MELBOURNE AUSTRALIA 12 February 2007 – The All Ordinaries index continued to close in on the new target of 6,000 points. On Friday the index closed at 5,899.30, a gain for the week of 1.5%. It was ably assisted by the performance of BHP Billiton, which gained by 5.5% following the release of its results last week, with most of that gain occurring on Wednesday.
Fellow resources giant Rio Tinto (ASX: RIO) didn’t fare so well, dropping by 2.2% for the week. The BHP Billiton (ASX: BHP) talk started the gossip mill, and there were suggestions that BHP would be on the acquisition trail, with Rio Tinto even being touted as a potential target.
Is this likely, or are we being swept up in resources bubble euphoria? It would be a big acquisition for anyone, but like any resources company, BHP is only as good as the resources it has and its probable resources still under exploration.
The law of large numbers tells us that if a company wants to continue to grow then one – or all – of three things has to happen. It needs to make a big, big acquisition in order to increase it’s reserves. Or it needs to discover a resource that will produce a big, big return. Or – as has happened in recent years – the price of the commodities it is producing needs to go through the roof.
BHP is spending $10 billion on buying back its own stock, which most likely reduces the chances of a takeover bid in the near term until the company can build up more cash. Unless of course it chooses to back it with debt. Another option not to be discounted involves the possibility of direct private equity investment.
Perhaps we are being guilty of stoking the private equity fire here, but with the comparative illiquidity in the Australian share market, chances are that private equity and their financiers – Super Funds? – could look more closely at alternative unlisted investments rather than continuing to pump funds into just the top twenty or so stocks listed on the ASX.
It could make a lot of sense for private equity and Super Funds to co-own an investment with a resources company of the stature of BHP or Rio as an alternative to investing in some of the smaller resources companies that may have less management experience.
In return, BHP for example would most likely have majority control, and would operate the facility, yet it would only have to fund half of the costs, the remainder being borne by the private equity fund. Further, this move would enable a company such as BHP to diversify its portfolio into other assets.
We mention this after seeing the report in the Australian Financial Review at the weekend under the heading “MacBank Rides The Bull.” The suggestion is that following a couple of years of diminishing management fees from its listed infrastructure funds, Macquarie Bank (ASX: MBL) is gearing up to exploit the unlisted sector.
Previously Macquarie would leverage up and buy a big infrastructure asset or assets, create a listed fund to drop it into and then proceed to charge fees through the nose for the privilege of managing the investment. These funds were then sold directly to retail investors and promoted by financial planners. Like most listed investments, institutions – such as Super Funds – were interested in taking a stake due to supposed “reliable income streams.” Although we think it might be worth asking the investors in Sydney’s Cross City Tunnel whether that has produced a reliable income stream.
Realising that the average investor has gone cold on the “Macquarie Formula”, the bank has had to dream up a new way of doing business. Now it would seem Macquarie has decided that it would be much easier to buy these assets completely with the help of institutions. This way it doesn’t have to concern itself with mass marketing campaigns; by virtue of compulsory superannuation, most Australian investors will have a stake in them anyway!