The BAL Event trade was first recommended as a buy on 16 September 2019. Below are each of the updates related to this trade in chronological order.
Current advice: This trade is now closed following payment
Update – 05 December 2019, 11:38am
BAL held its Scheme Meeting today and shareholders supported the deal in an overwhelming majority. This marks the final obstacle for the acquisition and now brings our investment into the closing stages. The deal still needs Federal Court approval (a formality) and then the stock will cease trading next Tuesday. Payment of $13.25 will be made on 23 December, and this will be made up of $12.65 in capital as well as a $0.60 fully franked special dividend (which will have franking credits of $0.257 per share attached) which means shareholders will be paid gross proceeds of $13.51 – a return on our entry price of $12.85 of 5.1%.
We are very happy with how straightforward this deal ended up and being able to return 5.1% in roughly three months with very little risk was a fantastic outcome.
Update – 15 November 2019, 9:03am
The Foreign Investment Review Board (FIRB) announced yesterday that it had given unanimous approval to the takeover for BAL from Chinese bidder Mengnui. Treasurer Josh Frydenberg, who has final discretion over the decision, also gave his support for the deal but with a few small conditions which seem likely to be accepted by Mengnui.
This brings the last hurdle of note to a likely close. There was another rumour floating around that significant shareholder Jan Cameron, the holder of 17.13% of the company, could oppose the deal but it was revealed earlier this week that she had been selling her holding and now currently owns only 13.06%. This implies that she is a seller at these levels and importantly leaves her with a stake not large enough to block the deal.
BAL should trade closer to its $13.25 offer price today, and we remain comfortable holding the stock until the deal completes. We remind members to get in their votes supporting the proposed deal.
Update – 13 November 2019, 11:52am
BAL recently released its Scheme Booklet which should have been received by members by now. The Scheme Meeting is due to be held on 5 December, with payment due on 23 December. As the record date is now within the 45 days needed to be eligible for the franking credits attached to the special dividend, anyone buying the stock now will no longer have that added value. Still, with total payments of $13.25, there is still upside of over 2% at the current price which implies there remains some concern over the FIRB approving the deal. Considering BAL’s assets, we don’t feel there is any real logic behind a potential blocking of the deal, so we are comfortable with the risks in holding the stock until completion.
With the scheme meeting not that far off, we recommend members send in their proxy forms voting ‘FOR’ all proposed resolutions. Alternatively, you can visit https://www.linkmarketservices.com.au to vote online. You will need the details on your proxy form to login to the registry website.
Original Recommendation – 16 September 2019, 10:26am
Fallen market darling BAL has surprised the market this morning by announcing that it has signed a Scheme Implementation Agreement (SIA) with a Chinese dairy company called China Mengniu Dairy Company (listed on the NYSE and Hang Seng) which will see BAL paid a total price of $13.25 per share. This price is a whopping 59% premium to Friday’s closing price and also will have $0.26 in franking credits come on top with a $0.60 fully franked dividend being part of the consideration.
This looks like a big price to pay based on recent trading prices as well as comparable transactions in the sector and suggests that the value seen in the local dairy industry exceeds what the current trading levels imply. Additionally, BAL’s success was always going to ride on its performance in China, and with Mengniu’s existing distribution and customer relationships the offer looks to be more an acquisition of a strategic asset rather than an opportunistic offer for a fallen star.
So, where is the opportunity for us? Well, with such a big premium it’s logical to suggest that the interest in BAL from other parties might be limited, but as one of very few dairy companies of scale in Australia/New Zealand there could be competing companies in China. We shouldn’t forget the demand for Warrnambool Cheese just a few years ago and while BAL is a distributor of dairy products more than a traditional dairy company like Bega (BGA) or Fonterra, there’s no disputing the value of its brand both in Australia and China. So, while we feel a competing bid is unlikely it’s certainly not impossible.
The second reason we are interested in buying BAL is that the value of the franking credits will not be reflected in the trading price as most international and institutional investors will ignore this when making investment decisions. With limited conditionality attached to the offer, a low-risk arbitrage (assuming no competing bidders emerge) is worthwhile as long as we can buy the stock at the right price. The stock has opened this morning around $12.50 which leaves around 8% upside, which suggests there is some doubt about the bid. We can’t see the FIRB (Foreign Investment Review Board) stepping in, although admittedly there is a spotty record with Chinese takeover bids in Australia but Mengniu is listed in the US and Hong Kong and is a legitimate company whose reputation would be in tatters if it skirted its legal obligations.
So, overall, we feel the risk/reward stacks up. We are therefore going to recommend members buy BAL at no higher than $12.85 (it has bounced since the open) and we will see how we go in getting set over the next few days.
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