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Australian Financial Review : October 17th 2006
FBA 020 The Australian Financial Review Tuesday 17 October 2006 www.afr.com 20Street Talk Edited by Anthony Hughes (email@example.com) James may eclipse Kerry in media deal James Packer may be about to outshine his late father's famous once in a lifetime deal to trade Nine Network with Alan Bond. In creating an unlisted media company with the help of the cashed-up private equity funds, it appears that Packer may well have set up Publishing & Broadcasting Ltd to act as the leading consolidation force in the Australian media sector and enjoy a re-rating as a purer casino play. It seems that Packer may have also embraced the Macquarie Bank specialist fund model, and there is talk that the new media vehicle will be managed like a Macquarie fund. Yesterday's talk was that PBL's Foxtel stake and Fox Sports would form part of the new media company, but there was some contention as to whether the 27 per cent stake in Seek, which Packer is enamoured of, would form part of the new venture. The deal again highlights the emerging power of the private equity funds. Kohlberg Kravis Roberts partner George Roberts blessed these shores in recent months, while also heading here in the coming days is the founder of the Carlyle Group, David Rubinstein. The new owner of British airports group BAA (owner of Heathrow), Ferrovial, is reportedly selling Budapest airport to Hochtief. Analysts were speculating yesterday it was possible that Budapest Airport will be offered to its airports joint venture with Australian Infrastructure Fund. Ferrovial also has still to deal with cross-ownership issues associated with its Australian airport interests. Investor ambivalence towards the bio-fuels sector has forced the withdrawal of a $75 million prospectus for Jupiter Biofuels, the second bio-fuels float after Global Ethanol to flounder this year. Shareholders in junior gold explorer Jupiter Energy were set to vote on spinning off Jupiter Biofuels at the coming annual meeting but that resolution has been withdrawn, the company has confirmed. History a worrying reminder to Suncorp Suncorp's bid for Promina Current Suncorp NPAT Current Promina NPAT NPAT synergies Potential funding costs Merged NPAT Suncorp shares on issue Price paid ($) New shares issued Total combined shares on issue EPS prior ($) EPS merged ($) EPS accretion Suncorp shares issued per Promina share Suncorp price ($) 894 456 114 --85 1379 558 7.3 272 830 160 166 3.7% 0.2618 23.00 FY08E EPS impact ($m) Westpac's possible Current Westpac NPAT Current Suncorp NPAT NPAT synergies Potential funding costs Merged NPAT Westpac shares on issue Suncorp price paid ($) New shares issued EPS prior ($) EPS merged ($) EPS accretion Westpac price ($) FY08E EPS impact Source: UBS SETTING SUN Any big bank would be wise to look at the share price chart of Suncorp in the aftermath of its takeover of GIO in 2000 if they want an idea on the best time for a tilt at the Brisbane-based banking and insurance group. Put simply, Suncorp may well be a lot cheaper in a year than it is now. Suncorp took GIO off a grateful AMP's hands in September 2001 for $1.24 billion. Despite an initial rise in Suncorp's shares to more than $14 over the balance of that year, Suncorp spent the next year in the market doldrums -- even falling under $10 in early 2003. It's been a very rewarding experience for Suncorp shareholders since but if history is any guide the integration phase for such an acquisition could be difficult. While moves in the share prices of Suncorp and Promina in recent days indicate that their merger plans, disclosed last week, might not see the light of day and Suncorp will instead become a target, this may be an overly pessimistic view about the Suncorp- Promina deals' chances of success. At yesterday's close, Suncorp's bid valued Promina at $7.60, but Promina was trading at $6.95. The canny folk at Perpetual Investments appear to have taken advantage of Suncorp's share price strength to lighten their holdings, disclosing yesterday that it had ceased to be a substantial shareholder. There is also a view that hurdles the Australian Competition and Consumer Commission might put up to a Suncorp-Promina union can be overcome, since the combination shouldn't have much more than 40 per cent of the NSW and Queensland motor market, and divestments such as Suncorp's share of the RACQ joint venture are possible. The other concern for Suncorp shareholders is that regional banks are more highly rated than insurance companies -- witness the price-earnings multiples of Bendigo Bank, Bank of Queensland and even St George -- but its banking exposure would be less than 25 per cent of earnings as a result of the takeover. MMC isn't holding its breath on PMP One party not waiting around for a takeover of PMP is MMC Asset Management. Its associated funds revealed they were sellers as PMP rose last week when the company confirmed it had been approached by private equity. The MMC funds cut their combined stake from 9.06 per cent to 7.73 per cent. Observers are scratching their heads as to how a private equity bid stacks up, and it is worth noting that there have been several examples in the past year where private equity approaches did not lead to a formal takeover proposal, including Pacifica, OrotonGroup and, so far, Coles Myer. Australia's toll-road dominance globally is seriously under threat if the outcome of the short-listing process for the £4.5 billion ($11 billion) widening of London's 100-kilometre M25 motorway is any guide. Separate consortia involving Macquarie Bank funds and Transurban didn't make the cut, with Europeans Ferrovial, Vinci and Balfour Beatty heading competing consortia for the project, which will be announced in 2008. Rich individuals answer T3 call Telstra's recent weak share price appears to largely reflect a view that Telstra is ''ex-entitlement'' to a guaranteed allocation in the T3 share offer, but it should be noted this is true only for retail investors. Institutional investors have until 6pm on November 17 to get onto the register if they want to qualify for an entitlement under the one-for-two offer. This comes amid talk that demand for stock under this week's broker firm offer is reasonably strong from high net worth individuals, as well as those using