Goyder pours Coles water on critics

Wesfarmers chief executive Richard Goyder answered his sceptics in spades by completing Australia’s biggest takeover of 2007.

The $20 billion Coles Group takeover has confirmed Wesfarmers’ ability to continue the enviable growth record it achieved under former chief executive, Michael Chaney.

The takeover was meticulously planned and executed with the calm professionalism that characterises many Wesfarmers deals.

Twelve months ago, Wesfarmers was not even considered a contender for Coles, which was being lined up by several private equity groups during 2006 and early 2007.

Wesfarmers trumped them all last April, when it bought an 11.3 per cent stake in Coles and announced a $20 billion takeover offer, initially in partnership with private equity investors.

The Wesfarmers consortium, which was advised by Gresham, Macquarie Bank and Allens Arthur Robinson, faced a number of challenges along the way.

The private equity partners fell by the wayside, analysts argued that Wesfarmers was paying too much, its share price fell to a level where the deal may have collapsed, and Woolworths tried to get a slice of the action.

Through all of this, Wesfarmers stuck to its guns, ultimately taking advantage of Coles’ need to find a buyer.

While market observers have hailed the professional execution of the takeover, the big challenge now is for Wesfarmers’ management to deliver on its planned turnaround of the Coles business.

Another momentous transaction for Western Australia was Woodside’s decision to proceed with the Pluto liquefied natural gas project.

The significance of this decision seems to have been lost in the large number of billion dollar resource projects proceeding in WA.

Pluto is far bigger than any other project, with capital investment of $12 billion making it the single largest resource investment in Australia.

Moreover, it has gone ahead in record time, with just four years from discovery of the gas field to the final investment decision.

In contrast, other LNG projects in Australia and internationally are still trying to work out how they can cope with spiralling costs, despite benefiting from much higher LNG prices.

In fact, Pluto was the only major LNG project to proceed anywhere in the world in more than two years.

That reflects, in large part, the determination of Woodside boss Don Voelte to see the project proceed.

The biggest takeover target in WA last year was energy company Alinta, which was acquired by investment group Babcock & Brown in tandem with Singapore Power.

The Alinta takeover dominated the headlines in the first half of 2007, and market observers are as divided as ever about the deal.

Former chief Bob Browning gets credit for spotting an opportunity for a management buyout, but he and former chairman John Poynton, who were both forced to resign, failed to properly manage the sales process.

The MBO turned into an auction and resulted in control of one of WA’s iconic businesses leaving the state.

Even the ‘winners’ have a mixed record since completing the deal. Singapore Power planned to flick its Alinta assets (on the east coast) to its associate, SP Ausnet, but the latter company rejected the proposal, while the share prices of the listed Babcock entities have slumped in recent months.

What is not widely appreciated is the extent of Babcock’s investments in WA.

The $8 billion Alinta deal, led by Babcock’s global head of infrastructure Peter Hofbauer, was one of many deals it completed in WA last year.

The group also paid $522 million to take full ownership of the AlintaAGL business.

In property, it formed a joint venture with Saville Australia for the $1.3 billion Capital Square apartment project, and paid $180 million for Tony Fini’s retirement villages and $16 million for a stake in PRM Property Holdings.

In the energy sector, it outlaid $270 million for a 36 per cent stake in Gordon Martin’s Coogee Resources and has played a lead role in several power station projects through subsidiaries, NewGen Power and WA Biomass.

In infrastructure, its subsidiary WestNet Rail dealt itself into the Mid West infrastructure debate.

The record low vacancy levels in Perth’s office market have prompted several major new developments.

The biggest of them all will be Multiplex’s 45-storey City Square project at 125 St Georges Terrace.

The new office tower was underwritten by Perth’s biggest leasing deal –BHP Billiton has agreed to take a reported 60,000 square metres of space so that all of its operating divisions in WA can be co-located.

The protracted takeover battle for diversified mining company Consolidated Minerals was one of the most extraordinary sagas of 2007.

As with the Alinta takeover, opinion remains divided.

ConsMin was in a deep rut in mid 2006, pummelled by the acrimonious exit of former chief executive Michael Kiernan and weak commodity prices.

The board spent several months negotiating a scheme of arrangement with Brian Gilbertson’s Pallinghurst Resources, and in February unveiled a complex deal that valued ConsMin at $2.28 per share.

It was immediately met with criticism that the scheme undervalued the company; but nobody guessed by how much.

Ukrainian group Palmary recently won control after lifting its offer to $5 per share, driven by the strategic value of ConsMin’s high quality manganese deposits.

Arguably, ConsMin shareholders should give most credit to Mr Kiernan’s new company, Territory Resources, which busted open the original Pallinghust deal, triggering the subsequent bidding battle.

Nickel producer Jubilee Mines is another mid-cap mining company set to change hands.

Jubilee’s share price has risen strongly in recent years, but despite that it managed to extract a big takeover premium from Swiss group Xstrata.

Investment bank Morgan Stanley ran a sales process for Jubilee, which culminated in Xstrata’s unexpectedly high $3.1 billion offer.

Jubilee was helped by the fact Russian group Norilsk outgunned Xstrata in the bidding was for another nickel miner, LionOre Mining, earlier in 2007.

Jubilee boss Kerry Harmanis agreed to accept the Xstrata offer, announced in October, and it was expected other shareholders would quickly follow suit. But that has not been the case.

One of the main themes of 2007 was the floating of several big mining services and contracting companies on the Australian Securities Exchange.

The biggest deal was NRW Holdings’ $303 million initial public offering, managed by investment bank UBS.

Southern Cross Electrical ($59 million IPO) and Brierty Contractors ($60 million IPO) were other notable examples, which allowed the founders to reap big profits.

Trade sales attracted less attention but were no less significant.

The most surprising was the $100 million cash sale of Welshpool-based Kingston Bridge Engineering, a low-profile plastic pipe manufacturer.

The purchase price was at a multiple of seven and a half times earnings before interest and tax, which was at the upper end of private business sales.

The big surprise was the ability of Kingston Bridge, formed in 1998, to quietly increase earnings to more than $13 million.

Other notable trade sales were TCC Group (for up to $100 million), and assay laboratories Ultra Trace ($80 million) and Genalysis Laboratory Services ($56 million).

Quadrant Private Equity and advisory firm Ernst & Young played key roles in two other major transactions.

Quadrant backed a $180 million management buy-out of Australian Fast Foods, the owner of the Red Rooster and Chicken Treat franchises.

This allowed former chairman and major shareholder Nick Tana to exit, some five years after he and his partner Frank Romano – who continues in the business – bought Red Rooster from Coles Myer.

Mortgage aggregator Choice Aggregation Services and its sister company, Choice Home Loans, was founded by Perth pair Greg Pennells and Ross Begley in the early 1990s.

They built Choice into Australia’s fourth biggest mortgage aggregator, with a little help from Quadrant, which in 2005 invested $20.1 million in return for a 48.2 per cent stake.

Early last year, the owners of the business appointed corporate advisory group Caliburn Partnership to run a sales process.

They eventually struck a deal with Challenger Financial Services, which bought Choice for $163 million – and concurrently acquired equity in two other aggregators, PLAN and FAST.

The sale terms meant that Quadrant quadrupled its money in two and a half years.

On a final note, the award for dud deal of the year goes to the George Jones-chaired iron ore hopefuls Gindalbie Resources (advised by Azure Capital) and Sundance Resources (advised by Capital Investment Partners).

They announced a friendly $2.4 billion scrip merger in September and four weeks later had to scrap the deal after realising they had completely misjudged the market.