Will GPT get Australand to lock-up stage?

There’s no deal on the table, but GPT is likely to revisit its Australand proposal soon.


Summary: GPT has a keen interest in Australand, which has just announced a 28% rise in full-year profit. Australand is currently trading at a discount to its net tangible assets.

Key take-out: GPT could pay around the $3.60s, which would be an attractive return.
Key beneficiaries: General investors. Category: Portfolio management.

There have been some signs that merger and acquisition activity will pick up this year. In the US last week, Warren Buffett teamed up with Brazilian financier Jorge Paulo Lemann to buy HJ Heinz for around $US23 billion; two US airlines – American and US Airways – agreed to merge; Dell is in talks with private equity firms about going private; and John Malone, who was previously the major shareholder here in Austar, has apparently agreed to buy Virgin Media in a deal worth $16 billion.

What all this means is that M&A is back on the agenda, and it’s easy to see why. The sharemarket is still bubbling along nicely, and interest rates are as close to zero as they will ever get, so financing is well and truly cheap and available for the right sort of deals. US companies have really cashed up since the Global Financial Crisis and have worked to repair their balance sheets. Companies are now looking to buy earnings because it’s easier than trying to grow organically.

What this says to me, is that the macro-economic conditions for deals in 2013 are better than they’ve looked in quite a few years. Australia tends to follow what the US does, and while we don’t have a lot of big deals in play here right now, I think it’s just a matter of time before it really picks up.

Australand (ALZ)

Of the deals that are currently in play, Australand is one that piqued my interest this week. The company had a very good profit result, with full-year profit rising 28%, and GPT has said that it is still interested. Just a few days ago, Michael Cameron, chief executive of GPT, said: “We are committed to advancing a proposal that is going to be in the best interests of Australand and GPT security holders”. That’s about as strong as you can get without actually having a proposal on the table, so obviously he wants to go ahead with a deal.

I firmly think that GPT will come back at Australand in the near future. If it doesn’t move on it soon, GPT will miss out. I don’t think there’s much risk in it, and there’s the possibility of a reasonable, but not massive upside. But you never get massive upside in property stocks.

Australand is currently trading at $3.44, about a 3% discount to NTA, which I would estimate is probably in the mid-$3.50s. I think GPT can afford to pay maybe a 3% premium. So in total, that’s 6% higher than where it is now. I reckon GPT could probably pay around the $3.60s, and I think that would be an attractive return.

Billabong (BBG)

The two bidders – VF Corporation, which teamed up with Altamont Capital Partners, and former director Paul Naude, who bid with Sycamore Partners – are due to finish conducting due diligence this week. For people with a reasonable appetite for risk, I’m beginning to think this is probably not a bad buy now.

Both groups bid the same price, $1.10, and they both requested roughly six weeks’ due diligence, which is pretty much up at this stage. I would say that probably one of these deals will go through.

If neither group comes up with a deal and Billabong is not successful in nailing down a takeover, then the stock will likely fall back some more. On the positive side, from a macroeconomic perspective, there are increasing signs that retail is picking up. Sales are improving and other retail stocks like JB Hi-Fi, Myer, and David Jones are well off their lows. People are shopping more, the global economy is improving, so my feeling is that while the share price might fall if the takeover bids don’t go ahead, it probably wouldn’t fall too much, because the overall retail environment has improved. On the other hand, if both decide to go forward, then we could see a competitive bidding situation.

So, at the current price, I think this could now be a buy. Investors have about a 16% upside from where the stock is trading right now to the takeover price ($1.10) and there is potential for a competitive bidding situation, which means the upside could be even higher. I can’t see much downside if a deal doesn’t go ahead. For me, this one is a pretty good risk/return trade-off.

Arrium (ARI)

Arrium has been an excellent performer since the bid from Steelmakers Australia – a consortium led by Korean steel producer POSCO and commodities trader Noble Group – fell away and I guess it vindicates the board’s decision. Anyone who bought back then has made a good profit, but I wouldn’t hang onto the stock in anticipation of another bid.

Obviously Arrium’s share price has bounced back a lot, in part because the iron ore price has recovered. At the time of the bid, Arrium was trading below 70 cents a share, whereas now it’s up in the $1.20s.

I can’t see POSCO and Noble coming back to make another offer. I think they probably should have been a bit more generous when they made their first bid. The board wouldn’t accept $1 now, whereas they might have accepted it back when the stock was at 70 cents.

While it doesn’t look like POSCO and Noble Group will come back, the stock has made a 50% gain since the bid, so it’s given investors the equivalent of a really good takeover premium. Anybody who bought back then, and I advocated buying the stock at the time (Bidders won’t get Arrium for a steal, October 1), has done well from it, I would say. I wouldn’t hang on for another offer; the share price has jumped up too much.

