Malaysia’s Malakoff tipped as Alinta suitor

Buyback time?

AS preparations for energy deals continue apace, the latest speculation surrounding Alinta is that Malakoff Corporation of Malaysia could be ­shaping up as a suitor.

Anticipation is building for the sale of Alinta next year, and various potential suitors have already started embarking on some early research on the asset, for which the price is tipped to be anywhere between $2.5 billion and $5bn.

Malakoff is one of the major Asian heavyweights in the power industry, generating and selling power as an independent power producer to Tenaga Nasional for uploading onto the National Grid, Malaysia.

Last year, one of its subsidiaries agreed to a $650 million deal to buy a stake in an Australian wind farm from Meridian Energy.

It is believed that Malakoff has been contacting various parties in the Australian market in its quest to better understand the Alinta business.

On offer are 10 gas-fired power stations in Australia and New Zealand and the Flinders coal-fired power station in South Australia. Lazard has been appointed as an adviser to run Alinta’s sales process, but Macquarie Group is very close to Alinta and its private equity owner, TPG Capital.

Overall, the company’s earnings before interest, tax, depreciation and amortisation is about $350m.

Other interested parties are likely to include AGL Energy and Origin Energy, and groups such as Japan suitors Marubeni Corporation and Sumitomo Corporation would be likely buyers.

Meanwhile, small-cap company Pacific Energy could be subject to a takeover, according to sources, with suggestions one of the major shareholders in the Western Australia-based company searching for an exit.

The company is listed on the ASX with a market capitalisation of about $160m and its two major shareholders include Kenneth Hall, with a 50 per cent interest, and Pacific Road Capital, which holds about 23 per cent, according to Bloomberg. Pacific Road is run by former Merrill Lynch banker Paul Espie.

It’s unclear whether an adviser is in the frame for Pacific Energy, although it is thought that the company may have held some discussions with West Australian-based adviser Azure Capital.

In 2009, the company purchased Mr Hall’s business Kalgoorlie Power Systems, which has 11 power stations co-located at mine sites, with a combined installed capacity of 250MW.

It also owns two hydro stations in southeast Victoria with a combined generation capacity of 6MW.

Pacific Energy did not return a call to The Australian. However, some have suggested it could be looking to delist because it lacked scale for the public market.

RFG finger in a new pie

THE board of Retail Food Group might have been bit by the deal fairy, with a recent binge seeing the mid-cap company spending more than $210 million in the last few months on a string of acquisitions.

Not bad for a company still capped below $900m, meaning it has stacked on more than one-fifth of its own size — and this has just been on coffee businesses, agreeing to pay $47m for Di Bella Coffee and buying coffee franchise Gloria Jean’s for $163.2m.

It looks like for now RFG has had its fill of coffee businesses, but the talk among merchant bankers is the company is now looking for something else to fill its food franchise portfolio, and it could be interested in failed fast-food chain Pie Face.

Although Pie Face does a strong line in coffee, indeed the higher margin coffee sales within Pie Face stores are a key earnings driver, the group also has a novel pie-and-lunch offering.

RFG already has Brumby’s Bakeries and Michel’s Patisserie and some believe Pie Face would complement those retail brands quite well.

The key will be if Pie Face ­management has the will, ­patience and expertise to turn Pie Face around and, just as importantly, resurrect its brand, which might have suffered in the wake of its ­collapse into voluntary administration in November and the ­closure of many shops across ­Australia.

The sight — and smell — of abandoned Pie Face stores, some with food products still on the bench, will hurt the brand, which sells itself on freshness and quality ingredients. The question is, will RFG’s managing director Tony Alford be prepared to hold his nose and make a bid for Pie Face to buy it from the administrators?

The logic of leveraging

IF you don’t leverage up your balance sheet in the current low-cost debt environment, you may well expect to see someone else doing this for you.

That is exactly the case with takeover target Bradken, which has opened its books to Pacific ­Equity Partners and Bain Capital Asia after the pair submitted an $872.1 million takeover proposal the week before.

The mining services provider falls under the category of companies that can employ the low cost of debt to buy their own shares, according to Credit Suisse analysts.

Companies now have access to the lowest cost of debt in a generation, where an A-grade issuer in Australia can raise a 10-year debt at 5 per cent.

On the other hand, analysts forecast the ASX 200 companies, excluding financials, to yield free cashflow at 7.3 per cent next year, which makes financial sense for companies to conduct buybacks to drive up earnings per share (EPS). No wonder some of Australia’s biggest companies have done large-scale buybacks this year.

Telstra completed its $1 billion off-market share buyback in ­October — a move that was ­heavily oversubscribed and had to be scaled back because of strong demand.

Blood plasma maker CSL ­announced a new on-market share buyback of up to $950m in mid-October, the eighth buyback program it has made in nine years. The previous seven buybacks, which totalled about $4.2bn, have boosted CSL’s earnings per share by more than 19 per cent.

Aurizon also said last month that it would buy back up to 5 per cent of its shares on market over the next 12 months, which were worth about $500m.

Analysts say global miners BHP Billiton and Rio Tinto have the potential for capital management of $4bn and $5bn respectively in 2016.

The potential list of companies to do earnings-per-share accretive buybacks also includes Seven West Media, Auto Holdings, ­Cabcharge, Downer EDI and ­Ansell, which has ­already got an active buyback in place.

All these companies can have the cost of debt considerably lower than their cost of equity, measured by their 2015 earnings yield.

If they don’t choose to use those buy back shares, as in the case of Bradken, they may easily find themselves targeted by ­others — and probably private equity buyers.

If they do, the buybacks will drive up the share prices, which will make themselves less attractive to potential acquirers.

Alternatively, they may choose to leverage up their balance sheet to make earnings-per-share accretive acquisitions.