takeover target, page-3

Here's the full story on Oxiana and Zinifex and who else is in line.

Investors strip out takeover premiums from Oxiana and Zinifex
Email Print Normal font Large font AdvertisementBarry Fitzgerald
March 5, 2008

THE $12 billion merger of equals between Oxiana and Zinifex has become a $10.75 billion merger.

Investors that had been betting either company could become the subject of a hostile takeover bid have cashed in their chips and moved on to chase takeover premiums elsewhere.

The stripping out of the latent takeover premiums built in to the share prices of the Melbourne-based pair was savage and outweighed the impact of the universally warm reception for the deal from analysts.

Oxiana fell 37¢, or 9.4%, to $3.53 and Zinifex tumbled $1.27, or 10.5%, to $10.88. The bigger hit to Zinifex was taken to mean that, of the two, it was the cashed-up zinc producer that looked the more likely to be the subject of a takeover if not for the merger. The merger was also generally seen as more favourable to Oxiana, but not by much.

While the heavy share price falls reflected reduced expectations that a third party such as Xstrata or Teck Cominco would now be prepared to launch a bid for either group, the severe nature of the share price falls would actually make it a lot cheaper to bid for either group, or the enlarged group.

Oxiana chief Owen Hegarty and Zinifex chief Andrew Michelmore have begun to sell the merits of the merger proposal in a 2½-week roadshow that began in Sydney yesterday. Apart from the embarrassment of wearing hefty share price cuts on the day, the initial feedback was positive.

There was also plenty of positive feedback in morning commentary from analysts. Credit Suisse said the pricing of the merger (3.1931 Oxiana shares for each Zinifex share) was not materially wrong. "Acceptance of a merger of equals suggests to us that both companies are more excited about the opportunity for future value-creating transactions than the relative pricing of their merger terms," Credit Suisse said.

Morgan Stanley's research desk — the firm's advisory arm has been retained by Oxiana — said that for Oxiana, the rate of earnings-per-share growth would slow but cash available on the balance sheet would increase substantially. For Zinifex, the rate of EPS growth would increase in the near term (lower from 2011), as would free cash flow.

Morgan Stanley said the merger was about "long-dated opportunities that are likely to be greatest in scale through a combined entity than on a single company (stand-alone) basis".

Goldman Sachs JBWere said the merger was "another example of corporates acting on the 'stronger for longer' thematic in commodities".

"We believe each party is bringing similar value to the table," it said.

"We doubt that there will be a competing bid for either company."

Potential targets for the merged group itself were listed as Equinox, First Quantum, Kagara, Albidon, Independence Group and Pan Australian. Goldman Sachs said that each offered major growth in copper/zinc/nickel/gold and, using a quote often used by Mr Hegarty to describe the upside, they had "oodles of exploration potential".

The reporter owns Oxiana shares.