Oxiana Shareholders To Gain More From Proposed Zinifex Merger

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            [1] => ((RIO))
            [2] => ((OXR))
            [3] => ((ZFX))
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            [1] => RIO
            [2] => OXR
            [3] => ZFX
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This story features BHP GROUP LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

While not on the scale of the BHP Billiton ((BHP)) merger proposal with Rio Tinto ((RIO)) the announcement yesterday of an agreed “merger” between Oxiana ((OXR)) and Zinifex ((ZFX)) is a major deal for the Australian equity market as if successful it will create a significant mining house with exposure to gold, silver, copper, lead and zinc.

The current proposal is for Oxiana to offer 3.1931 of its shares for each Zinifex share, with each company to emerge with a 50% share of the combined entity. Current Zinifex MD Andrew Michelmore will be the enlarged group’s MD, while Oxiana chairman Barry Cusack will take the chair of the new group.

According to JP Morgan the deal differs from the BHP/RIO merger as it is being done primarily to create a larger company rather than to generate synergies from combining operations as there is essentially no project overlap between the two companies.

Merrill Lynch and Macquarie suggest Oxiana shareholders are getting the better end of the deal as while their shareholdings will be diluted given the additional shares being offered the group gains access to the cash sitting on the Zinifex balance sheet and this will be used to finance the development of new projects such as Prominent Hill and the Sepon copper expansion.

As well, the broker points out with Zinifex shares trading on a lower multiple the merger would see Oxiana’s premium to valuation come down, implying its shareholders are gaining more from the proposed deal than Zinifex shareholders. JP Morgan agrees and suggests while the deal is slightly earnings dilutive it will be value accretive for Oxiana holders as the gap between long-term forecasts and current zinc prices is much less than is the case for copper, so by gaining zinc exposure Oxiana shareholders are left better off.

For Zinifex shareholders the attraction of the deal is more questionable in Merrill Lynch’s view, as it assumes most of those in the stock were there for zinc exposure and would have preferred to have received a cash return following the sale of  the group’s smelting assets last year but this will now not be the case.

On the plus side the company’s Broken Hill mine has limited reserves and the deal means there is a better growth profile going forward, while GSJB Were notes the merged group will have increased financial strength and this will better allow new projects to be developed.

Following the announcement of the merger there have been a few upgrades in rating for Zinifex, Merrill Lynch and Macquarie lifting their ratings to Hold from Underweight to reflect the implied share price of the scrip offering and GSJB Were lifting its rating to Buy from Hold as the broker sees Oxiana and the merged group as a conviction Buy.

Changes in ratings for Oxiana have also been made, ABN Amro upgrading the stock to Buy from Hold while noting the combined group may attract some corporate interest of its own given the scale and growth projects it would offer. In contrast both Macquarie and UBS have downgraded the stock to Neutral, but the brokers point out such a move was on the cards anyway given recent share price gains.

Overall Zinifex is now rated as Buy four times and Hold six times while Oxiana scores two Buy ratings, seven Holds and one Sell courtesy of JP Morgan. The latter’s average price target is now $3.93 compared to $3.78 pre the bid announcement, while the average price target for Zinifex has risen to $12.95 from $11.66 to reflect the value of the offer.

In a weaker overall market shares in both companies are weaker as the market continues to digest the deal and as at 2.15pm Zininfex was down 97c or 8% at $11.18 while Oxiana was trading 35c or 9% lower at $3.55.

FNArena notes that not everyone in the market agrees with the view that Oxiana shareholders are receiving the better part of the proposed deal. Stockbrokers at Bell Potter have been advising their clients this morning to sell Oxiana and buy Zinifex as an “arbitrage” trade between the two as Bell Potter is apparently of the view that Zinifex shareholders will be better off “from an arbitrage perspective and from a long-term investment perspective”.

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