Orica can't demerge, but Foster's must

PORTFOLIO POINT: Whether it was lack of demand or the high costs involved, Orica has decided against a demerger; it’s a luxury Foster’s cannot afford.
Orica. The price of Orica shares has fallen substantially since the company knocked back a takeover offer of $32 a share midway through last year. Having seen the error of its ways, Orica had been contemplating a demerger, whereby it would spin-off its explosives from its consumer paints division. The demerger is now off, mainly because there just wasn’t that much demand for it or it was going to cost too much.

The good news is that the company has upgraded its profit for the year ahead, which is a bit of a surprise. Whether it does a lot for the share price or gets the private equity bidders to come back is highly unlikely. I don’t think you’ll see $32 a share any time soon.

So if you’re a shareholder of Orica, I’d be turning up to the next annual general meeting and asking the board what they plan to do seeing they didn’t think $32 was a good price last year and the shares are now trading at about $18.

Foster’s. It has been revealed that North American brewer Molson Coors is the owner of the 5.3% stake held by Deutsche Bank. I don’t think Molson Coors is likely to make a bid for Foster’s. The two companies have about the same market capitalisation. Interestingly, I lived in Canada in 1989 and back then Foster’s had a big chunk of Molsons, a Canadian brewer. In fact, up until the mid-1990s, Foster’s owned 50% of Molsons. Then Molsons merged with Coors and now it’s bought this 5% stake. Foster’s has been completing a strategic review for a while now; the chairman has said he’ll get it done by possibly the end of February, but I’d say they need to hurry up about it.

The obvious thing for Foster’s to do is to demerge the wine from the beer and spirits business, effectively undo the Southcorp merger of 2005. I think Foster’s would have preferred to have sold the wine business, but there just aren’t buyers for wine assets right now.

The whole industry is struggling: profits are decreasing, average revenue per bottle is falling, new world suppliers such as Chilean wine suppliers are emerging, and people out there feeling the pinch are buying fewer bottles of expensive wine. Foster’s is definitely on the watch list over the next few months.

MYOB. Accounting software company MYOB is in a very interesting situation. It’s received a private equity bid from Archer Capital and HarbourVest. The bid was $1.15; MYOB have paid a 12.85¢ capital return, so the bid has been reduced by that amount to $1.0215, though it will be increased by 10¢ if the consortium gets to 90%.

The big problem here is that MYOB chief executive Craig Winkler owns about a quarter of the company. He’s knocked back bids before, also by Archer Capital, which were originally priced at $1.90 a share. But what’s interesting is that on Friday night MYOB said it was in discussions with other unnamed parties, and that shareholders should take no action on the Archer Capital bid.

MYOB is a pretty attractive company: it keeps throwing off cash and continues to pay out these extra large capital returns. If it’s got genuine interest from other parties, we could see – I’m loath to say it – a bidding war.

There are quite a number of companies that might be interested in MYOB. I would have thought another private equity firm would be keen, and there’s also bound to be other software manufacturers out there that could throw their hat in. The big issue, of course, is getting funding to launch a competitive bid.

Archer is a pretty disciplined firm; it’s walked away from plenty of bids before when it hasn’t got the price it wanted. The fact that this is the second time it has had a crack at MYOB shows how keen it is to win, but it won’t lift its price unless someone else comes along.

MYOB shares are trading at the level of the Archer bid, so if there is genuine interest then it’s probably not a bad punt.

Asciano. This company is in deep trouble. It’s got great port and rail assets, but it’s got far too much debt. We know that Asciano knocked back an indicative bid from the big US private equity group TPG at $4.40 a share in August. The stock is now trading at $1.70 (November 10 intraday trading).

I don’t think Asciano is going bust – although you can never say that with 100% assurance at the moment – but it does need to raise new capital. Apparently the company is considering doing some sort of convertible note. But if it can’t get that away, it’s simply going to have to place shares, as the banks are doing, with National Australia Bank announcing a $2 billion fixed price placement at $20 a share this morning (November 10).

So if Asciano has to raise more money that will be done at a discount, hence people are selling because they perceive that they’ll be able to buy the shares back more cheaply.

Whether the firm comes to some sort of arrangement with TPG is hard to say. Asciano inherited the bulk of Toll’s debt when the company demerged into the two companies, and it’s has really become a millstone. So maybe there’ll be another bid for Asciano, or it will raise capital or do a convertible note, but it’s going to have to do something pretty soon.

ABC Learning. There was a big corporate collapse last week when ABC Learning called in the administrators. Would anybody buy ABC proper? Not the whole company, no way. It’s now been revealed that 40% of its childcare centres were unprofitable. It just astonishes me that this somehow escaped the notice of analysts and auditors over the past several years.

