David Jones stocktake

PORTFOLIO POINT: Shareholders in David Jones should expect other suitors are shopping around for undervalued retail assets and the company remains a target.

David Jones (DJS). Call me conspiratorially minded, but frankly I don’t think the bid for David Jones was a real bid. In fact, I’m convinced ASIC should be investigating this.

The company released a statement to the ASX on Friday morning regarding an unsolicited approach with very little information, from a “non-incorporated UK entity”. This was followed by an update about 2pm Friday afternoon revealing the bidder as EB Private Equity, a “Luxembourg and UK real estate and real estate related investor” according to its website, and some details on a proposed $1.65 billion acquisition of David Jones.

The share price jumped 14.6% on Friday, taking other retail stocks up with it, but fell 5.4% this morning before David Jones requested a trading halt in the early afternoon. At 2.45pm today David Jones said the bid had been withdrawn as “recent publicity around its proposal has made it difficult to proceed”, and the share price dropped 13% on the resumption of trade before closing 10% lower at $2.33.

In the board’s defence, the fact that the bid did move the share price materially proves, in a sense, that they did the right thing releasing the information. If you don’t release information these days you can get caught up pretty badly.

When the bid was first announced late last week I thought it didn’t look the best. I had never heard of EB Private Equity, which is not unusual, but over the next 24 hours as more details – or lack of details – emerged, alarm bells sounded. Even the bid itself sounded very vaguely worded.

I think the fact it happened on the last trading day of the year is interesting as well. I read in one news report that EB chairman John Edgar had previously contacted the board in May with a similar, but lower, offer – so maybe the bid was serious.

To be fair, leaving aside whether or not this was a genuine bid, there’s probably a reasonable point of view for buying David Jones. On a good day, its property assets are probably worth $800-$900 million, though they’re only valued at $450 million on the company’s books. It’s possible that someone could buy it, redevelop the CBD Sydney and Melbourne properties as mixed use, sell them off and keep the retail business running – and that could make sense. If you’re looking for a quick turn on it as a private equity buyer right now it wouldn’t work, and there’s no way you would get a repeat of the Myer experience floating the retail business, but markets change.

Essentially, David Jones is still potentially a takeover target regardless – but I would let the share price settle down from the froth and bubble of this unusual bid. Further to this, my problem with retail businesses (leaving aside any property plays or takeover speculation) is their business models are facing fundamental pressure. I think you have to be pretty brave and pretty quick to try and call the bottom in retail stocks – they could look considerably worse in five years’ time than they do now.

Billabong (BBG). Still on the topic of retail and private equity, is Billabong. I said recently that unless Gordon Merchant changed his mind, no one could buy it. And, now, apparently he’s changed his mind.

I don’t understand why you would knock back $3.30 and then say 'now everything’s changed’. Nothing has changed. It’s got a new CEO but the business itself didn’t change – just Merchant’s world view. Will TPG, or any other private equity firm, come back? Maybe. But it won’t be at $3.30. Given it has just done a six-for-seven capital raising, $3.30 is only going to be the equivalent of about $2, although that is still a substantial premium to where the stock is right now – it closed down 1.4% at $1.06 today.

Merchant reportedly wants an equity stake in any sale, and that’s not really unusual. There are plenty of situations where private equity comes in and lets management keep some equity in the business. They might not want Merchant involved, but I suspect they would – it was his vision to set up the company, albeit some time ago.

However, in terms of buying into it now before a bid that might come – I would wait. One of my rules about buying potential bids is that you want the underlying business to be in good shape. You have to be happy to hold it in the meantime. To its credit, Billabong has paid off a lot of debt, and the decks are cleared with the new CEO. But if trading conditions deteriorate, you don’t want to be holding it, and so I would just wait.

News Corp (NWS). The proposed demerger of News Corp into entertainment and publishing divisions appears to have several motivations. On the one hand, newspapers and publishing really are very different businesses to broadcast entertainment, and the market likes it because the entertainment business would trade at a much higher multiple. But, on the other hand, given the future of newspapers seems to be on digital platforms including video it seems odd to separate one from the other.

I have a feeling there is a legal aspect to this, so that in case of a real backlash from the phone hacking scandal in the UK the majority business is insulated somewhat. And secondly, that Rupert Murdoch may be acknowledging his support for loss-making newspapers may be coming to an end. I think the blowtorch will be applied, and a lot of those newspapers – The Australian included, which is rumoured to run millions of dollars of losses – might not keep going.

