fml,cre and the stone conundrum

Following up on what fitnfam had to stay about Stone’s involvement in CRE (and hence FML), but moving it to a separate topic.

Problem with the Stone involvement in CRE is that you need to follow it over multiple companies in China, Hong Kong (part of China, but separate commercial setup), Canada and Australia (A1 and CRE).

Generally, the Stone Group seeks to acquire either a substantial, or majority shareholding in any company it is targeting, then supports the target with additional funding to permit further development under the skill set of existing management.

Depending on how things progress with companies that Stone has a substantial, or majority shareholding in, Stone sometimes moves to take full control, sells out, or keeps the status quo.

It also has to be said that the Stone Group is trying to diversify somewhat away from their corps interest and expertise in healthcare pharmaceutical products, electronic systems and information services (internet, mobile phone services)., and to date some of these diversification attempts have not been successful, particularly in mining (mainland China and overseas).

The Stone involvement in Australia started with A1 Minerals, where they entered into an arrangement to provide funding for a substantial shareholding, increasing under set conditions to a majority shareholding.

The deal at the time certainly raised eyebrows as it appeared no one else wanted a bar of A1 (probably considered a lost cause).

Next Australian move by Stone was the commencement of their purchase of CRE shares, and it would appear that either by poor judgement, or bad luck they started this at the exact moment FML made a takeover offer for CRE.

Since around that time, questions have been raised about why Stone continued to buy into CRE at inflated prices when it was fairly obvious that FML had achieved an unassailable majority shareholding in CRE.

Certainly, Stone late in the FML takeover period, made noises about wanting to make their own takeover offer for CRE, however this quickly came to nought.

There was also speculation that Stone would accept the FML takeover consideration and convert their CRE shares to FML shares, but this also did not happen.

With the takeover offer now finalised, Stone has around a 12% shareholding in CRE that it cannot readily dispose of on market, has lost the chance to favourably convert their shareholding to FML shares, and has minimal, if any, say in the future of CRE (it could attempt to make a takeover offer for CRE, but the premium would have to be huge).

To add further to Stone’s predicament, it will shortly be faced with the prospect of having to stump up just over $15 million on its A1 agreement, to say nothing of having to provide further funding for A1, as the $15 million will flow straight out to partially meet A1’s current debts.

All up you could say, Stone potentially could be tying up $30 million in two Australian gold miners with very little prospect of achieving a return on their investment in the short to mid term, along with little, if any, way to extricate their capital investment.

Long term (10 plus years), applying the current status quo, their investment in CRE should pay off in terms of attributable value, however, unless they can add something to A1, that appears to be a potential disaster.

Personally, I will be watching to see if Stone goes through with the A1 transaction.

Hope fitnfam can add something on this strange strategy by Stone – surely cannot be a series of poor judgements?