Citigroup issues wish list for mergers and acquisitions
by: Gillian Tan From: The Wall Street Journal January 19, 2012 3:28PM
CALL it a wishlist, but the Citigroup Australian Hedge Fund Sales Desk has sent clients their best ideas for M&A in 2012. Five of the broker's 11 picks in 2011 were subject of activity with Foster's Group, Equinox Minerals, Eastern Star Gas across the line while Austar and Whitehaven Coal are still pending.
From Citi’s perspective, friendly, all-cash deals tended to be most successful and a 30 per cent premium to closing price tended to seal the deal.
This year, the desk expects M&A appetite to remain strong and has named its picks, potential bidders, and reasoning as follows.
Santos could attract interest from Total or other global oil and gas majors due to its strong balance sheet and offering of production growth, premium gas pricing contracts and because its trading at a steep discount.
Transurban could become the target of Canadian and European pension funds since it offers yield and growth through whole or majority ownership of eight high quality toll road concessions in Australia and two in the US.
Insurance Australia Group could be swallowed by Wesfarmers to add scale to its insurance business, which is currently at the bottom of the cycle.
Johnson & Johnson, Medtronic or GE Healthcare are just a few, large healthcare players who could take a look at ResMed since short-term issues provide an attractive price entry point for the company, which offers growth drivers, cost synergies and improved market penetration.
Crown could bite at Echo Entertainment Group since it is already on the shareholder register. Citi reckons the company is through a significant portion of the capital expenditure cycle, meaning it's opportune timing for any activity.
Atlas Iron is one of the most attractive iron ore plays in Australia due to its open register, port capacity and direct shipping ore, and could find itself approached by Fortescue Metals Group or offshore parties, most likely from China or India.
Previously under offer, Treasury Wine Estates could see private equity interest resurface, or China’s Bright Food or Cofco could come to the table, attracted to its quality wine assets and offshore distribution channels.
Viterra, Glencore, Cargill are just a handful of players who could look at GrainCorp, which has ownership of key port infrastructure and no poison pill following Grain Growers divestment last year.
Sandfire Resources could be tapped by Oz Minerals, already a major shareholder, or another copper major due to the high grade and significant exploration potential at its De Grussa project.
Sinopec, Repsol, BG or Petrobas could make a tilt at Karoon Gas, which has early-stage exposure to liquefied natural gas in Australia and Brazil. Citi said the group could be vulnerable as it will be in need of funding.
Gold producer Medusa Mining could attract the eye of mid-tier Canadian miners or South Africans.
ENI, Total, Hess or ConocoPhillips could mull action around AWE, which will need funding for ongoing exploration and development and is undervalued according to Citi.
To be sure, these are just ideas. But a near 50 per cent strike rate last year could mean some aren't far off target.
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