In terms of takeovers, the idea that Murdoch could privatise the publishing half is possible, but it’d be a struggle to raise the money for that. And the last few big newspaper deals have had Murdoch on the buying side – and without him a lot of these newspapers could just close because there isn’t anybody else who wants to run them.

One interesting point is the local listing. As News Ltd in Australia is said to be going entirely in the publishing division for geographical reasons, that means the entertainment business might not be listed here – which would leave local investors left out of the more profitable side of the business. I think it would be a good thing if they did keep it listed here.

Alesco (ALS). To return quickly to the ongoing Dulux (DLX) bid for Alesco, the $2 a share cash offer is still on the table here. Alesco has traded around $1.95-1.98, and closed at $1.92 today, so the market is not appearing to be expecting an increase.

The independent valuation from Alesco valued it at between $2.23 and $2.52 though, so to get a recommendation Dulux would have to meet that – say $2.25 or thereabout – an 11-12% increase. I think Dulux can afford that, and I think while it’s not for the faint-hearted, the fact Dulux already owns 21% of it suggests it won’t walk away.

The bid expires around the end of the month, but that can be extended. It really comes down to intent. The independent expert has given its range, the target board seems stuck on that range, so it comes down to whether Dulux can increase by 12% and my view is they probably can.

Sundance (SDL). While Sundance received FIRB approval as mentioned last week, there is a delay in the approval process in China.

The new deadline for this is July 31, and I note after that it doesn’t mean there’s immediate funding approval – Hanlong still has another month until the end of August to actually obtain the finance.

I’m not saying it definitely won’t go ahead, but again, as I’ve said before on this deal – just wait.

Allied Gold (ALD). Finally, there are raised eyebrows surrounding the St Barbara (SBM) deal with Allied to form a gold miner supposedly worth more than $1 billion, as St Barbara appears to be paying roughly a 90% premium to Allied’s the last traded price.

To be fair, the cash and scrip deal was negotiated a while back, when apparently the premium was only 50%, and I suspect they’ll push ahead. But you can see the reaction from St Barbara shareholders is not great. There is no need to overpay for something by 90%. No one else is coming in to bid on this. If you’re an Allied shareholder, well done, but it’s a friendly bid – in my view I would just be accepting it.

If I was a St Barbara shareholder I’d be a bit concerned. It’s not unusual for a bidder’s share price to fall during the process, especially if there’s a large scrip component, but I don’t think this is just people shorting – I think they feel St Barbara is grossly overpaying, and they will suffer for it in the long run.

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

-Takeover Action June 25-June 29, 2012
Date	Target	Code	Bidder	(%)	Notes
20/06/2012	Alesco	ALS	Dulux Group	19.96
29/06/2012	Austock Group	ACK	Mariner Group	0.00
13/06/2012	Castlemaine Goldfields	CGT	Lion Selection	11.40
28/06/2012	Coalworks	CWK	Whitehaven Coal	72.80
25/06/2012	Curnamona Energy	CUY	Havilah Resources	92.72
29/06/2012	Eureka Energy	EKA	Aurora Oil & Gas	75.03
22/06/2012	Genesis Resources	GES	Clancy Exploration	8.01	Ext to Jul 30
15/05/2012	Hastings Diversified	HDF	APA Group	20.71	Closing Jul 15
28/06/2012	Hydromet	HMC	Simon Henry	92.79
24/05/2012	Minemakers	MAK	UCL Resources	0.00
31/05/2012	Norton Gold Fields	NGF	Zijin Mining Group	16.98
27/06/2012	Orion Metals	ORM	Conglin Investment Group	27.17
29/06/2012	Real Estate Capital Partners USA Property Trust	RCU	Woolley GAL II	32.81	Incl associate's holding
26/06/2012	Rocklands Richfield	RCI	Shandong Energy	52.46	Pre-bid agreement
04/06/2012	Thakral Holdings	THG	Brookfield Asset Management	38.58
Schemes of Arrangement
15/06/2012	Spotless Group	SPT	Pacific Equity Partners	19.64	Vote Jul 25
22/06/2012	Sundance Resources	SDL	Hanlong Mining Investment	17.99	To complete Nov 2012
Foreshadowed Offers
21/05/2012	PMP	PMP	TMA Group	0.00	Non-binding indicative offer

Source: News Bites