Opinion & Analysis
It is a perfect climate for takeovers - and for New Zealand investors to buy back stakes in companies sold offshore years ago. There is plenty of investment money around, a risk appetite for shares has returned, and the NZX is trading round five-year highs.
OPINION: The only problem is that it is damned difficult to see where the next move will come from. Many of our most promising companies have already been lost to our market, which is much slimmer than it used to be.
There is also mounting resistance to perceived opportunistic low-ball offers to sell our promising companies offshore, like the Chinese Haier bid for Fisher and Paykel Appliances whose new management is confident they've turned its fortunes around and that it faces a bright future. It is rumoured that Haier is facing an uphill battle, and their public relations team is mounting an increasingly aggressive struggle to win acceptances.
All these issues came together suddenly last Wednesday when some of Craigs' Investment Partners' clients got a chance to buy back control of old established Lower Hutt company Steel and Tube.
Many seasoned investors consider "Stubes" a core part of a portfolio. It has consistently paid good dividends in spite of economic upheavals and changes in controlling shareholder (including BHP and indebted One Steel which in July trendily changed its name to the meaningless Arrium). There was little surprise at this deal, except that a different broker was rumoured to be handling it for Arrium, which is A$2 billion (NZ$2.5b) in debt.
At its last profit announcement Arrium indicated Stubes was among A$120 million of assets for sale. On Wednesday Craigs' managed to convince Arrium that this was an opportune time to sell its 50.3 per cent stake to a mix of their institutional and retail customers at a discounted $2.05 a share. This realised NZ$91m. Bad luck for anyone who paid $2.46 a share earlier the same day.
I'm told the demand was intense. Most institutional investors were scaled back, receiving fewer shares than they had bid for, as were many of Craig's retail clients, those often dubbed "mum and dad investors".
A Craigs' investment adviser - who had been ringing clients lucky enough to be at home when he called offering them a chance to participate - was amazed at the response. "There was little or no hesitation from most people who said ‘Yep' and gave me a number. There is obviously an awful lot of money in bank accounts looking for a home."
Presumably some had been earmarked for the stalled Mighty River Power float, while, as noted last week, many fixed interest investors are wondering how to reinvest some of the $880m in bonds maturing. Apart from an Infratil issue there are few other fixed interest offers available.
Arrium's decision to sell is significant, as it highlights the growing economic and financial problems many Australian companies are having, and which might force others to unload stakes in their New Zealand and international subsidiaries.
Arrium - which before the global financial crisis offered $4 a share for Stubes - is in the worst of places as both an industrial steel producer and mining company as Australia Inc faces growing headwinds. Among other things it is pouring money into mine expansion with costly new mines, including the oddly named Peculiar Knob that is due to start production at a time of extremely weak ore prices.
Given its debt mountain, the Stubes' sale won't help Arrium much. First NZ Capital estimates Stubes produced A$7.5m a year in dividends - far less than the debt Arrium carried on this investment.
It is difficult to guess what other New Zealand assets of Aussie companies might be sold. This deal has awakened speculation that Origin Energy might sell its 52.3 per cent of Contact. This is by no means certain: Origin is in comparatively better health, and after a couple of abortive bids to gain control, has instead been quietly staging a creeping takeover by increasing its shareholding in Contact through the share in lieu of dividend scheme. So while Kiwis take cash dividends, the Australians recently acquired a further 8.8 million shares.
In the meantime, F&P Appliances shareholders face a quandary. Reluctant sellers have been warned the share price will wilt once the Chinese Haier passes the 50 per cent mark, or if it closes the offer. This could happen. On the other hand it could extend it.
Alternatively the Chinese were quoted when they bought their initial stake that they would want full control. Thus many investors seem ready to sit tight awaiting a better offer. Most recently this happened with Accurity (formerly Wakefield). Instead of these shares crumbling as expected after the bidders gained control, they've stayed stubbornly high at about the $5.84-$5.88 level.