/11/07	travel.com.au	TVL	Wotif	35.85
26/11/07	Unwired Group	UNW	Seven Network	87.10
Scheme of Arrangement
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.
30/11/07	Colonial First State Pvte Cap	CFI	SunSuper Superannuation Fund	18.75		Shareholders approve scheme.
30/11/07	Home Building Society	HME	Bank of Queensland	0.00		Shareholders approve scheme.
30/11/07	Oriel Communications	OCO	FCP Brencorp	0.00		Shareholders approve scheme.
8/10/07	Panbio	PBO	Inverness Medical Innovations	0.00		Vote December 17.
29/10/07	Perseverance Corp	PSV	Northgate Minerals Corp	0.00		Vote mid-January.
27/11/07	Symbion Health	SYB	Healthscope	11.10		Terminated.
26/11/07	Viking Industries	VKI	Provik shareholder consortium	28.38		Vote January 31.
10/10/07	Visiomed Group	VSG	Clinical Cell Culture	0.00
Foreshadowed Offers
26/09/07	Atlas Group	AHS	Unnamed parties	0.00		Balron offer rejected. Other discussions continue.
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.
29/11/07	Warehouse Group	WHS	Woolworths	0.00		NZ High Court clears way for offer
29/06/07	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		NZ High Court clears way for offer
Backdoor Listing
30/11/07	Mark Sensing	MPI	Sonofax Holding	65.00		Sale agreement received.