Aluminium Corp of China, CHALCO to buy 60% of SouthGobi - 1878 HK

SouthGobi, 1878 HK or SGQ CN (listed on TSX), has received noticed from CHALCO or Aluminium Corp of China (2600 HK) of a proportional takeover bid for up to 60% of Southgobi's outstanding and issued common shares. 


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)

Customers Limited takeover offer by DirectCash Payments

The takeover offer is recommended by the board. The offer price is $1.27. Currently it is trading 1.23/24

The last price of CUS AU is $0.92 before the announcement of the deal. At the current offered price for CUS AU ($1.24), there is 2.42% premium in the deal which translates to 8.49% IRR if you take a completion date of 15 July 2012.

The offer is done via a scheme of implementation meaning shareholders have to approve the deal by voting. Required 75% votes from 50% of shareholders to approve the deal.

The deal is still conditional upon Customers shareholder approval, regulatory approval (not much risk here), independent expert report, and lastly but not least FINANCING. DirectCash has 25 days to get a committed term sheet to fund this deal.

It seems to be trading at a tight spread given financing is yet to be secured for this deal.

The concern for me is that this deal is roughly worth around US $130 million and DirectCash is just CAD$400 million. Wonder if financing will be an issue here. (Do a check on the debt ratio and current ratio)

With that said , downside risk is roughly 26%. I would probably get some if the price goes to a more attractive level to price in the financing risk.

Possibly entry price $1.22 or $1.23

China Gas takeover Update

The China Gas Long Stop Date has been extended to May 15, 2012 to accomodate the release of rulings by the regulators. It can still be extended further if needed.

Austar Takeover by Foxtel Update

The minority shareholders have overwhelmingly approve the takeover of Austar by Foxtel.

The deal is schedule to pay out by 26th April 2012 if everything goes smoothly. The only impediment currently is the ACCC ruling. It might be granted in time, not in time or ACCC might still flatly reject the deal going through.

Based on current valuations of $1.45 for Austar and the offer price of $1.52, its a 4.83% premium and an estimated IRR of at least 60%. Quite a large spread to be earned which of course reflects the risk inherent in this deal.

In my opinion, ACCC seems to be leaning towards approving this deal. Given where the markets have been heading, even if the deal falls through it would seem the downside is roughly 20%.

Anyone feeling speculative should invest a small sum. Otherwise, continue staying away from this deal.