BREAKFAST DEALS: Billabong beat-up

Billabong International is back in the deals pages after a director stepped away to try to find the financial firepower to take the company private. Few give him a chance and if it fails, it’s just another distraction for boss Launa Inman. Qantas Airways is similarly fighting the news cycle this morning. Meanwhile, Arrium chairman Peter Smedley has done a good job reassuring investors, Elders boss Malcolm Jackman is confident the company will handle its debts without difficulty, and there’s a theory floating around about a potential buyer for Kerry Stokes’s Coates Hire.

Billabong International

Launa Inman faces another six weeks as the leader of an embattled clothing company that’s the subject of takeover speculation.

Speculators pushed the Billabong International share price up 10.1 per cent to 81.5 cents on Monday. This followed the announcement that executive director Paul Naude, who is in charge of Billabong USA, is stepping away from the board for six weeks to "investigate the possibility of putting forward a proposal for a leveraged buyout of the company”.

Billabong made it clear that the board did not solicit Naude and there has been no understanding with any individual board member. "He is acting alone,” the Billabong statement said.

Few seem to give Naude much of a chance of finding the financiers for a buyout. Billabong has looked increasingly isolated since TPG Capital and Bain Capital withdrew their proposals of $1.45 a share, or $700 million, for the whole group. Earlier discussions at $3.30 now seem utterly of another age.

As such, the market has given no credit to the notion that Naude could muster a proposal comparable to TPG or Bain. Despite a 10 per cent surge, the stock is still trading at a 43 per cent discount to those indicative offers.

Part of the reason for that is the sheer uncertainty that continues to surround Billabong. The market still doesn’t know why TPG and Bain walked away, one of them after just a week or two of looking at the books.

If Naude’s tilt ends in a similar fashion to TPG and Bain, Billabong should level with its shareholders about why the company looks so appetising from afar, but less so up close. Otherwise the shareholder hopes of a buyout will rise and fall with the subtly of the company’s stock.

While some Billabong shareholders would no doubt be willing to exit the company at a lower price than TPG and Bain were prepared to pay, the news must be frustrating for Inman.

Naude, who has been with the company since the last 1990s, is in charge of her largest region by sales and profit, but he’ll be absent from director duties for six weeks.

Qantas Airways, Emirates

Attention this morning surrounding the future of Qantas Airways is centring on Leighton Holdings chief financial officer Peter Gregg.

The former Qantas executive is distancing himself from reports that he’s one of four prominent Australian business figures – along with former Qantas boss Geoff Dixon, ad kingpin John Singleton and investment banker Mark Carnegie – that are putting an alternative strategy to shareholders.

In a report by Fairfax, columnist Adele Ferguson says Gregg "denies supporting a plan to destabilise Qantas, he has not denied giving his opinion on the airline and its strategy to investors – when they asked for it.”

So far it appears the quartet isn't totally opposed to the 10-year Emirates alliance that Qantas boss Alan Joyce is pushing for. But they do believe that a sale of the Qantas Frequent Flyer business and/or a float of low-cost operator Jetstar would be a better way of extracting value.

Let’s not forget that Qantas has $3 billion in cash, which agitators may also have plans for.

For his part, Joyce needs to get his shareholders behind him. The Australian Financial Review reports the Emirates deal can be called off by either airline if there is a shift in strategy or an "inconsistent investment” from a third part that wins 20 per cent of the register or 10 per cent and a board seat.

Either scenario would be a serious test of the belief Emirates has in Qantas, which underlines the importance of comments from Emirates president Tim Clark last week in support of Joyce.

The Australian Competition and Consumer Commission isn't set to make a final decision on the deal until March next year.

Ultimately, this could come down to a referendum on Joyce’s leadership. Some shareholders might lament the missed deals in other parts of Asia or the more nimble performance of Virgin Australia under former Qantas exec John Borghetti.

But Qantas ran into some regulatory issues, along with others, in its quest to form an alliance in Malaysia or Singapore. It should also be pointed out that Virgin isn’t saddled with the same union problems as Qantas.

In response to the latter point, Joyce was prepared to ground a global airline fleet, making international headlines, to bring the situation to a head.

If it comes down to a referendum on Joyce’s time as chief executive, this columnist believes his strategy has a good chance of staying.

Arrium

Arrium chairman Peter Smedley told shareholders that the steelmaking company is open to engaging with a suitor at a fair price, but offered a strong defence of the company’s long-term strategy.

Speaking at the annual general meeting yesterday, the number one issue for Smedley was to leave shareholders with the impression that, takeover or not, their company has a future above its closing price of 72 cents.

"We believe we're doing everything possible to be competitive by international standards,” Smedley said.

The former Spotless chairman said the best defence for the company was to meet its iron ore production targets and maximise earnings from other arms of the steelmaker.

"Longer term, we believe the business is well positioned to deliver significant value for shareholders,” he said.

The Arrium board members were given indicative proposals at 75 cents a share, then 88 cents, from an Asian consortium called Steelmakers Australia. Hong Kong’s Noble Group and South Korea’s POSCO led the charge.

The board would not engage with SA, indicating that the offer simply undervalued the company.

A quick look back at Arrium’s share price shows that the offer dropped in a state of weakness for the iron ore sector. The ‘scare’ at Fortescue Metals Group came around the same time.

Now the iron ore price is back up around $US120 a tonne and the Arrium stock isn’t just reflecting its takeover target status, but its improved position as a company.

Elders

Elders chief executive Malcolm Jackman expressed confidence that the asset sales currently underway would generate enough cash to cover its debt burden. The company is facing a refinancing deadline of $385 million in December.

"The rationale for this decision is simple and compelling: that, in the current climate, the value generated by a competitive sales process is forecast to be superior to that than can be delivered by other options,” Jackson said in the company’s annual report.

It’s a strange exercise to read the Elders annual report for 2012, considering that one of the first lines reads, "Elders is an Australian company with leading businesses in Rural Services and Automotive components supply.”

Well, it is for the moment. The Futuris automotive parts business is being sold too.

Merger speculation emerged earlier this year when it was revealed that Jackman had received a letter outlining a vague proposal from Ruralco counterpart Richard England. The discussions essentially went no further than this.

Some are keeping an eye on whether Ruralco tries to pick up the rural services business from Elders, marking a merger of sorts after all.

The reality is that they will have to compete with some potentially powerful Asian buyers. If a foreign suitor picks up those bits of Elders, perhaps Ruralco will be next.

But that’s a few steps down the road.

Wrapping up

Drillsearch is going to the market for $50 million in order to pay for its $132 million takeover of Cooper Basin explorer Acer Energy. The funds will also go towards permits picked up through the Acer acquisition.

The company is putting up 38.6 million shares at $1.30 a piece, which is a 12.8 per cent discount to the previous trading price.

The Australian Financial Review has floated the theory of Wesfarmers making a play for heavy equipment hire company Coates Hire, currently held by Seven Group billionaire Kerry Stokes.

At the moment, this is just a theory.

And finally, APN News & Media is offloading its newspapers on the South Island of New Zealand, as well as its community newspapers around Wellington.
 

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