NOVEMBER 27, 2011, 10:18 PM ET
Article from The Wall Street Journal
By Gillian Tan
It’s a sweetened takeover bid that could turn sour in the eyes of some Australian hedge fund managers.
In October, China’s Hanlong Mining increased its offer for the iron ore developer to 57 Australian cents a share from an initial offer 50 cents a share.
But emerging from a trading halt Friday, the stock is sitting rather unhappily at 39.5 cents a share, valuing the company at 1.1 billion Australian dollars (US$1.08 billion), a 44% discount to Hanlong’s bid.
The sell-off is due to Friday’s announcement that Hanlong has not received a “Highly Confident Letter” of guarantee from China Development Bank due today. Although the Sundance board decided to waive it as a requirement for Phase One of the Scheme Implementation Agreement, the market sees it more as waving a red flag.
Looking at the deteriorating iron ore price, some fund managers believe Sundance appears desperate to get the deal through while Hanlong could have been seeking a way out.
Pengana Capital senior fund manager Antonio Meroni is maintaining a small long position but admits the probability of the deal has tilted toward failure rather than completion.
“The commitment from the buyer is still there but there seem to be a few tactical delays which means there are still a lot of question marks around a positive outcome,” he told Deal Journal Australia.
Though it’s being priced as a broken deal, Fortitude Capital managing director John Corr is still a holder.
“We believe there’s still some chance of it going ahead and believes it’s an attractive opportunity at such a cheap price,” Mr. Corr told Deal Journal Australia. “Whilst there appears to be a continued push for Chinese companies to buy assets around the world, it’s not coming together very smoothly this time,” he admitted.
Beulah Capital chief investment officer Tom Elliot told Deal Journal Australia he had been advising clients to stay away.
“Any trading at these levels this has to be seen as speculative given the probability is not high,” Mr. Elliot said.
Even though Sundance chairman George Jones says he received a letter from Hanlong assuring him of the company’s genuine interest, there’s a long way to go.
The deal is already tainted given the Australian Securities and Investments Commission is still investigating former Hanlong board members and employees for insider trading relating to the company’s initial bid for Sundance in July which could potentially hold up approval from the Foreign Investment Review Board.
Both Sundance and Hanlong are continuing to work together to confirm the ratification of the Mbalam Convention in the Republic of Cameroon and the Mining Permit in the Republic of Congo by Feb. 29 next year.
Another of Hanlong’s highly conditional proposals — to acquire uranium developer Bannerman Resources for a premium A$143 million — was benched by the target in October.
The group’s financier China Development Bank required additional due diligence to be undertaken to gain certainty regarding timing and conditions of a mining license.
As a result, Bannerman’s board decided it was unlikely that Hanlong would be able to enter a binding agreement in a time frame that would meet expectations of stakeholders, including the Namibian government.
“Whilst Bannerman remains willing to consider a less conditional proposal from Hanlong, the company has instead focused on its existing discussions with other parties regarding development joint ventures and alternative corporate arrangements,” the board said in a statement. The company’s market capitalization has since sunk to A$59.8 million.
A spokesperson from Sundance declined to comment.
