Infamous Sydney stockbroking identity, Renee Rivkin, reputedly made a fortune out of takeovers. One of his golden rules was never to accept the first offer, particularly if there were competing bidders.
That was back in the eighties, when the market was a little frothier than it is currently, and takeovers were genuinely “takeovers”. Today, most “takeovers” are conducted through a ‘Scheme of Arrangement’. Rather than being a hostile act, it is a company sponsored initiative where the Board is recommending (usually unanimously) that shareholders approve the Scheme on terms that the Bidder and Company have agreed.
For a Scheme to be approved, shareholders must vote to accept, and the Federal Court must subsequently endorse. To be carried by shareholders, there are two tests.
50% of shareholders voting (i.e., number of shareholders) must vote to approve. Sometimes the more difficult test, 75% of shares voting (i.e., number of shares) must vote to approve. Because many retail shareholders don’t bother to vote, a single shareholder or a group of shareholders who collectively own 20% of the company can stop a Scheme from passing the second test.
If a Scheme is approved, shareholders don’t have any choice to accept or not. Rather, their shares are automatically exchanged for the script or cash consideration, and the company is delisted from the ASX.
With that background, let’s look at two current “takeovers”: The Brookfield Consortium’s bid for Origin Energy (ORG), and potentially competing bidders trying to takeover lithium miner Liontown Resources (LTR). How should you play them?
Origin Energy (ORG)
Brookfield Asset Management and MidOcean Energy have entered into a binding Scheme Implementation Deed to acquire Origin Energy. Origin Energy would be separated into two businesses – Energy Markets (the existing upstream and downstream power generation and retail distribution business) – and Integrated Gas (the 27.5% interest that Origin has in Australian Pacific LNG, the largest producer of natural gas in SE Australia and a major exporter of LNG to Asia). Brookfield would acquire the Energy Markets business and MidOcean the Integrated Gas business.
The agreed offer price is a mix of A$5.78 and US$2.19, less any dividends paid. Since the Scheme was announced in March, Origin has paid two dividends of 36.5c. This reduces the A$ component to $5.415. The US$ component will be converted into Australian dollars at the time of implementation. When the deal was announced, the exchange rate was around 0.70, valuing this component at A$3.13. At the current exchange rate of around 0.632, it is worth $3.47. So, the current value of the bid is around $8.88.
On Friday, Origin’s shares closed at $9.27, quite a material premium to the bid value. Two of Origin’s major shareholders, Australian Super and Perpetual, have indicated that they are uncomfortable with the bid price saying is doesn’t fully value the business. Together, they own around 15% of Origin’s shares and with a block of that size, are probably in a good position to stop the Scheme being implemented.
Last week, a major hurdle to the bid proceeding was cleared when the ACCC gave it the tick. It said that the “public interest benefits” outweighed the “public detriments” from vertical integration. Specifically, the public interest benefits came from the assistance the new owners would provide with our renewable energy transition.
Clearly, the market is betting that a higher bid will be forthcoming from the Brookfield led consortium. It shouldn’t take the consortium long to work this out, so I would “back” the market and hang on for the short term. However, if no new bid emerges in the next couple of weeks, I would take the money and run.
Liontown Resources (LTR)
US resources company Albermarle first approached lithium miner Liontown Resources in October 2022 indicating a bid price of $2.20 per share. Liontown is developing one of the world’s largest lithium mines in the Kathleen Valley in WA, while Albermarle is building a lithium hydroxide processing plant in Kemerton WA and owns two lithium mines in Greenbushes and Wodinga WA.
Albermarle then lobbed two higher non-binding offers of $2.35 and $2.50 per share, before a final bid of $3.00 per share was enough to catch the Board’s attention. Subject to the completion of due-diligence to the satisfaction of Albermarle and no-higher offer, it was the Board’s intention to unanimously recommend the $3.00 offer.The Board granted Albermarle an exclusive due diligence period of 4 weeks. That period ran out last week, with the Board announcing last Thursday that in response to a request from Albermarle, it had extended it by a further 7 days.
Meanwhile, iron ore magnate Gina Rinehart accumulated via Hancock Prospecting a stake of 19.9% in Liontown. Paying an average of $3 per share, she purchased these shares in the first couple of weeks of October.
Under Australian Corporations Law, she is not allowed to buy any more shares in Liontown unless she announces and makes a full bid for the company. Under the ‘creep’ exemption, she can acquire an additional 3% every 6 months, but it would take more than 5 years for her to gain majority control.
But, with 19.9%, she can certainly stop Albemarle’s bid (via a Scheme of Arrangement) from succeeding.
Late this week, we should know what Albermarle plans to do. Politely withdraw its offer and lick its wounds (citing some finding in the due diligence), or make an improved offer? If the latter, it is by no means certain that Gina Rinehart would vote to accept.
And what does Gina Rinehart do? Her 19.9% probably gives her a claim for a Board seat (this is not guaranteed – it would be up to the Board to invite her), where she can influence the Company, but hardly direct it. This doesn’t seem to be a particularly satisfactory situation.
The next saga in this story should be revealed this week. Although the market has eased back with the shares closing on Friday at $2.79, my guess is that this has further to play out. With two keen bidders, I don’t think it is done and dusted. Critically, I can’t imagine that Gina Rinehart will be satisfied with just 19.9%. If you can be patient, I would play (like Rene Rivkin) the waiting game.
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