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Street Talk
Author: Edited by: Anthony Hughes ([email protected])
Date: 03/02/2006
Words: 1865
Source: AFR
Publication: The Financial Review
Section: Market Wrap
Page: 50


Myer sale gets complicated
The retail world is alight with rumours and innuendo as the murky Myer sales process gets more complex by the day.

Following suggestions this week that several parties were having second thoughts about bidding for Coles Myer's Myer department store chain, it appears the powerful Myer landlords are starting to play their part in the process.

Coles Myer is seeking more information from bidders about their intentions, given the landlords are particularly concerned about the quality of the future operator of Myer stores and their commitment to the business.

This could be a slightly uncomfortable request for the private equity bidders who, by their nature, invest for only up to five, perhaps seven, years.

Meanwhile, there was talk yesterday that Coles's supermarkets chief, Hani Zayadi, might bring forward his retirement after a disappointing performance by Coles's food and liquor operations in the first half.

Analysts believe that Coles's supermarket operations have been underperforming those of Woolworths and that the group may be looking for new blood.

Meanwhile, Brisbane-based retailer Colorado made a small rebound on idle talk that Solomon Lew might be buying back into the company he sold out of less than 18 months ago at $5.90 a share.

Some have noted that close to 17 per cent of the stock has traded since the profit warning last month and that the resignation of boss Rohan Webb caused the group's share price to slump to $3.20 this week.

While that even prompted the wry suggestion that Lew might renew his interest in the company (he once owned more than 20 per cent), the stock has recovered slightly to $3.34. But it might be wishful thinking that Colorado's issues can be quickly resolved.

Childs play for Macquarie Bank

Childs Family Kindergartens appears to have hit the jackpot by luring Macquarie Bank into buying a 30 per cent interest and injecting $10.9 million into the company.

Childs hasn't exactly set the market alight since listing last year, trading at a discount to its 50? issue price when its raised $15 million from the market this year.

Getting Macquarie on board was probably an easier option than raising more money from the market, though Macquarie has extracted its pound of flesh because it will pay no more than 38? a share for its stake, versus Childs's close of 42.5? before its trading halt and its close yesterday of 49?.

At this point, ABC Learning boss Eddy Groves, who now runs a $2 billion-plus business after floating a company about the same size as Childs in 2001, won't be shaking in his boots as he pursues his United States expansion.

But the addition of Macquarie as an investor with its eye for businesses that have a government-sanctioned growth path certainly adds a lot more credibility to chief executive Barrie Childs's business.

Certainly it needs it, based on the latest news that has been seeping out of Childs.

The company has already warned that it will miss its prospectus forecasts, and early indications are that the half years results to December 31 will show a loss of $750,000. Childs's problems are a result of lower than forecast occupancy levels, lower pricing levels, higher than budgeted operational costs and increased workers' compensation premiums.

The company has, however, indicated it will return to profitability in the second half, reducing the loss for the full year to $300,000.

Shares in Toll Holdings hit a 52-week low yesterday as the transport group decides whether to extend its heated bid for transport rival Patrick. Given Toll boss Paul Little is still holding out hopes of doing the deal despite misjudging the Australian Competition and Consumer Commission's rejection, it should be an easy decision to extend.

What is particularly disappointing for Toll and shareholders of both companies is that the market was at one stage betting up to $1.8 billion of value could be created by the union, but that has all come to nothing.

Patrick meanwhile may need to produce a supplementary target's statement outlining its new business strategy in light of the ACCC decision.

There are conflicting views as to the level of activity within the Toll camp in terms of finding a plan B. While some insist these are times for quiet introspection, Toll is also seen to have been actively seeking out other targets and is being mooted as a possibly eager buyer of assets in the fuel transport sector, with Mitchell Corp, a transport group owned by AMP Private Equity being one possible target.

Graeme Hart is easily the most unpredictable figure in the market, which makes predicting where he will spend the billions in cash that he has raised for Burns Philp by selling Goodman Fielder very difficult. Griffin's Foods is one speculated target, but some say this is more likely to be purchased by Goodman Fielder (20 per cent owned by Hart) than by Burns or Hart himself. Certainly Goodman's new shareholders would have cause for complaint if Goodman is not getting the first look at food assets.

Appetite for small brokers bodes well

Float broker UBS initiated research coverage this week on newly listed insurance broker Austbrokers, which shares an important characteristic with successful small-cap companies - it has the potential to consolidate a fragmented market to generate high earnings growth.

Since listing in November at $2 a share, the stock has risen more than 30 per cent. UBS reckons the share price can keep rising to $3 a share as Austbrokers buys small broking firms at multiples substantially below its own to deliver value for shareholders.

