10/05/2005 - 22:00

Tim Treadgold: Briefcase - Watch for King Kong with a chequebook

10/05/2005 - 22:00

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Not many people in Perth have taken an interest in the $760 million takeover battle for the alternative energy company, Pacific Hydro.

Not many people in Perth have taken an interest in the $760 million takeover battle for the alternative energy company, Pacific Hydro. Why should they? Pacific Hydro is not a player in the local electricity market, and no-one raises an eyebrow these days at a takeover priced at less than $1 billion.

But with Pacific Hydro there is a very important reason for taking a much closer look. Not at the target company, but one of the bidders - it’s a superannuation fund.

‘So what?’ the uninformed masses ask. ‘Super funds have lots of money, and it’s growing every day, why shouldn’t they make a takeover bid.’

That view has a one-word answer; risk.

Super funds are supposed to be risk averse. They are set up to provide for your pension, because by the time you need it the government won’t be providing much. That’s why super funds are supposed to squirrel away the cash you pay, hoarding it safely to make sure you can collect a pension for an increasing period of retirement thanks to modern medicine keeping us alive longer.

In the case of Pacific Hydro the fund doing the bidding is called Industry Funds Management (IFM). It is, to a degree, a specialist with a highly competent boss in Garry Weaven, one of the fathers of the modern super industry.

As a fund, IFM aims to deliberately seek alternative investments, such as infrastructure assets (toll roads, ports and power companies) and private equity opportunities. It looks to achieve a superior return over the long haul, a target being achieved because Mr Weaven is a smart operator and has invested wisely.

In the case of Pacific Hydro, which was strongly supported for some time by IFM, Mr Weaven has invested incredibly wisely, taking a long-term position and now sitting on a paper profit of around $200 million because a Spanish company, Acciona, wants to buy Pacific Hydro.

It is at this point that the game gets interesting. Rather than take the profit and fade into the background in the way super funds are expected to behave, IFM has become a rival bidder, forcing Acciona to increase its offer - a classic takeover battle.

Eyebrows should be rising rapidly now because Mr Weaven and IFM are blazing new ground. They have become aggressive players in the corporate game rather than benign squirrels.

Having looked at the Pacific Hydro case, Briefcase believes IFM is on a winner and that Mr Weaven deserves a medal for making a huge profit for his members, whether he sells now or beats Acciona and sells later, or simply enjoys 25 years of profits and dividends from owning a business that produces hydro and wind-powered electricity.

The catch, which all thinking readers should have spotted, is that there appears to be no-one able to stop other, less competent super fund managers, from trying to follow in Mr Weaven’s footsteps.

It is human nature for every young gun with the power to sign a super fund’s cheque book to think that, ‘if Mr Weaven can earn $200 million on a deal and generate returns of between 22 per cent and 36 per cent on alternate investments (which is what he has been getting), then I can do it too’.

Enter the magic word; risk. And add a few others, such as competence and opportunity.

Briefcase, having watched other ordinary people try to mimic the masters – the old SGIO buying Bell Resources shares in 1988 remains a textbook classic – believes that warning bells should be ringing loudly at the Australian Prudential Regulation Authority and in other government agencies because someone is certain to get burned if the squirrels looking after your super suddenly think they are King Kong with a chequebook.

•••

The strangest investment tip to pass across the desk of Briefcase in a long time is a buy recommendation on the iron ore miner, Portman - not that there is anything wrong with Portman, it’s a terrific little business.

The odd aspect is that control of Portman, in fact a whopping great 80.4 per cent of the company, has recently passed to the US miner, Cleveland Cliffs, which is making a return to mining in Australia.

During the course of Cleveland Cliffs bidding for Portman the iron ore price kept rising, and so did the bid price. But, it seems that a few hold-outs are convinced that Portman is worth a lot more than the $3.85 offered in the bid, which has now closed.

The situation, as far as Briefcase can tell, is that around 34.4 million Portman shares (19.6 per cent of the stock) are still in non-Cleveland Cliffs hands and that the holders of those shares are currently ‘underwater’ since the stock is trading at $3.82, 3c below what they could have got a few weeks ago.

The game, and that’s what it is, seems to be one of squeeze the Yanks - to hang in until they are forced to re-enter the market and mop up minorities, presumably at a higher price than $3.85.

Perhaps this is a game worth playing. Perhaps Cleveland Cliffs will be squeezed. But on the flipside you can bet that the Yanks will play hard ball too, such as cancelling dividends (in the name of capital investment, naturally), and making life unpleasant for the hold-outs.

In the humble view of Briefcase, the hold-outs are playing a stupid game. Perhaps they will get a higher price later, but at the cost of zero return (no dividends) and forgone opportunities on the cash trapped in an illiquid stock.

•••

A special prize this week to the journalist in an unnamed (but national) newspaper who wrote, breathlessly, that Heron Resources was planning to float its Balladonia mineral sands project, “which lies in WA across the South Australian border from Iluka Resources’ recent Eucla Basin zircon discovery”.

On the one hand, that is a perfectly correct statement. On the other, the distance from Iluka’s discovery to the WA/SA border is about 600 kilometres, and the distance from the border to Balladonia is a further 500km which, to the man in the moon, probably looks quite close.

•••

“Football is a game designed to keep coalminers off the street.” Jimmy Breslin.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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