Corporate activity is alive and well and investors can expect more takeover offers to emerge as companies seek out opportunities to boost growth and cut costs. The resources and finance/bank sectors are ripe for consolidation, but suitors will swoop on any undervalued company if it fits its profile for the right price.
Westpac Bank’s move on competitor St George is fuelling the rumour mill as to what banking stock might be next outside the big four given the four pillars policy is here to stay. Or, will one of the other major banks make a counter offer for St George? Steven Hing, of Novus Capital, says the most likely scenario of a Westpac/St George merger will pressure the other three majors to go on the acquisition trail to remain cost and market share competitive.
Hing says Bendigo and Adelaide Bank and Bank of Queensland are possible targets for the Commonwealth, NAB and ANZ banks looking to expand their customer base while spreading their tentacles deeper outside the major capital cities. The credit crunch that accompanied the sub-prime meltdown slashed bank share prices to the point they are trading up to 40 per cent below their highs. Hing says Bendigo and Adelaide Bank and the Bank of Queensland should appeal as they are trading cheaply on historical price/earnings ratios and dividend yield.
“If the Westpac/St George deal is approved, then I expect to see more consolidation in the banking sector,” Hing says. “It’s the perfect time for it. The other three big banks will have to look for targets to get on equal terms with Westpac. A mammoth Westpac will be able to squeeze margins in a bid to snare more market share from its competitors.”
Hing, executive director of equities, says AMP at $7.30-to-$7.50 price levels may also be prey for the major banks or financial institutions. AMP’s wealth management arm and the nation’s booming superannuation pool may tempt a bid for the insurance giant well below its year high of $10.97.
Investors dumped gambling companies Tattersall’s and Tabcorp after the Victorian Government announced an end to the poker machine duopoly in 2012. Tattersall’s will need to find other revenue sources besides lotteries and wagering from its Unitab acquisition. Hing says Tattersall’s and Tabcorp will face fierce competition from Australian Leisure and Hospitality (a hotel chain jointly owned by Woolworths and pokies king Bruce Mathieson) for the gaming machine dollar. He says: “Given that Tattersall’s is too small to make a grab for a casino, it would seem, following its merger with Unitab, that it may be a good fit for Tabcorp.” A Tabcorp/Tattersall’s merger will generate bigger betting pools by combining punters and enticing new ones from competitor Betfair.
After a takeover offer is announced to the market, the share prices of targets generally rise in anticipation that a suitor will increase its bid, or a rival bidder will emerge. But if an offer is rejected or unlikely to proceed, the target’s share price can plummet as investors strip out takeover premium. Companies engage in merger and acquisition activity to generate growth, cut costs, increase market capitalisation, diversify operations and defend themselves from being taken over. A bigger merged company can put it on the radar screens of fund managers, who will buy shares to adequately balance portfolios.
Finding takeover targets is far from an exact science, but doing your homework can increase your chances of investing in a potential target. Predators often look for under-valued or out-of-favour profitable companies with good and similar assets, strong cash flows and little debt. In the mining sector, it seems increasing production by acquisition is a cheaper and safer way to buy growth rather than explore and stgelop internally.
Carey Smith, of Alto Capital, says AngloGold Ashanti may make a move on Independence Group, its joint venture partner in the Tropicana gold project, with a resource of at least 4 million ounces. Independence owns 30 per cent of Tropicana and AngloGold owns 70 per cent in what Smith describes as “Australia’s most exciting gold discovery in the past two decades”. Independence also owns the Long Nickel Mine at Kambalda in Western Australia and posted a $100 million profit from this project alone after producing 9000 tonnes of nickel last year. Smith says Albidon is about to start producing nickel at Botswana where it has big reserves. Lion Selection Group plans to sell its 20 per cent stake in Albidon, opening the Albidon door to corporate activity.
Smith says: “Furthermore, I believe the coal sector is open to consolidation. Just about every Asian country needs more thermal coal for power and coking coal for steel production.” Specifically, he, says, suitors would be interested in Centennial Coal and Macarthur Coal for their fabulous assets at the right price. The thermal coal price has risen more than $20 a tonne in the past month and was trading at $152 a tonne on Friday, May 30.
Smith says perennial predator Xstrata is always on the acquisition trail and a successful Oxiana/Zinifex merger will put it on the Swiss giant’s radar screen. Xstarta, already bidding $1 a share for Indophil Resources, is the world’s biggest zinc company and Zinifex is third. An even bigger entity would dominate the market and provide cost saving synergies in a mining boom showing no signs of slowing down.
Ben Potter, of ABN Amro Morgans, says Suncorp-Metway may generate some takeover interest for its insurance and banking divisions amid flat earnings and squeezed margins. Suncorp-Metway is prominent in Queensland and the timing is right for potential suitors to make an opportunistic bid when times are tough. He says Suncorp-Metway’s takeover of Promina has not provided the value shareholders expect, so they may be tempted by takeover premium.
For every successful takeover, there are plenty that hit the wall. On June 2, Fashion retailer Just Group rejected an $836 million takeover offer from Soloman Lew’s Premier Investments, claiming the bid under values the company. In late May, Origin Energy baulked at a $13.6 billion bid from Britain’s BG Group, claiming its coal seam gas assets were worth considerably more after Santos and Malaysian company Petronas agreed to build an LNG plant using LNG gas as feed. Another bid for Origin may emerge as company managing director Grant King says the company is always for sale at the right place. QBE Insurance withdrew its $8.7 billion offer for IAG after IAG management, to the dissatisfaction of several major institutional shareholders, claimed the bid was inadequate and incomplete. And Rio Tinto has constantly said that BHP Billiton’s offer of 3.4 shares for every Rio Tinto share significantly undervalues its assets and prospects. Scott Marshall, of Shaw Stockbroking, says: “This begs the question: What price is acceptable to Rio? Based on our analysis, we believe Rio may consider a scrip offer in the range of 3.6 to 3.9 BHP shares for each Rio share.”
But there are also agreeable mergers. Investors have pencilled in a $10 billion Oxiana/Zinifex merger of 3.1931 Oxiana shares for each Zinifex share. The board of Iron ore stgeloper Midwest Corporation is in favour of .575 Midwest shares for every Murchison Metals share, effectively putting Chinese company Sino Steel’s $6.38 cash bid for Midwest on the back burner. Zinc and lead producer Perilya announced a merger with fellow producer CBH Resources by way of a scheme of arrangement in a proposal that includes three CBH Resources shares for every Perilya share. On May 21, toy distributor Funtastic announced that a private equity consortium led by Archer Capital was offering 80 cents a share in a non-binding indicative proposal for the company.