A bidding war in the pipeline

PORTFOLIO POINT: A group of Canadians has turned HDF into a contested bid, and there’s a good chance APA will make a higher offer.

Hastings Diversified Utilities Fund (HDF). In spite of the terrible state of the Australian sharemarket, there is a contested bid for HDF – and there’s a reasonable chance of an increase.

In December, pipeline infrastructure group APA made a cash-and-scrip bid of 50c and 0.325 APA shares, which works out to a value of about $2.06-10 a share (see, most recently, February 22). After moving along slowly this year, a consortium of Canadians calling itself Pipeline Partners Australia has come out of the blue and made an all-cash offer of $2.30 a share. I think APA does want to win this, and as this is a contested bid, it justifies trading at a small premium (HDF closed at $2.38 today), but I would put the likelihood of an APA increase at 50/50.

In the current market, the lure of an all-cash bid has a lovely ring to it, and it will be hard for APA to compete with that. There’s no argument over valuation with a cash bid, and it’s difficult for APA to put too much more on the table because it runs the risk of putting more pressure on its own share price.

One of the difficult things in making a scrip bid is that you’re immediately introducing an element of shorting into your own share price. You might say 'that’s unfair’, but the market looks at what the price is now – not in the future – and this is why a scrip bidder often struggles to compete with a cash bidder, especially in weak markets.

Having said that, there is the advantage of capital gains tax rollover relief in scrip bids, assuming you’ve made gains on your position.

In terms of how to play this, I think it’s worth paying for it, because there is a 50/50 chance of an APA increase and it is a contested bid – but don’t over-pay. At $2.38, you’re paying about 3% above, and that’s always my limit.

Pacific Brands (PBG). We’ll likely never know why KKR weren’t interested in PacBrands – private equity firms aren’t known to publish why they do things – but it looks like there’s just not enough fat in the company left to trim.

The company announced last week (May 15) that talks with KKR had ended, and a bid from it or other private equity firms was “unlikely to be forthcoming in the near term”. PacBrands’ management has already taken a razor to the company over the past couple of years and I think the work has already been done. Sadly, the share price reflects the work that’s been done, and it’s still not very strong, closing at 55.5c.

From what I understand, quite a few retailers now are just using their own lines and going direct to suppliers for socks and jocks and these kinds of products (they’re almost a commodity).

I think this is part of a broader move by private equity away from retail. Private equity has had some success with retail – remember, PacBrands was previously owned by a private equity firm, as was Just Group, and Billabong was a target – but the world is a different place now and brands are really starting to struggle.

Industrea (IDL). General Electric have lobbed a $1.27-a-share bid for Industrea, which has been recommended by the board absent a superior bid, and there’s the potential for a kicker here as well.
The reporting on this has been a little confused, but essentially Industrea has a division – Industrea Mining Services – that GE doesn’t really want. So there’s a certain agreed value that, if during the bid process Industrea can sell the division for more than this value, then investors will receive extra for their shares.

Neither the value of the division that would trigger this, nor the amount extra shareholders would receive, has been made public and I wouldn’t put a high probability on this occurring. The good thing is if they can’t sell it, you still get the cash amount – $1.27.

Industrea makes and designs its mining equipment, and obviously has some intellectual property, so it looks like GE has decided it wants to get into that high value-add industry. There’s a chance of a higher bid, but I would just play it on the existing cash terms. Industrea shares closed 3.25% below the bid price at $1.23.

Coalworks (CWK). An independent expert’s report is still being prepared on the Whitehaven (WHC) bid, but Coalworks has put out another statement saying the $1-a-share offer materially undervalues the company.

Whitehaven obviously wants to wrap this up, and I still think there is a very good chance of a counter bid. Coalworks closed today at $1.02, and if the whole world falls apart Whitehaven just mops it up at $1, and your downside is low. Whitehaven could easily throw a bit extra on the table, in the range of 20-25c more a share.

