FYI | Jul 05 2006
Acquisitions are not always a guarantee of success. I am not referring to the fact that a public offer can actually fail, or be trumped by another offer.
Think about HP buying Compaq, or, closer to home, Sons of Gwalia buying PacMin’s gold assets. While the story as told by the general media is that Sons of Gwalia ended up in receivership because of a much too aggressive hedge book (that went wrong), a big part of these problems dates back to the ill-conceived decision to expand the gold division with PacMin’s assets.
With the assets came a hedge book. Need I say more?
Regardless of the many academic studies that tell us the majority of the blue-sky promises made at the time of acquisitions never materialise, it is time and time again difficult for investors not to get excited about these transactions.
It’s all about expectations, projections and possibilities – and about making a quick buck in a short time span of course.
Can anybody imagine S8 (SEL) without acquisitions?
Yet, we know it doesn’t always work out as planned. Take Foster’s (FGL), for instance. Those who have been following us for a while will remember how at the time we placed a big question mark behind the decision to acquire Southcorp.
The latest industry figures have again vindicated our concerns back then. Well known brands such as Rosemount and Wolf Blass are struggling, big time. Sales figures in some markets are in decline by double digits. As a result, Foster’s wine management is in heavy cost cutting mode, and selling assets to keep some of the blue sky within reach.
Another company that has done some shopping recently is junior telco BigAir (BGL). BigAir is all about wireless broadband and the ability to circumvent Telstra’s copper network. CEO Jason Ashton doesn’t want to create overly high expectations, but if I were a BigAir shareholder I would throw the IPO prospectus forecasts in the paper bin (any other bin will do as well).
There are quite a few freshly listed companies that are going to exceed their prospectus forecasts by significant measures. I mentioned Oaks Hotels & Resorts (OAK) and Fone Zone (FZN) in Monday’s Weekly Analysis, I think BigAir is poised to do the same. Maybe not in September yet, I don’t know Ashton well enough to gauge whether his cautious tone during our telephone conversations is justified by operational developments, but next year should be a cracker for the company.
If the feedback from my industry contacts is correct, things should even be better at another junior telco, Tele-IP (TEE). The shares hit a high of 6c at the beginning of the year only to head south ever since. The way things have been going recently you would expect the company is in big trouble with the shares currently changing hands for 1.8c a piece, having fallen as low as 1.6c recently. However, my informants, admittedly from outside the company, have told me differently. Their feedback tends to be reliable.
Tele-IP is going through a transformation. In essence, it is becoming a genuine company, including profits and acquisitions. It is difficult to see how the share price will not benefit from this.
Acquisitions have many faces. Glove and condom manufacturer Ansell (ANN) is bidding for a Polish condom manufacturer. It may well be that we all wake up tomorrow morning (Thursday) with the company announcing success or failure.
However, the big speculation, the one that is tickling the imagination of investors, is what are the major resources companies up to?
The stellar share price performance of Queensland based junior Australian Mining Investments (AUM), soon to be named CuDeco, is partly the result of speculation resources giant Xstrata will simply buy it. AUM’s share price gained another $1.86 today to close at $7.11. A few weeks ago these shares could be bought for 29c.
AUM shares were placed in a trading halt today "pending a company announcement". No doubt, this will have pushed adrenaline here and there to even higher highs.
Two other local miners who are regularly the subject of take-over rumours, Iluka (ILU) and Oxiana (OXR), have so far remained relatively immune against the renewed spike in take-over speculation.
Maybe that is because majors such as Xstrata, BHP Billiton (BHP) and Rio Tinto (RIO) are believed to be "busy" elsewhere. Xstrata, of course, is still trying to acquire nickel giant Falconbridge, which would like to tie-up with Inco and Phelps Dodge instead.
And BHP and Rio Tinto are supposedly circling around US aluminium producer Alcoa. Or was it Canadian aluminium producer Alcan? I think it was both.
If there is any truth to these rumours, and judging by how low Iluka shares are currently trading, the market certainly seems to think so. Potential local targets will have to live without an extra-premium in the short term.
But it won’t necessarily take long for this to reverse.
Your happy I have my own targets editor,
Rudi Filapek-Vandyck
(Supported by the Incredible Four: Greg, Chris, Rob and Terry)