margin loans. Given all this, it is starting to sound like $8 billion will be easy to fill. Certainly it will be if everyone takes up their entitlement but this is unlikely, given Telstra's record. While there is speculation the deal could be increased to $13 billion or even $14 billion, the federal government is expected to be careful about swamping the market with stock and will draw the line at about $10 billion. If that's the case, there will still probably be a squeeze on institutional investors needing to get an index allocation or wanting to get access to the super-yielding instalment receipts, particularly since while they might show a 14 per cent yield at the issue price, some say they could conceivably trade on a yield of closer to 10 per cent. Heavy trading in takeover target Vision Systems in recent days has surprised some. Austock dominated the trading on Friday but this was said to be primarily related to Vision executives exercising their options and selling their shares on-market before the JPMorgan-advised Danaher Corp's $3.75-a-share bid. Yesterday, other shareholders followed the executives when more than 3 per cent of Vision's stock changed hands. Hedge fund sources said it was not much of a trade if the stock was bought by an arbitrage fund at $3.73 ± only a very small return, given it will be some weeks before shareholders accepting the offer will be paid. ' ' AWB is understood to have been ''bear spreading'' December 2006 to July 2007 contracts only to see the wheat market turn violently against it. Speculation sparks ConsMin advance Experienced mining watchers say Consolidated Minerals, whose share price has moved up sharply in the past week, is vulnerable to a takeover. Sightings have lent credence to a view that Consolidated Minerals would be a good fit for nickel and gold player Independence Group, which controls assets near Consolidated Minerals' nickel project in Western Australia. Consolidated Minerals rose 17¢ to $2.18 yesterday, lifting the gain from its close on October 9 to 27.5 per cent. It is perceived as a manganese company, but it is more interesting for its nickel assets as they are set to generate about 60 per cent of its 2007 earnings. An Independence Gold tilt at Consolidated Minerals ± which may depend on Independence getting a further boost from firming up its 30 per cent-owned Tropicana gold resource ± would be a case of turning the tables, since in the past it was thought more likely that Consolidated Minerals would bid for Independence. However, Consolidated Minerals' manganese price-related profit warnings mean Independence is the bigger party, with a market value of more than $500 million. The timing of a bid is based on a view that miners often move when the headwinds look greatest, and while the near-term outlook for manganese looks flat the nickel operation could be valued at about $300 million on its own. Independence had a June-quarter net profit of $17.3 million. It has about $50 million in cash, and with nickel prices stronger in this quarter it is tracking well for a higher profit. Such an acquisition would extend Independence's mine life around Kambalda to more 10 years. Its annual nickel output would rise from about 8500 tonnes to more than 12,000 tonnes. There is also Consolidated Minerals' ore sorter at Kambalda that allows the quality of the ore to be upgraded. Another option for Independence would be to sell off Consolidated Minerals' manganese, chromite and iron ore assets and its minority interest in Jabiru Metals. The manganese assets comprise about 10 per cent of world production. The talk has led to a view that Consolidated Minerals could be worth more than $3 a share. The company has parted ways with ex- chairman Michael Kiernan, which may mean it's more likely to have corporate appeal. Wheat marketer AWB's depreciating share price suggests mounting concern over the extent of its exposure to futures contracts traded on the Chicago Board of Trade. AWB is understood to have been ''bear spreading'' December 2006 to July 2007 contracts, only to see the market turn against it. Bear spreading is a strategy designed to profit from a drop in a security's price by selling a near- term futures contract and buying a deferred month futures contract. But lower than expected wheat production due to drought for its 2006-07 pool may have left AWB on the wrong side of trades as December prices hit record highs. CBOT traders have estimated losses in the spread at anywhere between $US20 million ($26.6 million) and $US30 million, which has left some traders wondering if AWB's position has been underestimated. Shares in AWB fell to a new low yesterday when they shed 19¢ to $2.59. Most of that was probably a reaction to GrainCorp saying yesterday it would have a 2007 loss of between $20 million and $30 million. Ripplewood deal in Sweden turns spotlight on Coates FOR HIRE Coates Hire Share price, daily $ 7.00 6.00 5.00 Source: Bloomberg Oct 06 Aug Dec Oct 05 A big global private equity deal in the equipment hire industry has underscored the robust view held by some on the outlook for mining and construction and also underlined the value of Australia's major equipment hire group, Coates Hire. Ripplewood Holdings and Oak Hill Capital Management earlier this month agreed to buy most of Swedish company Atlas Copco's construction equipment rental business for $US3.8 billion ($5.1 billion), in a divestment advised by Deutsche Bank. The deal was struck on a multiple of 5.7 times the business's 2006 earnings before interest, tax, depreciation and amortisation, which is relatively low by recent private equity standards but probably reflects the industry's cyclical nature. This is roughly in line with Coates's trading multiple, but given Coates is more exposed to the West Australian mining boom and a robust outlook for infrastructure-type construction, arguably Coates should be worth a little more. About 20 per cent of Coates's hire sales come from the mining sector. Coates's share register has been fairly stable, though the flat share price of late may have something to do with AMP's recent disclosure that it has ceased to be a substantial shareholder. Meanwhile, it may not be all good times in the private equity sector given talk that one of the larger deals of the year with a building industry theme is not going too well for its new owners.