Ludowici takeover

After a hiatus from the blog, I am back. It has been a tumultuous ride through 2010 and 2011 for me. I believe 2012 would be a better year.

So the deal we are looking at this time around would be Ludowici Ltd. Listed in ASX under the code LDW.AX

An offer was made by FLSmidth in late January 2012 at the price of AUD $7.20. Anyone who entered the trade around that level would have made a killing. Current price as of 21-Feb-2012 is AUD $9.74

In between the jump in price, we have seen another offer coming in from the Weir Group and how they have gone to the Takeover Panels to prevent FLSmidth to put in a better offer.

In their undertakings to the Takeover Panels, they seek that FLSmidth to be held accountable for their CEOs statement on Reuters "that the bid was last and final". Weir Group is seeking that the Takeover Panel rules the statement is legit and FLSmidth not resile from it.

Since then, FLSmidth has put in another offer of AUD $10.00 pending the results from the takeover panel.

In my view, the takeover panel would not block the AUD$10.00 deal as the stock was not halted and investors/speculators have continued to take on positions/sell position. By blocking the deal, it would mean that the Takeover Panel is consciously impeding a free auction market for an asset where there is a willing buyer and seller.

Now i understand that there are investors our there that sold their shares based on the statement given the the CEO in the Reuteres interview declared " The bid was last and final", they would probably seek damages from the FLSmidth if the takeover preceeds. Besides that, the most probably course of action the Takeover Panels might do is just serve a fine to the CEO, as there wasnt any release in any ASX official document. It was just an interview with Reuters which Reuters did eventually update and remove the statement from their website. As it goes with interviews, words might get misintepreted.

So what do we make of the deal at the moment?

With the current price of $9.74 and the deal should pay out date, barring any disaster, to be around early to mid June. Lets take 15-June as the payout date. The premium translates to 2.66% or on an annualised basis, 8.47%. Note that the current Australian Cash Rate is 4.25%

This means we essentially earn roughly 4.2% above cash rate.

Now however if you look at the downside of the share, it can go down a long way to $3.00. a whopping -66% lost. However it is deemed unlikely given that there are 2 suitors for this company. Once the Takeover Panels have given their ruling , I believe the Weir Group would come in with their serious offer. Also note, if the ruling is in favor of FLSmidth and there is a takeover war, this trade could still translate to another +20% ie the offer of $12.00 by one of the potential acquirers.

I would personally wait for abit on this trade. Potentially i would have a normal size position when it hits below $9.70

At $9.70, the premium is roughly 3.1% and the annualised rate is 9.8% unlevered.

I believe in low-interest rate countries, this is actually a good return. Even after hedging for currency risk. If one believes that the AUD will get stronger, then just leave the currency risk unhedged.