• Despite obvious near-term headwinds, we believe that the BLY share price is unsustainably cheap. If BLY continues to trade at these levels, we believe that the likelihood of an opportunistic takeover must increase. In this note we discuss the broader acquisition potential of BLY and specifically look at whether it would make sense for Orica (ORI) to acquire BLY. • Cheap on any metric – BLY is trading on an FY08 PE of just 1.2x with this based on guidance provided less than a month ago. Looking forward, BLY is trading on an FY09E PE of 1.7x and FY09E EV/EBITDA of 2.7x. • Cash flow likely to remain supportive - Cash conversion for BLY is high and this is likely to improve in a declining market as capex is wound back. We believe that sustenance capex for this business is US$30-40m. • Acquisition by ORI – could it work? - ORI’s stated acquisition strategy is to purchase businesses with leading market positions, attractive industry structures, high cash conversion and synergy opportunity. We believe that BLY ticks all these boxes with the possible exception of the market structure for the Drilling Services business. BLY also satisfies ORI’s desire to grow in mining services / resources space. What’s more, we believe that ORI has sufficient capacity to finance an acquisition if it chooses. • Synergies could be material – Our analysis suggests ORI could generate synergies of $45-90m pa with a mid-point of ~$70m. We see opportunities from revenue expansion, procurement and corporate and head office savings. • Reiterate our Overweight recommendation - While we believe that a potential acquisition may stack-up financially for ORI, we are not suggesting it is imminent. However, we do believe that this demonstrates that, if current prices for BLY are maintained, an acquisition is a possibility. We continue to believe that the current share price fundamentally under-values BLY under even the most bearish commodity price scenario.
BLY Price at posting:
22.2¢ Sentiment: Buy Disclosure: Held
