By davis symons
It's early days for Newcrest's $9.2 billion tilt at Lihir Gold but analysts generally regard the proposed offer of one Newcrest share for every nine Lihir shares, together with 22.5¢ cash for each Lihir share, as within spitting distance of a fair price.
Nevertheless, with the Lihir board having rejected the proposal, Newcrest's ability to harness the support of Lihir's major shareholders - many of whom also figure on the Newcrest register - will be key to whether any deal is put to shareholders.
A key factor for the institutions, led by BlackRock, Colonial and Fidelity, will be the ramifications of reducing the investable universe of gold companies through the creation of a larger company that, once formed, will be of a scale that makes it an unlikely target of corporate interest.
For the fund managers, the size of their relative shareholdings in Lihir and Newcrest may dictate how hard they fight for a high valuation of Lihir. However, the prospect of an increase in the offer is unlikely to be based on the language Newcrest has used thus far. The company has described the proposal as ''full and fair'' and as ''compelling but not vital for Newcrest's growth''.
With Lihir now in play, the emergence of an interloper is possible but far from assured. Analysts from Goldman Sachs JBWere believe that there are only four companies of sufficient size to make an alternative bid - Barrick, Newmont, Goldcorp and (possibly) Randgold.
However, Newmont's interest is thought to be reduced by its expansion project at Boddington, together with possible reluctance to be associated with undersea tailings disposal practised at the Lihir operation in Papua New Guinea.
RETAIL ROUND-UP
A notable absentee from the Myer register when it floated last year, Paul Fiani's Integrity Funds Management has demonstrated that it was the Myer opportunity, rather than the retail sector, that didn't appeal. Integrity last week emerged as a substantial shareholder in JB Hi-Fi.
JB Hi-Fi has seen its share of shareholder rotation after the shock announcement in February that its long-serving chief executive, Richard Uechtritz, would be moving on later this year.
BlackRock recently dipped below the 5 per cent disclosure level for substantial shareholdings, and Commonwealth Bank of Australia has joined Integrity in taking advantage of temporary share price weakness to build a larger stake in the home entertainment success story.
Elsewhere in the sector, a source says that CHAMP Ventures last week picked up a 40 per cent interest in the privately owned women's leisurewear retailer Lorna Jane on a seven times EBITDA multiple, valuing the business just short of $70 million.
With Kathmandu floating last year on an 8.8 times multiple, CHAMP looks to be off to a good start, provided that Lorna Jane stays on track.
DOWNER JITTERS
Despite the efforts of its chief executive, Geoff Knox, market anxiety lingers over Downer EDI's exposure to the debt-laden Waratah rail project, a public-private partnership with the NSW government.
Downer's share price has been under pressure since Moody's and Standard & Poor's last month downgraded credit ratings for Reliance Rail Finance (the entity established to fund the 78-train project). Reliance Rail is 49 per cent owned by Downer, and the downgrades highlighted the fragility of the project's capital structure, with $2.3 billion debt supported by equity of just $274 million. Of greatest concern is a $357 million bank facility that would require refinancing if two troubled monoline insurance providers become insolvent.
Reliance Rail's financial obligations are secured and protected from the balance sheets of its investors. However, neither the protection nor Knox's efforts to hose down speculation that Downer will contribute more equity to the project has stopped the company's share price decline.
While some brokers see the weakness as a buying opportunity, analysis from Commonwealth Bank Global Markets Research suggests the market is right to be spooked by risks arising from Downer's multifaceted role in the Waratah project.
CBA says Downer's involvement in ''the design and construct and maintenance phases carry joint and several operating guarantees. These performance guarantees effectively put Downer's balance sheet at risk to performance issues within Reliance Rail's business.''
With the project facing delays in the delivery of the first train, Downer's liability is unclear.
CBA also sees implications for Downer's ability to win ''other state, federal or large-scale projects where it wins those projects based in part on its reputation'' should Reliance fail. As a result, both Downer
and the NSW government will be motivated to find a viable solution for Reliance Rail.
As any Reliance Rail restructure plays out, the bank believes that ''Downer will find it difficult not to be harshly judged by capital markets for its role in participating in a deal that yields such small profits in comparison to the balance sheet risks that the company now faces''.
The issues with Reliance are substantial enough for CBA to slap a sell recommendation onto Downer with a share price target of $6, more than 20 per cent below the already-depressed market price.
dsymons@fairfaxmedia.com.au