takeover target ...huntley

LEI took a stake in september will be even more tempting after winning this contract

"Speculation of a potential bid for DOW sent the share price 15% higher over the past month. It emerged that Leighton Holdings (LEI) took a strategic stake in September. Speculation comes following LEI’s comments last month on the increased workflow in infrastructure construction coming from state governments flush with mining boom cash. The level of infrastructure demand from state governments is expected to surpass growth from the resources sector and appears more enduring than previously expected.

Increased opportunities and the limited number of domestic players increases the likelihood of international players eyeing companies like DOW. Any bid by LEI would require an equity raising, perhaps displeasing majority shareholder Hochtief who has recently increased its holding. DOW has significant marketshare and any takeover would require regulatory approval from the ACCC.

DOW’s scale, diversity and recent concerns over transparency add risk for any potential buyer. Transparency concerns escalated with the shock $199m after tax write-down of bad contracts in FY06. Management believes it has been unfairly singled out for its disclosure policy, with double standards applied relative to its peers. CEO Stephen Gilles suggests competitors are taking contracts on a bit by bit basis rather than dealing with potential problems upfront. DOW’s contract with Iluka is on track for completion by 1H07.

Many of the contracts under the provision are not in dispute, but new accounting treatment assumes all contracts with any variation from requirements will be disputed and are provided for as though amounts are expected to be lost. Gilles sees exposure to fixed price lump-sum contracts as minimal going forward given less than 10% of DOW’s business is in construction and of this only 25% is under fixed contracts. Accepting this explanation still doesn’t answer our previous concerns as to why the CEO of the Engineering and Head of Telecommunications were forced to step down."