Dioro waits for market leg-upMichael Quinn, 1 June 2009RHOD...

Dioro waits for market leg-up
Michael Quinn, 1 June 2009

RHOD Grivas is undoubtedly a very busy executive as he gets on and off phones and planes desperately trying to drum up third party interest in Dioro Exploration, the Avoca Resources-threatened company he heads. That’s clearly why he’s proved so difficult to contact over the past few weeks – as opposed to being because he might be a tad embarrassed talking on the record after KPMG valued Dioro at multiples of what the market has deemed fair value to be in recent times.

The market had evidently completely lost faith in Dioro’s management – seemingly corresponding with notification of a share consolidation (which are reasonably consistent destroyers of shareholder value), and definitely following subsequent operational mishaps such as pit wall failures – with shares in the company falling from peak levels around the $A2.40-mark to below 40c in the 12-month period between October 2007 and October 2008.

When Avoca lobbed its unfriendly bid back in April, the stock was still languishing well down from those 2007 levels, despite Grivas’ assertions at conferences back in February that better days were in the offing following completion of underground development at the Frog’s Leg mine – as reported by HighGrade February 23.

Avoca’s implied offer price of 53c per share was someway short of the $1.88 share value KPMG came up with in its independent expert’s report late last month.

Ignoring the stock standard criticism made of independent expert’s reports – the one that argues whoever pays the piper calls the tune, with that argument of course being made by the party whose case isn’t supported by the report (see also below) – Avoca surely has a point in querying how it is that the market can have got it quite as wrong as KPMG is suggesting.

Avoca will no doubt have a few other queries when it formally (and imminently) responds to the Target’s Statement.

However, one question worth canvassing by those in the Dioro corner is the actions of Baker Steel. As noted by the Target’s Statement: “Page 16 of the Bidder’s Statement makes reference to Baker Steel selling 2,348,723 Shares to Avoca. The Bidder’s Statement does not disclose that, following this transaction. Baker Steel acquired on market a further 2,628,842 Dioro Shares to increase its holding to 10.87% of Dioro. Accordingly Baker Steel has increased its shareholding in Dioro to a level higher than prior to the sale to Avoca.”

It’s understood that Baker Steel’s argument is that its actions were based on it being a cheap entry price into Avoca. However, that wasn’t confirmed, and Avoca’s managing director, Rohan Williams, has, like Grivas, been keeping a very low media profile of late.

So, ignoring the protagonists’ respective press releases, where is this bid going?

The anecdotal word from some analysts is that Avoca could pay the equivalent of up to about 80c per Dioro share – and still get a good deal – which, coincidentally was about what the stock was changing hands at late last week. There is also the belief of analysts that for it to have embarked on a hostile takeover of Dioro, Avoca must have confident designs on the 51% of Frog’s Leg held by Canadian company La Mancha.

A dummy's guide to hostile takeover bids
To contemplate a hostile takeover, you would want to be reasonably sure that the bid will succeed, a corporate advisor told HighGrade.
“These things cost a lot of time and money and you don't want to come out the other end defeated or having paid too much.The acquirer is banking on the belief that the shareholders of the target will be that (annoyed) with the management of the target that they will contemplate a takeover, even if it is not at a huge premium.
“As for independent valuations, there is some truth in the statement that the numbers will suit the purpose. Often companies may shop around for a different Independent Expert if the first one won't give them the answer they are after.
“However, the big danger for a group that accepts a high valuation (noting that you can usually get an Independent Expert to reduce a valuation easier than getting them to increase it), is that it then needs to demonstrate to the market that it is actually worth that amount. Effectively, the management of the company is setting a fuse for themselves to either get the share price up (assuming the takeover fails) or fall on their sword. So whilst it is always in the target company's interest to extract a higher bid, there can be dangers doing this if it means that you have shareholders demanding that you now perform.”