There’s talk about Macquarie trying to replace Coalworks board members with their own, but you don’t need to worry too much about the machinations of what’s going on behind the scenes. You simply need to look at a dollar as pretty safe, with 2% downside and maybe 15% upside. That’s a good trade.

Eureka (EKA). An article ran in the Wall Street Journal’s Deal Journal Australia blog this afternoon that Aurora (AUT) was considering dropping its bid for Eureka Energy because it was worried about a costly debt facility. This is rubbish.

Aurora’s bid for Eureka is an on-market bid, and by its very nature has to be unconditional. As I explained on May 7, the bidder must sit in the market for a minimum of a month.

Aurora’s recent capital raising didn’t make as much as it wanted, but it doesn’t have the money for this takeover and it appears to want to build scale through acquisition. I don’t think anything has changed.

PMP (PMP). Finally, the indicative bidder for printing and distribution company PMP has been revealed as ticketing and labelling group TMA.

I said in April that investors should wait and see who the bidder was, rather than follow the hype, and the share price has come down considerably since then.

It’s now at 40c, and while this is still a very risky situation, with no formal bid yet on the table, it may be worth a look for less risk-averse investors.

Shares are priced well below the 68-78c range indicated, and while it’s still 15c or so back down to where they were trading before the bid, there is 28-38c of upside. For some investors, that’s worth playing.

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

-Takeover Action May 14-18, 2012
Date	Target	ASX	Bidder	(%)	Notes
1/03/2012	Accent Resources	ACS	Xingang Resources	60.65
30/04/2012	Alesco	ALS	Dulux Group	19.96
18/05/2012	Brockman Resources	BRM	Wah Nam International	86.45	Closing Jun 14
10/05/2012	Coalworks	CWK	Whitehaven Coal	17.30
17/05/2012	Curnamona Energy	CUY	Havilah Resources	50.31
30/04/2012	Eureka Energy	EKA	Aurora Oil & Gas	2.79
2/04/2012	Genesis Resources	GES	Clancy Exploration	0.00
15/05/2012	Hastings Diversified	HDF	APA Group	20.71	Closing Jul 15
17/05/2012	Hydromet	HMC	Simon Henry	75.02
17/05/2012	Ideas International	IDE	Gartner Australia	81.91	Pre-bid acceptances
17/05/2012	Magma Metals	MMW	Panoramic Resources	66.25	Ext to May 10
17/05/2012	Real Estate Capital Partners USA Property Trust	RCU	Woolley GAL II	28.93	Associate holding
10/05/2012	Scandinavian Resources	SCR	Hannan's Reward	83.99
17/05/2012	Somerton Energy	SNE	Cooper Energy	21.57	19% pre-bid agreement
24/04/2012	Thakral Holdings	THG	Brookfield Asset Management	0.00
16/05/2012	UCL Resources	UCL	Minemakers	14.30	Ext to May 22
Schemes of Arrangement
27/04/2012	Gloucester Coal	GCL	Yancoal (Yanzhou Coal)	64.50	64.5% holder Noble Group in favour. Vote Jun 4.
10/04/2012	Ludowici	LDW	FLSmidth	22.00	Vote May 31
30/04/2012	Spotless Group	SPT	Pacific Equity Partners	19.64	Vote late Jul
11/10/2011	Sundance Resources	SDL	Hanlong Mining Investment	17.99
Reverse Takeover
11/05/2012	Millepede International	MPD	Agline Pastoral Pty Ltd	0.00	Agline and shareholders to control 67.6%. Vote May 23
Foreshadowed Offers
28/02/2012	Goodman Fielder	GFF	Wilmar International	5.00-	Press speculation
18/05/2012	Matrix Composites & Engineering	MCE	No party	0.00	Suspended on operational and financial update
27/04/2012	PMP	PMP	Unnamed party	0.00	Non-binding indicative offer

Source: News Bites