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    Saturday, August 15, 2009


    Felix Resources (FLX FLX.AX) Takeover – Counter Offers

    I have received a few emails and comments on Felix and the chances of a counter offer. In summary, a counter is likely.

    There are three criteria that determine the chances of a counter:

    Based on Yanzhou’s $18 offer they should see a 60% plus return in 2-3 years. This clearly support a counter offer. Furthermore there are parties that could create synergies from buying Felix, thereby creating an even greater return. At $24 there would still be a 20% return before synergies. If Xstrata were to bid then they could achieve substantially more than 20% because their Ulan mine is next door to Felix’s Moolarben mine. Examples of synergies would include shared transport infrastructure or marketing.

    Next we consider the contract signed between Felix and Yanzhou. I was surprised by the small break fee of A$33M . While Felix directors are prevented from actively seeking another offer. They are allowed to negotiate and assist a potential acquirer once a superior offer is made. The contract appears quite supportive of an auction developing

    Finally the ability of other bidders to finance a bid comes into question. This is probably the biggest impediment to an alternate deal. It isn’t easy to get substantial debt or equity finance right now (unless you’re borrowing from the Chinese government). Xstrata recently did a large rights offering to reduce debt as did Rio Tinto, it therefore seems unlikely that they would bid. BHP, Vale, China Shenhua, Noble and Peabody have been identified as potential bidders. There have also been rumours that Canadian Teck Resources were looking for an Australian mine to diversify their coal sources.

    By looking at Felix as a percentage of the acquiring companies capital, looking at debt to market value of equity and analysing synergies it’s easy to establish who the most likely counter bids will come from.

    Click on the table above to see detailed analysis and ranking of the potential acquirers

    Based on the analysis in the table above:

    In closing, BHP and Vale are the obvious bidders if an auction develops. China Shenhua is not going to compete directly with Yanzhou. BHP and Vale could acquire a neat addition to their respective portfolios and achieve a high return on investment even at a substantially higher offer; both because of the attractiveness of Felix’s assets and because they would realize synergies with their existing businesses. Vale already owns 20% of Felix so they won’t need to do substantial due diligence to put together an offer.

    A counter offer is reasonably likely from a non-Chinese company with the capacity to finance. It’s unlikely that Yanzhou has made their final offer. Given the synergies on offer, the ability to pay with shares and the break fee it seems likely that a counter will cause another Australian mineral company to spurn their Chinese fiancé or at least make her increase the dowry.

    As a Felix Shareholder for some years, I would be happy with an all share deal from BHP, at the equivalent of say $25 a share in BHP shares.
    This would suit many shareholders with large CGT Liabilities,and the strength of BHP for future values.
    Thanks for your excellent analysis of the potential bidders, making BHP the clear leader in the field.
    Quillan thanks for your comments! I'd also be quite happy with BHP shares but i'd probably sell them relatively soon (maybe spread the cap gain over a couple of years). It's a shame that so few companies are in financial shape to bid. With only BHP and Vale in the picture the odds may only be around 50/50.
    Please go to Aussie Stock Forums to read my letter posted to Brian Flannery, as this Blog service limits posts to 4096 characters.
    I suspect the Moderator will refuse to publish this because of my comment, and also for referring to a rival publication. Perhaps you should amend your rules?
    To the CEO, Mr Brian Flannery.

    Dear Brian,

    The concensus is that the right value is about AUD24 per share.

    A discrepancy of 33% seems beyond the purported claim of "Fair".
    As soon as the offer was announced, Yanzhou's share price went up considerably whilst Felix's went down,

    It was stated the impact on Yanzhou's earnings in 2 year's time could be as much as 37%.
    Deloitte, advising Felix,ignored this point.
    They are protected from any claims in respect of Shareholders' interests.
    Deloitte also tries to justify the valuation by pointing out that there have been no counter offers. FIRB must clear it first. This could mislead Shareholders into the belief that this proves the offer fully values Felix.

    Trying to pull the wool in this manner shows little respect for our Shareholders' intelligence to which Deloitte is appealing.

    To say the bid was too low when the Directors have already recommended it, would make the Directors appear somewhat incompetent, so we can conclude that the Fee of $200,000 was wasted even if it was mandatory to go through this charade.

    The Directors said the bid as "fair" before their "Independent Expert" had spoken!!

    To suggest any "Independent Expert" is independent in this context,is risible.

    The ASXand or the FIRB should establish a panel of Mining Experts to deal with situations like this, and whoever is chosen, it should be an independent choice, made by neither Party involved in the Bid. The costs should be borne equally by both Parties.This would make it genuinely independent and not the fait accompli which has been put to Shareholders today.

    The argument that you, the Directors have endorsed the offer and therefore adds weight to it being a fair bid, could be riddled with holes.

    Your motivations to accept, may be very different from the ordinary Shareholder, who is looking for full value for his/her investment, if it is to be snatched away and replaced with cash, which will mean tax has to be paid as well.

    For this reason, many would prefer a 100% share offer from BHP.

    The Directors [and any supporting major shareholders] are already fabulously wealthy, and as far as I know no details of the ongoing Terms of Service have been released, if the offer is successful. Therefore, there could be many reasons for recommending acceptance beyond the share valuation. I am not saying there are other considerations, merely it is a possibility with any takeover situation.

    For the Directors, the offer is not just limited to the value of the Share offer, hence you have a different agenda from the Shareholders.

    I am sure everything you have done is by the letter of the law as laid down by the ASX, and any other Regulatory Bodies.

    I believe wholeheartedly that you have earned the wealth you have created , and the benefits which have therefore accrued to your Shareholders. You have grown Felix into a Company of which we are all very proud , which makes it all the more surprising that you should recommend the offer, at a price so far below that suggested by the Professional Mining Commentators.

    Let me put a scenario to you.
    What would be your response to the bid if you and all the Directors were in their 30s, with only limited personal Shareholdings and few other assets?

    My bet is that you would all be saying "This bid is entirely inadequate. Please read our summary of the potential of the Company in the coming years, as set out in the Annual Report, and you will understand why we must be allowed to grow the Company and Shareholder value, as we have proved we can do to date. The best is yet to come. Reject the bid" !!

    THAT is the only fair way to judge the true worth of our Company.

    My post to Brian Flannery had to be considerably shortened here in order to comply with the 4096 character rule. A pity you don't provide a counter. You expect contributors to count the characters as they go along? Looks like this will be my last post.You need contributors. Look at others in the field such as Aussie Stock Forums, and you will understand why they have 50 pages of comments on Felix, whereas you can only manage 3 posts.
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