The not-for-profit childcare operator Try Youth and Community Services is interested in buying between 20 and 40 centres in Melbourne and eastern Victoria, and taking over ABC’s contract for the Australian Defence Force. Ramsay Health Care is also said to be interested in buying some of the centres. Anybody who buys them will only want to buy the profitable ones in the right areas where there isn’t too much competition, which means hundreds of ABC centres are either going to have to be propped up by the government or just closed.

I think ABC’s collapse will have huge ramifications for childcare as an industry and I think some people are going to be arguing that childcare should go back to being the province of government and not private interests.

Incremental Petroleum. The takeover bid by oil and gas company Cooper Energy for fellow Perth group Incremental Petroleum closed on Friday (November 7), with Cooper getting 27% acceptances. Canadian-listed TransAtlantic has also bid $1.05 per share for Incremental, but that bid is conditional upon 75% acceptances.

It’s a bit of stalemate: TransAtlantic can’t get to 75% now because Cooper owns 27% and it won’t accept the bid.

Cooper could have gone to the Takeovers Panel to have its bid changed, but I think it’s decided that at 27%, it’s got its foot on the company. Will TransAtlantic come back and lower its minimum acceptance condition, possibly to 50%? Maybe, but as I said the other week, TransAtlantic is not a big, well-capitalised oil company: it’s only worth about $87 million Canadian, and it’s not entirely clear to me where the cash for this bid comes from.

So I would approach Incremental with some caution; the Cooper bid is no longer on the table, the Incremental bid’s condition can’t be satisfied, and its financing has to be considered a little bit suspect. It could be one that goes a bit further, but it’s a risky one.

CITIC Australia Trading. Perhaps one that’s less risky is Citic Australia, the local offshoot of the Chinese investment company. Its parent is offering a buyout at 75¢ a share. It would be a mixture of capital, return and dividend. It hasn’t said how much would be capital return and how much would be dividend, but the cash amount will be 75¢.

The stock is not that liquid; it trades around 70–72¢. It’s almost certain you’ll get the 75¢. There won’t be an increased bid; no one else would bid for it. But if the dividend part is big, it could be worth a few more cents a share in fact in credits, if you’re the type of shareholder that can use franking credits. Clearly Citic, the Chinese parent, can’t use Australian franking credits, so it’ll be prepared to pay out a dividend to get rid of all the franking credits.

Gindalbie Metals/Anshan Iron & Steel Group. Chinese group Anshan has lifted its stake in junior iron ore explorer Gindalbie Metals to about 36%. What we’re seeing is big Chinese groups taking strategic stakes in small Australian miners. It’s good for the Chinese companies: they get to secure sources of supply. I would say in the long run, however, it’s bad for minority shareholders, because it pretty much stops other bids happening.

Another thing is that it is almost certain that these large Chinese shareholders will seek to get preferential pricing on their offtake agreements, and as larger shareholders they’ll be in a position to do that. Now, there is a conflict of interest there, but, who’s going to stop them?

In the short term, these companies like Gindalbie need these shareholders and these contracts. But longer term, I think it’s going to be detrimental for their profitability. It will stop them from supplying into other markets and to other buyers.

Rio Tinto/BHP Billiton. BHP appears to be ploughing on with its bid for Rio Tinto. The European regulator could give an answer as early as December, but has given itself a deadline now of January 15; of course, regulators can always extend their deadlines. There will be conditions that the European regulator will impose; we just don’t know how onerous those conditions are. If they’re onerous, BHP could walk, but I don’t believe it will.

Resource companies are going to struggle to grow so the logic of Rio accepting this bid is now more compelling than ever. And Rio, for all that it’s been talking about its expansion plans, is now pulling back its expansion in the Pilbara and looking for joint venture partners in China. It’s suddenly realising it can’t finance these projects by itself.

With BHP prepared to offer a 25–30% premium to the current Rio share price, it’s very hard for the Rio board to say no given that expansion in the near-term is going to be difficult. If the Rio board doesn’t engage with the BHP board then, like Orica and other companies that have knocked back bids, they will be seen to have done their shareholders a disservice.

St George/Westpac. St George shareholders will vote on Westpac’s takeover offer this Thursday (November 13). There’s a tiny, tiny chance the shareholders will knock the bid back, so one might assume that deal will go through and further entrench the oligopolistic power of the big four.

