The reaction to contrasting news on private equity buyouts at Orica and Austar yesterday was illuminating and says a lot about the overcharged state of the Australian share market at the moment.
Chemicals and explosives group, Orica rejects a $9.88 billion, $32 a share offer from a group of private equity operators and the shares explode, rising more than $5 in the space of a few minutes to trade over $33 and then on past $34 towards $35 before easing, as traders punted on an another offer.
The shares closed up a massive $5.61 at $33.30, a new all time high on more than eight million traded.
Orica’s rejection was quite strong and the company will no doubt be trusting it has the support of the only substantial shareholder, Perpetual Trustees which has just over 14 per cent and which topped up its stake at the end of March.
Perpetual and the head of its Australian funds management business, John Sevior, is also blocking the $18 billion Cemex bid for Rinker Group and the $3.8 billion offer for APN News and Media by a group of buyers including APN’s biggest shareholder, Independent News and Media, controlled by the O’Reilly family.
Regional Pay TV operator Austar reveals solid first quarter figures and a possible large capital management program that could include a $300 million buyback but there’s no mention of ‘third party talks’ and the shares slip 2.5c to around $1.73.5c because of the lack of any update.
The market ignored solid first quarter results and a huge possible buyback.
The third party talks were first mentioned in a statement on April 4 that “AUSTAR confirms that it has received confidential approaches from third parties regarding possible transactions however discussions are preliminary, incomplete and highly conditional.”
The talks, it seems are still too “preliminary”, to expand upon.
The company said the discussions were still very preliminary and the company would update shareholders at the appropriate time.
But Austar did give a big hint that shareholders could expected a capital return of up to $300 million; news which sat well with the 17 per cent increase in first quarter earnings.
AUN shares have been driven to record highs before and since April 4 by the buyout speculation, hence the less than enthusiastic reception yesterday.
Earnings before interest, tax, depreciation, and amortisation rose a solid 17 per cent to $38 million in the first quarter, compared to the corresponding quarter in 2006, on the back of a slower, 14 per cent rise in total revenues to $134 million.
Profit before interest and tax rose 41 per cent to $24 million.
Total subscriber numbers rose to 619,360 following a net influx of 18,234 subscribers during the quarter.
The Company said it would be seeking shareholder approval at the upcoming Annual General Meeting on May 31 to continue its capital management strategy. In September of 2006 the Company undertook a $202 million capital return to shareholders.
“Under the proposed strategy, which mirrors that announced in its 2006 Notice of Meeting, the Company may return up to $300 million of capital to its ordinary shareholders over a 12 month period.”
That’s more of a hint to the possible bidder or bidders what they will have to offer to get shareholders, including John Malone’s Liberty group, interested in a deal.
Foxtel is the best tip to move on Austar.
Meanwhile Orcia said in its statement:
“Orica Limited (“Orica”) announced today that it has rejected a non-binding and indicative proposal from a consortium (comprising Bain Capital Partners, Blackstone Capital Partners, Pacific Equity Partners and Morgan Stanley Principal Investments (“Consortium”)) offering to acquire Orica for a cash consideration of A$32.00 per share by way of a scheme of arrangement. The proposal was subject to due diligence and a number of other conditions.
“The Chairman of Orica, Mr Don Mercer, commented, “The Board of Orica has carefully considered the Consortium’s proposal and believes that it significantly undervalues Orica and its growth prospects.”
“As disclosed in its 2006 Annual Report, Orica’s total shareholder returns over the five previous years have been more than 500%, substantially out-performing the S&P / ASX 200 accumulation index.
“Orica has been through a substantial portfolio transition over that time, including the recent Dyno Nobel and Minova acquisitions, and the divestment of various non-core businesses such as interests in Incitec Pivot, Qenos and Adhesives & Resins.”
On the face of it what private equity could have done to boost the returns of Orica except load it up with more debt, is hard to see. Orica does have a problem with the disposal of thousands of tonnes of highly toxic chemicals from its Botany sight in Sydney.
That is presently bound for Germany but environmentalists here and in Europe have said it should stay here and be dealt with. But that has already been suggested, looked at and rejected because no one wants a processing plant to handle the chemicals located near their homes. Orica looked at several sites.
Orica certainly hasn’t let the grass grow under its feet: it is rationalised and re-orientated itself towards the resources industry here and internationally. Shareholder returns have risen sharply and it has hard to see where private equity could make improvements.
There is a ring of the controversial $11.1 bid for Qantas about the approach to Orica: nothing to do with operational matters, just rank opportunism and unlike Qantas the board and management at Oricia have remained independent.
