SouthGobi has also been informed by its 57.6% major shareholder, Ivanhoe Mines Ltd. (“Ivanhoe”), that Ivanhoe has signed a lock-up agreement with CHALCO, committing to tender all of its shares held or thereafter acquired by it during the Offer Period of CHALCO into the Proportional Offer.
The
Proportional Offer will be made by way of a takeover bid circular under British
Columbia law and will be made to all SouthGobi shareholders. If shareholders
tender more than 60% of the outstanding common shares of SouthGobi to the
take-over bid, a proportional amount of shares will be taken up from each
shareholder. SouthGobi has not received any formal documentation relating to
the Proportional Offer. CHALCO has advised SouthGobi that it expects to
mail the takeover bid circular in connection with the Proportional Offer on or
about July 5, 2012. (Quite far away)
The
offer price is CAD $ 8.48 or roughly translated to be HKD$ 65.97. Given that
Ivanhoe Mines has signed a lock-up agreement I would think the deal should not
have any acceptance risk.
The
pre-announcement share price for 1878 HK is HKD $51.25 and the current price is
HKD $ 59.90. At
current levels there seems to be zero premium (or slightly negative premium) in
the deal if you take into account that you can only tender in 60% and assuming
that the 40% you can sell at pre-announcement price.
The
deal gets attractive around HKD$56, as I would deem you need a bit more premium
to assume the risk of the remaining 40% that you can't tender in.
Usually
in these deals where the target is listed in 2 markets, there are always
opportunities to arbitrage the target stocks just like doing ADR
arbitrages.
The
good thing about the deal is that besides the proportional takeover, the
company has entered into a Cooperation Agreement as well with Chalco. I have
attached the excerpt from the release on HKSE
"Key
benefits under the Cooperation Agreement between SouthGobi and CHALCO include:
•
Coal off-take by CHALCO
– SouthGobi will have the right to offer up to 100%
of its salable coal to CHALCO and CHALCO will have the obligation to purchase
the coal at market prices for a period of 24 months.
•
Infrastructure support
– CHALCO will assist SouthGobi to procure
electricity for its Mongolian business operations either through a direct
connection to grid power, or through development of a conveniently located
power plant. CHALCO will also provide support to SouthGobi’s coal-haul highway
project. "
So
at least in my opinion, there will be a support level for the share price of
SouthGobi. (when you think of the 40% that you can't tender in)
Agree with your points. Acceptance risk is low unless CHALCO has difficulty funding the acquisition (probably unlikely given their parent despite losses and credit rating).
ReplyDeleteHowever, I think it unlikely that 100% of shareholders will tender their stock. CIC owns 14%, and has $250mm of Convertible Debt with a current conversion price of C$8.88. Their average buy-in price is already just shy of C$12. Coupled with the Chinese government's calls to diversify into overseas coal assets, it is unlikely CIC will tender (they are more likely to counter-bid). I would also guess that there are other key shareholders who think that C$8.48 undervalues the company (still only $2 of EV/JORC). So if we assume that only 80% will tender, then there is only 25% of stock that we “can’t tender in.” Under that assumption, with the current price circa C$7.30 there is a lot of risk premium. Even if we have to sell our remaining 25% at SGQ’s 52 week low of C$5.54, the return on an investment at C$7.30 is still 6.1% (it’s 4% ROI if everyone but CIC tenders). AND, I agree that SGQ with CHALCO as its “big brother” is a far more valuable company than an SGQ with Ivanhoe as the majority shareholder. Especially given CHALCO have locked in the 9 most senior SGQ executives. AND, everyone forgets that this company was trading at C$16 less than a year ago. It is still undervalued compared to its peers, so there is every chance that a competing bid comes out of the woodwork for this company before July 5th. Ivanhoe will sell to the highest cash bid. AND, the CHALCO board has approved the acquisition of 60% of SGQ for up to US$1B. Ignoring deal costs, that equates to a possible bid of approximately C$9.16, implying they are prepared to move if pushed.
So I like the risk/reward on this at C$7.30. At an 80% take up, my remaining 25% post tender will owe me less than C$4 a share. At 100% take up, it will owe me C$5.54. Assuming the proportional takeover actually happens there isn’t much downside yet there is upside optionality from the possibility of an increased cash bid
Hi Genghis,
ReplyDeleteSeems like SGQ.CN took another dip. Currently priced at $7.23
Beginning to look really attractive to me. I believe you have shares with us very good points. I have not checked on CIC's position but that is really a positive point in this deal. But in the case of another bid coming in from CIC, I would think there is a lesser chance for that to happen given that CHALCO is also a state-owned enterprice. I would not think that they will go head to head to outbid each other for this asset given every takeover has to go through the "party" first.
Besides that, the deal will only be presented to shareholders (if it is presented) roughly in end of July and expected to close late August. So that might lower the IRR a little. Given interest rates I wouldnt mind borrowing money in HKD and buying into this deal unless the premium is better in CAD.
Waiting to see at what price it opens up in Asia.
Btw Genghis,
ReplyDeleteHave you had a look at the Lithium One deal with Galaxy Resources?