WHEN Publishing and Broadcasting Limited announced its $686 million offer for Burswood late last month, it was already sitting on a strategic 15.75 per cent shareholding.
WHEN Publishing and Broadcasting Limited announced its $686 million offer for Burswood late last month, it was already sitting on a strategic 15.75 per cent shareholding.
That was correctly seen as a blocking stake, effectively ruling out the possibility of a competing takeover bid.
However, the absence of competing bids still leaves scope for Burswood’s board to extract a higher price.
The market is already pricing in the prospect of a higher offer, with Burswood shares trading at about $1.45, above PBL’s $1.40 offer price.
A majority of market players contacted by WA Business News agree a small increase in PBL’s offer, to $1.45 or $1.50, would be enough to ensure success.
Optimists hoping for an even bigger increase could look to last year’s takeover of brick and tile maker Bristile for inspiration.
Sydney company Brickworks already owned 22 per cent of Bristile when it launched its offer and the housing market – a key driver of earnings – was seen, at the time, to be near its peak.
Despite this, Bristile managing director David Gilham fought a determined and successful battle to extract a higher price.
Brickworks was twice forced to lift its offer, from $3.15 to the final $3.875, which was above the valuation range set by independent expert Grant Samuel.
Bristile’s takeover defence was built around three elements that bear a close resemblance to the current Burswood situation.
First, Bristile released upgraded profit forecasts.
Burswood chairman Don Watt has already released updated earnings data showing Burswood “is currently experiencing its best financial and operating results in years”.
In a letter to shareholders he says net profit for the 300 days to 25 April was $36.6 million, nearly four times the profit for the corresponding period last year.
Further details of Burswood’s financial performance will be included in its target’s statement, due out later this month.
Bristile’s second line of attack was to argue Brickworks’ bid was at an unreasonably low valuation.
Mr Watt also tackled this issue in a letter to shareholders, saying PBL’s offer represents a premium of “only” 11 per cent to the average share price in the three months prior to the offer.
By contrast, PBL said its offer was 29 per cent above the 12-month average share price.
In addition, it pointed out that Burswood’s share price received a boost when PBL acquired a strategic stake last October, implying the three-month figures were misleading.
Mr Watt also argues that Burswood’s 2003 profit does not provide a good basis for valuing the offer.
“Burswood considers the current level of performance and business growth, rather than the 2002-03 earnings, to be a far more appropriate reference point for valuation purposes,” he says in his letter to shareholders.
Deutsche Bank analyst David Leslie has cut through this debate, saying PBL’s offer is 8.3 times Burswood’s forecast earnings (EBITDA) for 2005.
This is slightly above the average multiple of 7.9 times applying to other casino transactions over the past three years.
A third line of attack used by both Bristile and Burswood was to question future dividend payments, should the respective bidders acquire more than 50 per cent but less than 90 per cent.
PBL has stated it would seek to apply all free cashflow to eliminating Burswood’s debt rather than paying dividends.
It is understood PBL believes it would be prudent to reduce Burswood’s debt, given the inherent volatility in its earnings.
Mr Watt has countered by arguing that Burswood’s debt of $188 million represents a conservative gearing (net debt to equity) ratio of 30 per cent.
A handful of institutional shareholders could prove decisive as the takeover battle unfolds.
Maple Brown Abbott holds 9.1 per cent of Burswood, followed by PM Capital with 6.9 per cent and AMP with 5 per cent.
Burswood’s prevailing share price is in line with the latest valuation by Deutsche Bank, which lifted its share price target from $1.40 to $1.45.
“We believe some increase in the current offer may be required to secure shareholder acceptances,” Mr Leslie said.
Both Deutsche and local broking firm Euroz Securities rate Burswood a hold at its current share price.
