M&A round-up: communicating value

Jul 01, 2008
<p>Debates over valuation pervade in BG Group's attempted takeover of Origin Energy, Lihir Gold's successful takeover of Equigold and ongoing bids from BHP Billiton for Rio Tinto</p>

When faced with an unsolicited bid at the end of March, Australian energy retailer Origin Energy decided to boost its case by commissioning new research into its business to give investors (and management) an up-to-date picture of the company’s potential.

The bidder, oil and gas giant BG Group, had tabled an offer of A$14.70 ($13.99) per share, which Origin felt considerably undervalued the business. Origin took advice from several experts, which included commissioning a study of its reserves, as well as reviewing its internal valuations. The company found its reserves of coal-seam gas – a natural by-product that occurs when organic matter turns into coal – had significantly increased since Origin had last checked, and put this information to BG. The UK-based group responded by increasing its bid to A$15.50, but this still didn’t meet Origin’s expectations.

‘Directors have been mindful of the certainty a cash proposal provides for shareholders,’ said Kevin McCann, chairman of Origin, during a presentation. ‘Based on these recent developments, however, the board has decided the revised proposal does not adequately reflect the greater value available to shareholders if Origin pursues other alternatives.’ Origin says it is open to a renewed offer, but any future proposal needs to be significantly higher in value.

Lihir Gold (LGL), a gold producer headquartered in Papua New Guinea, has successfully acquired rival Equigold, creating a combined group worth A$9 bn. Once Equigold’s management was convinced of the deal’s worth, the proposal was put out to the target’s shareholders, almost 95 percent of which supported it at a meeting in Perth at the end of May.

‘It is gratifying to see Equigold shareholders strongly supporting the scheme and recognizing the potential in a newly merged group,’ comments Ross Garnaut, chairman of the merged company. ‘The union of these two companies will create a major gold producer with an attractive growth profile and more diversified operations.’

Keeping your own shareholders on side is just as important as convincing those of your target and Garnaut had to do this twice in three days: LGL is required to hold its AGM in Papua New Guinea, where it is registered, and this meeting took place on May 21. LGL has a high proportion of Australian shareholders, however, so a second meeting took place two days later in Brisbane, where Garnaut had to put forward his acquisition strategy all over again.

Staying with the mining sector, still locked in heated debate over valuation are mining giants BHP Billiton and Rio Tinto. BHP has already made two bids for Rio; both were rejected, and the aggressor is now gearing up for a third hostile attempt.

Rio has consistently argued that BHP significantly undervalues it and recently outlined an expansion plan to highlight this point. At an investors’ seminar, it predicted that world mineral production would double by 2012, and CEO Tom Albanese spoke of a ‘clear road map’ that would ‘unlock value’ in this future environment. For its part, BHP has approached the European Commission in search of anti-trust clearance before it makes its next move.

Details correct at time of going to press.

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