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

nTakeover Action November 3-7, 2008
Date	Target	ASX	Bidder	(%)		Notes
30/10/08	Amazing Loans	AZD	IEG Holdings	0.00		Letter of intent received.
23/10/08	Babcock & Brown Communities	BBC	Prime Retirement & Aged Care Property Trust	0.20		Seeks up to 40%. Ext to Nov 28.
02/10/08	BigAir Group	BGL	Clever Communications	0.00
24/10/08	Broadcast Production Services	BKR	Prime Media Group	76.04		Offer for the balance.
02/10/08	First Opportunity Fund	FOF	Equities & Freeholds	0.00
22/10/08	GoldLink IncomePlus	GLI	Emerald Capital	27.06		Seeks 45%. Possible increase in offer.
06/11/08	Huntley Investment	HIC	Brickworks Investment	35.98		Bidder's statement sent.
06/11/08	Incremental Petroleum	IPM	Cooper Energy	24.78		Ext to Nov 7.
27/10/08	Incremental Petroleum	IPM	TransAtlantic Petroleum	8.04
29/10/08	Ingena Corp	IGG	UXC	0.00
03/11/08	Medusa Mining	MML	Crosby Capital	5.14		Drops offer.
22/09/08	Murchison Metals	MMX	Sinosteel	0.00		Cleared by FIRB to move to 49.9%
07/11/08	MYOB	MYO	Archer Capital, HarbourVest Partners	0.00		See Foreshadowed Offers.
11/07/08	Olympia Resources	OLY	Territory Resources	73.53
28/10/08	Pelorus Property	PPI	Pelorus unlisted funds	0.00		Vote Nov 28 on group merger.
02/10/08	Perilya	PEM	CBH Resources	0.00		Renewed offer.
04/11/08	Portman	PMM	Cliffs Natural Resources (formerly Cleveland-Cliffs)	99.27		Compulsory acquisition.
06/11/08	Queensland Gas	QGC	BG Group	78.79
03/07/08	Rio Tinto	RIO	BHP Billiton	0.00		ACCC clears offer.
06/11/08	Sunshine Gas	SHG	Queensland Gas	96.95		Ext to Oct 28.
nScheme of Arrangement
24/07/08	Australasian Resources	ARH	Resource Development International	66.37		Resource Devel associated with Clive Palmer who holds 66.37%.
22/10/08	Aviva Corp	AVA	NEMI Northern Energy & Mining	0.00		50-50 eventual shareholding split. No vote set.
28/10/08	Espreon	EON	Vectis Group	19.80		Talks on breach of "index decline" condition.
05/09/08	Extract Resources	EXT	Kalahari Minerals	39.11		Vote Nov 6.
04/11/08	Island Sky Australia	ISK	Salton Inc	0.00		No vote date set.
23/10/08	St George Bank	SGB	Westpac Banking Corp	0.00		Vote Nov 13. ACCC clearance. Treasury approval.
nBackdoor Listing
25/09/08	Grange Resources	GRR	Australian Bulk Minerals shareholders	73.90		ABM shareholders will have 73.9% if reverse takeover succeeds.
22/10/08	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	0.00		Agreement signed, subject to EGM.
09/09/08	Mark Sensing	MPI	TMA Group	82.00		Vote Oct 22. TMA would have 82% on completion.
07/11/08	Metminco	MNC	Hampton Mining	0.00		To acquire 51% of unlisted Hampton. Change of control.
nForeshadowed Offers
04/08/08	Asciano	AIO	TPG Capital consortium	0.00
03/11/08	APN News & Media	APN	Several unnamed parties	39.00		Independent News & Media has approaches on its 39% holding.
23/10/08	Babcock & Brown	BNB	Unnamed parties	0.00		Expressions of interest.
28/10/08	Becton Property	BEC	Several unnamed parties	0.00		Due diligence starts.
28/08/08	Berklee	BER	Manumatic	0.00		Heads of agreement on $10.9m sale of business.
22/10/08	Bravura Solutions	BVA	Ironbridge Capital	0.00		Discussions terminated. Possible alternative proposal.
14/10/08	Felix Resources	FLX	Several expressions of interest	0.00		New approaches.
16/10/08	Jackgreen	JGL	Unnamed parties	0.00		Received approaches.
07/11/08	MDS Financial	MWS	Unnamed parties	0.00		Rejects offer for Market Data. Other discussions continue.
07/11/08	MYOB	MYO	Unnamed parties	0.00		Possible alternatives to Archer proposal.
16/06/08	Staging Connections	STG	Several parties	0.00		Non-binding proposals. Due diligence proceeding.
05/11/08	Imagin Un	IUL	Sonnet Corp	0.00		Proposal terminated.
07/11/08	Warehouse Group	WHS	Woolworths	0.00		Media reports that Woolworths still interested in offer.
29/10/08	West Australian Newspapers	WAN	Seven Network	22.40		ACCC not to intervene in any acquisition.

Source: NewsBites