As Australia eases into Easter, Macquarie is out with a note that will give bankers and media executives plenty to think about over the long weekend. One of the investment bank's analysts, Alex Pollak, is envisioning major mergers, takeovers and spin-offs at some of the country's biggest media companies, including News Corp, Ten, Consolidated Media and Fairfax. Speaking of which, who could be behind a recent spike in trading of the publisher's stock? KKR and Carlyle Group are also back in the news as they attempt to raise funds to maintain their local investments, amid warnings their credit costs are about to climb. Meanwhile, Dexus moves out of the US, as QBE moves into the UK. And Queensland premier Campbell Newman might have lost a potential buyer for the state's stake in QR National. Elsewhere, Xstrata's favourite deal advisor goes down for sharing sensitive information.
Consolidated Media, Fairfax, Gina Rinehart, News Corp, Seven Group, Ten Network
There's been a flurry of activity on Fairfax Media's register — $16.6 million worth of the publisher's shares changed hands yesterday – and we don't yet know the identity of the buyer. But the action gives some credence to a provocative new note by Macquarie analyst Alex Pollak, who is imagining big changes in the ownership and construct of Fairfax, News Corp, Ten Network and Consolidated Media in the likely event of softer cross-media ownership laws.
According to a report in the Wall Street Journal, the analyst reckons Gina Rinehart might be planning to up her stake in Fairfax – already at 13 per cent – as her bid for a seat on the company's board looks less and less likely to succeed. It's a reasonable suggestion, as it becomes increasingly clear that Rinehart, who also owns a stake in Ten Network, is comfortable buying her way to influence. Let's not forget recent reports about her bankrolling a potential bid for the full ownership of Fairfax's radio assets via John Singleton's Macquarie Radio Network.
But Pollak doesn't stop there. He's also run the numbers on News Corp spinning off its British broadcaster BSkyB, or even its prized newspaper assets, both of which would be value-positive for the company – especially in the wake of the British phone hacking scandal. Then it might hunt down Ten, he says. Pollak also raises the prospect James Packer selling out of Consolidated Media to pursue his bid for a Sydney casino license, and reckons he'd find a willing buyer in Kerry Stokes' Seven Group, which already owns a slice. Sure it's speculative. But the logic's there.
KKR, Carlyle Group, BIS Industries, Coates Hire
Here's something more concrete. The separate futures of BIS Industries and Coates Hire could become clearer this quarter, as the companies' private equity parents prepare to raise a combined $2.9 billion in debt funding in an effort to cover the investments while they plan their best exits. BIS owner KKR needs $905 million to keep its Australian investment alive, while Carlyle Group, which owns Coates Hire with Seven Group, will be tapping banks for about $1.95 billion. Unfortunately, in constrained credit markets, they might be forced to pay top dollar.
The big four Australian banks are expected to play a greater role in this round of financing, as the European banks KKR and Carlyle had come to rely on pull out of the market. The private equity giants might also tap Asian lenders and institutions, as they look for replacements in syndicates built on 15 to 25 banks. But sources have told The Australian Financial Review that margins will probably blow out, forcing KKR and Carlyle to pay a lot more than the their current rates of 225 basis points and 262 basis points, respectively. The outcome of these talks could determine how much longer they're willing to hold on.
Dexus Property Group, Blackstone Group
In the property sector, Dexus Property Group's new chief executive, Darren Steinberg, has wasted no time making his mark on the company. Just a few months after taking the reins at the local company, he is close to offloading the majority of its US industrial portfolio in a deal that could be worth around $800 million. That's a lot of play money for a new boss.
Dexus has just entered into exclusive negotiations with private equity giant Blackstone Group, which has been buying up assets right around America in anticipation of an economic recovery there. One of the particular appeals of Dexus' portfolio, analysts say, is the inclusion of three properties in Florida, Ohio and Georgia, in which Whirlpool is a long-term tenant. A transaction, which would require approval by Dexus' board, would also represent Blackstone's third big deal in Australia recently, after buying Centro's US portfolio and taking Valad Property Group private last year. Could there be more to come?
QBE Insurance Group, Brit Insurance
Australia's largest insurer, QBE Insurance Group, is about to become a major player in the UK, too, as it buys the renewal rights of Brit Insurance's $US556 million ($545 million) of regional premium income.
That means QBE can take over clients when they renew their insurance policies without taking on any liabilities or capital from the acquisition. It's also expected to deliver the local insurer about 5 per cent of the UK market.
It's QBE's fourth big buy this year, after it picked up the general insurance businesses of Hang Seng Bank and HSBC Argentina Holdings, plus all of Optima Insurance Group, a Puerto Rican underwriting business. However, it may not be the last. John Neal, the new boss of the bulked up insurer, says he's still on the look-out for new bolt-on acquisitions. Deal watchers, take note.
UBS has poured cold water over speculation QR National might buy back the state of Queensland's $3.2 billion, and the bank's logic is simple: the railway company can't comfortably raise that much cash. UBS analysts estimate that QR National couldn't source more than $1 billion in debt markets without putting pressure on its BBB+ credit rating, according to The Australian Financial Review. What's more, even if the company did borrow $1 billion to partially fund a buyback, the bank reckons it would only have a 0.4 per cent impact on the company's earnings per share. And that's hardly compelling.
Anyway, it's likely to be some months yet before we find out what's going to happen Queensland's holding, now presided over by premier Campbell Newman. He's indicated that he's committed to selling the 815 million shares in an effort to pay down the state's debt, but he won't say when.
Meanwhile, Xstrata looks set to lose a valued advisor who is deeply involved with its proposed merger with Glencore. According to reports, JPMorgan's Ian Hannam, who has worked closely with Xstrata chief Mick Davis for a decade, will step down from the investment bank after being fined £450,000 ($690,000) by the UK Financial Services Authority for disclosing inside information about a potential bid for Heritage Oil in 2008.
While there is no indication that Hannam expected the information would be abused, and he will not step down until the Xstrata-Glencore merger is finalised, the news will undoubtedly rattle all parties over the Easter break. Xstrata and Glencore will probably be busy attempting to sooth regulator fears in Europe, where other industry players have kicked up a stink about the potential size and reach of the combined entity.
Elsewhere, the first guess is in about Telstra's expected capital management strategy. Merrill Lynch's Sameer Chopra is betting that the telco will announce a buyback of between $1 billion and $1.5 billion in shares, which would leave it just enough room to renew spectrum licensees and keep its credit rating steady, according to The Australian Financial Review. Expect more analysts to chime in ahead of Telstra's investor briefing on April 19.
AGL Energy will be sweating after receiving notice that the Australian Competition and Consumer Commission has extended its review of the company's $448 million proposal to buy the 67.5 per cent of the Loy Yang A power station it doesn't already own. While there might not be much in the delay, AGL has sour memories of the ACCC knocking back its plan to take the initial stake in the Victorian generator, before the decision was overturned by Australia's Federal Court. Tokyo Electric Power Co will also be disappointed, because the Loy Yang deal includes its 32.5 per cent interest, which it wants to offload so it can shore up its balance sheet in the wake of Japan's nuclear disaster last year.
And there are early jitters surrounding DirectCash Payments' bid for local ATM operator Customers Limited, amid talk its suitor may not be able to finance the $173 million deal. Under the agreement signed by both parties, DirectCash has three weeks to present a committed term sheet, or else Customers could walk away. The Australian Financial Review attributes a small pullback in Customers' share price yesterday to fund managers fretting about whether DirectCash will indeed come up with the cash.