Bradken's broken takeover

For the third time, a consortium has approached Bradken about a takeover and subsequently walked away. For a third time, the share price has plunged – this time 30% – to reflect disappointment in the lack of a deal.

It was Pacific Equity Partners and Bain Capital who walked away this time. Initially discussing a takeover at $6 a share, the consortium was rumoured to have offered $5.10 a share before discussions stopped. The private equity groups said only that they were unable to make an offer, undoubtedly spooked by sharply lower iron ore prices.

We need to acknowledge that our indecisiveness has resulted in an opportunity cost: we should have sold when the offer was made. Yet the share price never approached the offer price and that gap was the reason for our reluctance. Since then, iron ore and coal prices have fallen yet again and Bradken faces the prospect of a slow, grinding recovery.

The business remains better than average. Manufacturing consumables that require frequent replacement, the company is exposed to mining volumes, especially in coal and iron ore. With a high proportion of variable costs, management has enthusiastically cut costs and made changes to operations.

Expensive production from Australia has been replaced by output from Bradken's Chinese foundry. A newly acquired Indian foundry will contribute further cost reductions. To fund that purchase and to make additional structural changes, the company is likely to seek a capital raising, a move the market fears more than it should.

The swift response of management has not been enough to combat awful industry conditions. Bradken is ideally suited to a recovery but there isn't one in sight. Oil, a fledging bright spot for the business last year, has joined coal and iron ore in the doldrums.

Our mini mining services portfolio, introduced in Time to buy mining services part 3, is in the dumps. We moved into the sector too early. That said, this is a cyclical business in the throes of a downturn. Now is not the time to cut losses.

Debt, although high, is serviceable and cash flow remains healthy. The company will survive to see better days as the cycle turns. Although industry conditions have forced lower prices in our recommendation guide, Bradken remains part of our portfolio approach to the sector. Right now, no sector is riskier and none is cheaper. SPECULATIVE BUY.