Discovery Metals (DML)

When the deal with Cathay Fortune fell apart, I said investors should let the share price settle before buying in. It is now trading at 70 cents. The trader in me says that at this price, it’s in the buy territory.

It’s had every bit of bad news it could have in a short period of time, and I think probably its share price has been punished hard enough now.

I’m not saying buy in because there’s a deal on the table. What I’m saying is that if the bidder, Hong Kong-based private equity company Cathay Fortune, was prepared to pay $1.60-$1.70 not long ago, when the world actually looked a bit worse than it does now, I would say it’s probably now a very good risk/return trade-off for the medium term.

As well, although Cathay Fortune’s ownership of Discovery looks to have dropped from 16% to 13.6%, that’s actually the ownership it held prior to the offer. The extra 2.5% was held by one of its partners in the bid, which has now been dropped.

As a result, I think the stock is now a speculative trading buy at 70 cents

Sundance (SDL)

I’ve been saying for some time to stay away from this one (Sun setting on Sundance bid, December 3), and my view hasn’t changed. The latest is that the deadline has been pushed back to May-June and the stock reflects that; it’s drifted back to 28-29 cents.

It’s not a question of ‘Is iron ore hot again?’ It obviously is; the iron ore price is up 80% from its lows in August. But if this deal with Hanlong Mining doesn’t go through, Sundance will really be stuck. It says itself that it could not fund the Mbalam/Nabeba project itself, it needs a partner to get at this resource. Where else is it going to find the $5 billion it needs to develop the mine? It really needs the deal to go ahead, and Hanlong is clearly having problems raising the dough. I wouldn’t touch this with a barge pole.

Whitehaven Coal (WHC)

There has been a bit of speculation that Whitehaven Coal could be a takeover target now that it’s received approval for Maules Creek. For me, I would wait and see what happens with Nathan Tinkler before buying in.

There are some quite positive things about Whitehaven, mainly that coal prices have been solid (although not great), and Maules Creek has been given the go-ahead. But Nathan Tinkler is still a big negative. His stake is essentially hocked for as much as it’s worth; in fact it’s hard to get a reading on how much he actually owes, but some people believe he is in the red to the tune of about $100 million.

A complication is that Farallon, the company that lent him the money, already owns about 7% of Whitehaven. So even though it may want to be repaid, it can’t take Tinkler’s stake because it would then have more than 20% of Whitehaven shares, which would mean it would be forced to launch a bid.

If I was looking at bidding for this company, I would wait and see if Nathan Tinkler goes bust, because then there might be the chance to buy his stake at a discount; there could be a fire sale.

That’s the sort of event I would be looking for to get into Whitehaven.


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

Takeover Action February 14-20, 2013

DateTargetASXBidder(%)Notes
13/02/2013Central Australian PhosphateCENRum Jungle Resources0.00
23/10/2012Clearview WealthCVWCrescent Capital Management62.70
15/02/2013Discovery MetalsDMLCathay Fortune16.17Offer lapses
6/02/2013EngencoEGNElphinstone Group45.60
18/12/2012Firestone EnergyFSERange River Gold0.00
18/02/2103Globe InternationalGLBMariner Corporation0.07Closed
19/02/2013Gujarat NRE Coking CoalGNMJindal Steel & Power21.51
8/02/2013LinQ Resources FundLRFIMC Resources88.74FIRB approves. Ext to Mar 15
30/01/2013Neptune MarineNMSMTQ Corp83.36Unconditional
18/02/2013United OrogenUOGIron Mountain Mining22.93Unconditional
18/02/2013Wentworth HoldingsWWMAustralian Renewable Fuels0.00Offer lapses
19/02/2013Wilson HTMWIGMariner Corporation0.00Offer extension fails
Schemes of Arrangement
24/12/2012Avocet ResourcesAYELion One Metals0.00
1/02/2013EndocoalEOCChina Yima Coal/Daton Group0.00Vote Feb 28. FIRB approves
19/02/2013PMI GoldPVMKeegan Resources0.00Merger terminated
31/01/2013SkywestSXRVirgin Australia0.00SCI, Singapore, approves. ACCC clears offer
30/01/2013Sundance ResourcesSDLHanlong Mining Investment17.99Meeting adjourned. Date TBA
22/01/2013Texon PetroleumTXNSundance Energy Australia0.00Vote Feb 25
Foreshadowed Offers
1/02/2013BerkleeBERBrett Jones - managing director0.00Offer to takeover certain assets
14/01/2013Billabong InternationalBBGAltamount/VF Consortium0.00Due diligence
19/12/2012Billabong InternationalBBGExec Paul Naude Consortium0.00Due diligence
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
11/02/2013Westside CorpWCLUnnamed party0.00Discussions continue
26/10/2012WHK GroupWHGSFG Australia0.00Discussions

Source: NewsBites