RE: Lots to sort out,: musical chairsre BHP borson
INVESTMENT INSIGHTS
Rumour mill intact - Private equity to grab BHP Billiton?
Right, and Coca-Cola may once again diversify into shrimp farming, and Richard Branson is going to alight on Mars.
Author: Barry Sergeant
Posted: Friday , 04 May 2007
JOHANNESBURG -
As the global equities market moves into its fifth consecutive bull market year, experts and layman alike appear to be suffering from either increasingly blurred imagination, or just plain party exhaustion. This week produced the plum example of Merrill Lynch analysts in Australia suggesting that BHP Billiton could become a target for private equity, a global sector now said to be experiencing around $300bn burning holes in pockets.
Merrill Lynch's idea - which boosted stock prices of diversified resources companies around the world - is full of holes. BHP Billiton's market capitalisation is a princely $150bn; a private equity takeover bid would have to pay a control premium of at least 20%, adding $30bn to the price tag. Other bidders would likely enter the fray, and $200bn could soon be at stake on the snooker table.
The only justification for the idea would be that BHP Billiton is undervalued. The stock trades at a forward price-to-earnings (PE) ratio of about 13 times. This represents a discount of about 20% on the overall PE for the Standard & Poor's 500 index. Merrill Lynch (Australia) believes (like most individuals who live in resource rich countries) in the commodities "super cycle", and suggests that if a private equity buyout firm teamed with an industry partner like Xstrata or CVRD, BHP Billiton could be had.
For people with more beauty than brains, BHP Billiton may look like a pushover. But this is a group that runs like a finely oiled monster machine, with 38,000 employees deployed at 100 operations in 25 countries. BHP Billiton is the world's leading supplier of core steelmaking materials (such as iron ore); it is No 3 in copper, No 2 in energy coal, No 3 in nickel, No 4 in uranium, No 6 in aluminium, along with material interests in oil and gas, diamonds, silver and titanium materials.
You don't mess with machines like this: they are run by resources people who are idiosyncratic and strong, and respond poorly to being bossed around by hybrid geek-wolves who have never seen even a photograph of a drill bit. To fiddle with this machine would be akin to breaking up the car for a fireproof lounge "suite", a generator for when the mains power goes down, and a compact sound system that can be carried around while exercising the dogs.
Merrill Lynch really does seem to be scraping the barrel. Just last August, investors may recall, markets were ablaze with speculation over "who's next" in resources merger and acquisition activity amid reports of record earnings from, in particular, diversified heavyweights such as BHP Billiton and Rio Tinto.
During that round of severe exercise of grey matter, Société Générale created the storyline that Anglo American was "predator rather than prey", following immense speculation that the group itself was a break-up target for an active predator. Such speculation followed speculation that Xstrata, Rio Tinto and CVRD had hired financial advisers ahead of possible action.
It must have been some relief for everyone involved when, over the past few weeks, Anglo American finally did buy a couple of things. It announced its tender win of the Michiquillay copper project in Peru, for $403m. Just before that, it confirmed its acquisition of a 49% interest in MMX Minas-Rio for an effective $1.15bn.
Sadly, it has been the huge cash flows generated by diversified resources stocks that have been moving the cheese, not the investment bankers. Back in August as well, JP Morgan specifically speculated that BHP Billiton and Rio Tinto could be takeover targets of private equity consortiums, or even global crude oil majors.
Also at that time, Société Générale said the idea of Xstrata standing as a predator was flawed; the group, so the argument went, was involved in a substantial $18bn all-cash acquisition of Falconbridge. The call now rings a little hollow: Xstrata is now universally seen as the leading corporate predator of this minerals cycle.
Late in March this year, it bid C$18.50 a share for LionOre, giving a potential transaction value of C$4.6bn/US$4bn, when outstanding debt and convertibles are included. At this time, while it was clear that Xstrata's bid for LionOre was well covered, it also appeared to be just the opening salvo in a potentially big takeover battle. This week, hey presto, Norilsk announced a bid for LionOre at C$21.50 in cash per share.
This one could really develop into a serious story. LionOre is also especially attractive to Xstrata's acquisition nemesis, viz., BHP Billiton, which two years ago outbid Xstrata for Australia's WMC. The BHP Billiton/WMC west Australian nickel assets possess potentially intimate synergies with LionOre's Activox hydrometallurgical process technology. Industry experts see LionOre's Honeymoon Well 1m-ton contained nickel project as a look-alike in many respects for the jewel of BHP Billiton's nickel business, Mt Keith.
Years of bull markets and the rising power of private equity have produced some strange bedfellows. In Hong Kong and Shanghai, the rising power of the Chinese consumer has seen new stock exchange listings for the likes of noodle companies. Bank listings are passé. The frenzied atmosphere around merger and acquisition also produced this year's top market fiasco to date, a purported "bid" for Gold Fields by one "Edward Pastorini", who may not even exist.
The Bloomberg news wire service categorically stated during early trade on April 11 that Pastorini and unidentified partners would make a bid for Gold Fields. With a starting market value of around $10bn on Wednesday, investors pushed Gold Fields up by as much as 10%, adding $1bn to its value. As news spread that the Pastorini story might be a hoax, the stock retraced by the equivalent of $800m.
Investors, like Coca-Cola, should stick to their knitting. Who can forget the momentous occasion, decades ago, when Coca-Cola diversified into shrimp farming? For decades, less a few years, Coca-Cola has focused on its core business. Then again, who can forget February 17 2006, when the stock price of platinum digger Lonmin shot up nearly 30% in literally minutes, shortly after one o'clock London time, to 2860 pence a share, on the company's own announcement that it may be a takeover target?