Consolidation models have had mixed records for investors but the ones that have worked - pathology operator Sonic Healthcare is a good example - have produced stellar gains. As Austbrokers trades at a price-earnings multiple of more than 12 and should be able to buy some of the more than 700 licensed brokers in the Australian market at multiples of 6 to 7, such deals could add markedly to earnings per share, assuming Austbrokers buys wisely.

The other longer-standing listed insurance broker, OAMPS, has been doing this for a while but its pace of acquisition has slowed. Even so, Austbrokers and OAMPS may not be competing for assets much given Austbrokers' business model, whereby the principals of the broker businesses retain an equity interest in their new owner.

OAMPS's diminished appetite could mean the company is at a strategic crossroads and deciding whether it is time to sell or restructure.

There have been rumours that OAMPS has actually fielded offers from insurance companies. Another option would be for it to split its business between its underwriting and broking operations.

OAMPS trades at a discount to Austbrokers' multiple despite its longer history as a listed company. It might be able to extract a better market rating as a result of narrowing its focus to a pure broking operation.

BHP Billiton wants out, but other gas players all fired up

Coal seam gas appears to be too small an opportunity for the global resources empire of BHP Billiton, which is rumoured to be offloading its worldwide coal seam methane assets.

But there are plenty of reasons why companies like Origin Energy, Santos, AGL and even Alinta will continue to show a lot of interest in the sector.

Shares in CH4 Gas, a BHP Billiton partner and operator of the Moranbah gas project in Queensland, jumped again yesterday amid speculation it could become a takeover target for the buyers of BHP Billiton's assets.

BHP Billiton's interest in Moranbah is thought to sit within its coal division, creating uncertainty as to whether it is one of the assets earmarked for sale.

But Origin, which this week purchased more coal seam assets in Queensland, has good reason to increase its supplies because it owns Townsville's Mt Stuart power station, which needs to be converted to a gas-fired station to be competitive.

AGL is also planning to build a station in Townsville that could be powered by the Papua New Guinea gas project. It might prove wise to have alternative sources of supply if PNG gas is not delivered in time, and coal seam gas will probably be cheaper.

Santos bought the Tipperary assets last year for $600 million and Queensland Gas has bid for the troubled Sydney Gas, reflecting a view that the price of gas is likely to rise significantly in the coming years.

Alinta emerges as culprit in AGL trade

The mystery surrounding trading in the soon-to-demerge AGL in the past few weeks is gradually being lifted, after Alinta confirmed it sold most or all of its $80 million stake (1 per cent of the company) in the past few days.

The sale means that the acquisitive Alinta - which still harbours hopes of being an east coast energy retailer and could have used its satellite fund to help bankroll a full bid for one of Australia's oldest companies - has, for now at least, abandoned its ambitions for AGL.

Observant types noted that Avcol Stockbroking - a broker not usually busy in trading AGL shares - commanded about 40 per cent of the share in AGL trading on Wednesday as the share price dipped, suggesting it probably acted for Alinta (even though the ASX's move to market anonymity in November makes it harder to detect such trading, and many suspect Macquarie Bank has also been involved in Alinta's plan).

The strange part of all this is that AGL is much bigger than Perth-based Alinta. But it is not the first time that a smaller firm has tried to gulp up a bigger one: Metcash Trading's $3 billion bid for Foodland is another example (although Woolworths eventually ended up buying the trophy NZ grocery assets, leaving Metcash with the wholesale grocery assets).

Alinta, which had bought some of its 4 million shares in AGL before the demerger announcement in late December, approached AGL with a proposal in November, only to be told that AGL wasn't interested.

AGL's shares have soared from $14 to $18 since it announced the demerger; and in more recent weeks it appears Alinta approached a handful of institutions with an $18 offer. But it looks like they wanted at least $19 a share, perhaps more than $20.

Unfortunately for Alinta, AGL's share register is well-spread (there's only one major shareholder), making it harder for any raider to secure a big block of stock. It would seem AGL is in the clear to push through the demerger over the next few months.

Market mulls Nylex McPherson's link

Another mystery has been this week's decision by Nylex to replace chairman Ray King by elevating director Peter George. King, the former boss of Mildara Blass, cited a conflict with his chairmanship of McPherson's and the potential for Nylex and McPherson's to compete for acquisitions, but whether he had something specific in mind was left to the market to ponder.

A sceptic would wonder whether either company (both have been beset by profit woes) is in shape to spend money, but a possible explanation is that both have their eyes on listed homewares company Homeleisure.

Homeleisure's consumer products arm might fit with Nylex, and McPherson's may be interested in all of Homeleisure, given its bite-sized $27 million capitalisation.

Nylex faces the perception that major shareholder Kerry Stokes's Australian Capital Equity is a seller of its stake after Nylex recently sold its plant hire operation to another company in the Stokes stable of investments, National Hire.