Stock takes - Takeover talks

The Warehouse, along with Auckland Airport and SkyCity, have been mentioned in takeover talks. Photo / Michael Bradley

MISSING IN ACTION
The credit crunch put an end to what was in retrospect a fairly busy period of merger and acquisition activity on the local sharemarket.

Now things have calmed down a bit it's not unreasonable to assume that M&A might pick up again and some unfinished business could be completed.

One of Stock Takes' sources was this week kicking around a few ideas about who the potential targets might be and why.

PRIMARY PLAYS

Now that the dust has finally cleared from Craig Norgate's failed bid to merge Silver Fern Farms and PGG Wrightson, this year may well bring yet another attempt to grasp the nettle of meat industry consolidation as firms struggle to raise capital, seek economies of scale and seek surety of supply of livestock.

There is, according to our source, potential for Affco to feature prominently in any such consolidation, potentially as a takeover target.

Talleys made a partial offer for Affco back in 2006 and have now crept to a 53 per cent stake. Affco may be significantly undervalued. Singapore's Olam paid $100 million for a 25 per cent stake in Open Country Cheese a couple of years back which has positive implications for the value of Affco's 35 per cent stake in the company.

Meanwhile, Olam also acquired a 14.35 per cent cornerstone stake in NZ Farming Systems Uruguay and there may be potential for the company to move to a control position, particularly if NZ Farming Systems looks to raise capital to continue growth.

Our source also tips Pike River Coal as a company to watch. While it is still struggling with initial production, once it has established steady reliable output it may be of interest to a Chinese or Indian firm wanting a secure supply of coal. The other thing is it may not be seen as a core business by current controlling shareholder NZ Oil and Gas.

UNFINISHED BUSINESS

Auckland Airport and The Warehouse must surely be candidates for postscripts to earlier takeover attempts.

Although Auckland Airport has more recently been the acquirer of other assets rather than a target itself, it's not that long since the offers from Dubai and Canada Pension Plan.

Our source reckons overseas investors might find the going a bit easier this time around under a National Government.

However, Auckland's council shareholders have given little indication they are interested in divesting so any deal would likely still have to be a partial takeover.

Woolworths and Foodstuffs both still have 10 per cent of The Warehouse but that story remains all about Stephen Tindall and his intentions.

Meanwhile, even as Haier made its initial investment in Fisher & Paykel Appliances last year, one or two commentators thought it likely the Chinese government-owned company would at some point look to extend its ownership enough to gain control.

Our source observes F&P Appliances is by no means out of the woods yet and is still struggling to improve earnings, especially in the US. Should it require more capital, it's likely Haier would be happy to help.

TALK IS CHEAP

Tower New Zealand, alongside SkyCity crop up as the subject of takeover speculation from time to time.

It's worth noting rhetoric from the Guinness Peat Group camp suggests Sir Ron Brierley, if not his lieutenants, may be about ready to step back from the game, monetise some assets and make the long-promised return to shareholders which could mean game on for Tower.

Despite making good progress in its turnaround over the last decade or so to the point where it has resumed paying dividends, Tower NZ is trading at something of a discount to its peers, says our source who also notes life insurance has been a popular play in Australia for some time.

SkyCity has been performing better operationally under chief executive Nigel Morrison and remains a potential target either for private equity interests or an Australian trade buyer such as Tattersalls or Tabcorp.

I'M A SURVIVOR

New Zealand Finance was about the only listed finance company to survive the sector bloodbath over the last three years but it hasn't done so unscathed.

The company's shares reached $1.65 four years ago, making it one of the markets most spectacular performers, but they have been badly mauled since and last month lurched from 25c to an all-time low of 20c.

Shortly after that the company was reported as saying it was hoping to clear around $100 million of debt from its books by selling loans to institutional investors.

NZ Finance had formerly been active in loan securitisation - an area of endeavour that became problematic in the wake of the sub-prime crisis.

Chief executive John Callaghan was recently quoted as saying there are some signs of a pick-up in the Australian securitisation market which would have positive implications for his firm.

Meanwhile, the company, which has about $58 million in debenture funding from retail investors, is waiting to see whether it can secure a sufficiently robust credit rating to participate in the extended retail deposit scheme that takes effect in October, thereby securing ongoing retail support.

NO SURPRISES

The reporting season is almost upon us again and it's worth noting there has not been much in the way of alterations to market guidance from firms, either upwards or downwards.

The upwards revision that springs to mind - apart from those from Nuplex which Stock Takes commented on last week - is that from Hallenstein Glasson which said it expected a 50 per cent increase in interim profit. On the downside, in turning over rocks at South Canterbury Finance, Sandy Maier appears to have found yet more unpleasant stuff underneath, although just how bad remains to be seen.

Given continuous disclosure requires listed companies to update guidance when the result is likely to deviate from previous estimates by more than 10 per cent, it's unlikely the reporting season will bring huge surprises, but there is still scope for mild disappointment and elation.

Hamilton Hindin Greene broker James Smalley expects the tone to be one of "steady as she goes" with a touch of underperformance. The market, as ever, will be focused on managements' comments about their businesses' outlook but that is, Smalley points out, difficult given the lingering uncertainty around how economies and markets will cope with the expected withdrawal of liquidity and other government support applied to fix the global financial crisis.

ON THE EDGE

A one-time market darling, New Zealand's first listed biotechnology firm Genesis Research and Development appears to be teetering on the edge of the abyss.

The company reported "a significantly reduced net loss for the year of $1.2 million" yesterday. Last year's net loss was $7.5 million.

However the company only has cash reserves of $300,000 and also announced it would seek yet more funds from shareholders via a share purchase plan.

The company will issue up to 10.2 million shares at 6c each which means the most it can hope to raise is $612,000.

It's a far cry from the company's IPO a decade ago when it raised $34.5 million by issuing shares at $6 each, which rose above $7.

Yesterday, Genesis shares closed 1.3c higher at 6.9c.