Incitec Bid For Dyno Nobel Seen As A Win-Win

This story features INCITEC PIVOT LIMITED. For more info SHARE ANALYSIS: IPL

By Chris Shaw

Since it took a 13% stake in Dyno Nobel ((DXL)) the market considered it a matter of time before Incitec Pivot ((IPL)) made a full bid for the company and yesterday these expectations were met as the company launched a scrip and cash offer valuing Dyno Nobel at $2.80 based on Incitec’s pre-bid share price.

With Incitec indicating the deal would be as much as 10% earnings accretive in year two most in the market are positive on the bid, Citi suggesting it will be a win-win outcome for both parties while conceding the issues surrounding Dyno’s Moranbah ammonium nitrate project mean the price being paid is a full one.

On the plus side for the deal the broker notes the fact it is a combined cash and scrip offer means Incitec retains enough balance sheet flexibility to pursue additional growth options, which is a particular positive given the current tough credit environment.

JP Morgan likes the deal as it would provide Incitec with a more reliable and less risky earnings platform though it notes the key elements of the deal will be the synergies and benefits it delivers, which together could total as much as $100 million on the broker’s estimates.

UBS points out the Moranbah project means there is as much as $200 million in value that may or may not be realisable, so Incitec’s ability to generate anything out of this will impact on the returns the company achieves. Citi agrees and notes the company has based its bid on the notion the project carries a negative $200 million impact on Net present Value (NPV), though it will proceed with the project if it can be shown to make financial sense.

For Deutsche Bank one positive in the deal is the scrip component allows Incitec to take advantage of its elevated share price, but the broker estimates the return on capital will only be 8.9% and this is well below its stated target of 18%. With Incitec shares trading at a significant premium to its global peers the bid has not encouraged the broker to shift from its Sell rating.

Deutsche is the only broker in the FNArena database with such a rating, compared with two Buys and three Hold recommendations. One of the Holds comes from JP Morgan, who suggests the recent share price weakness may present an entry opportunity though on valuation grounds it sees its rating as appropriate. The broker also suggests Dyno Nobel shareholders should take advantage of the price strength resulting from the bid and take some profits at current levels.

Merrill Lynch sees little chance of a higher offer emerging but continues to rate Dyno Nobel as a Buy, as do ABN Amro and Credit Suisse, though neither broker has yet updated its rating since the bid was announced. The stock also scores six Hold recommendations.

Factoring in the terms of the bid the database shows the average price target for Dyno Nobel has increased to $2.53 from $2.44 previously, while Incitec’s average price target has come down slightly to $154.20 from $160.78 previously with Deutsche remaining way below market with its $85.00 target.

Shares in Incitec have strengthened today in line with the stronger overall market and as at 1.05pm were up $5.15 or 3.9% at $136.09, while Dyno Nobel shares were trading 2c higher at $2.51.

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