With its early and surprisingly bullish market update out of the way last week, fertiliser maker Incitec Pivot turned to unfinished business yesterday, revealing plans to buy explosives maker Dyno Nobel for $3.3 billion in a cash and shares offer that will be done via a scheme of arrangement.
The significant earnings upgrade, to a record estimate of $700 million to $730 million, boosted the IPL shares, which then allowed it to think of offering more scrip in a bid than cash, which it has done.
The bid ends around eight months of speculation about IPL’s intentions after it snapped up a 13.2% stake in DXL last August after the latter had abandoned its expensive Moranbah ammonium nitrate plant in Queensland’s Bowen basin after a big cost blow out made it uneconomic to continue.
IPL shares fell $9 Monday, perhaps with a little bit of ‘early news’ of the bid around. Yesterday the shares fell further after the bid was revealed in the early morning.
They shed $18.06 to $130.94 after falling as low as $120.11. DXL shares ended at $2.49, under the implicit bid price range of $2.64 to $2.80, but above the $2.34 on Monday night. More than 37 million shares were traded as hedge funds piled in hoping for a higher counter offer.
With its 13% though, IPL is in the box seat.
The combination of Incitec and Dyno will create a $9 billion fertilisers and explosives group and a top 30 ASX company.
Incitec is already familiar with the explosives industry, having been controlled by Dyno’s major competitor, Orica, until Orica sold its 70% stake in 2006.
Incitec is offering 0.01406 Incitec shares and 70c cash per Dyno share, valuing the target at $2.80 a share.
The transaction, which will be implemented by a scheme of arrangement, has the unanimous support of the Dyno Nobel board, pending an independent expert confirming that it is in the best interests of shareholders.
"The board of Dyno Nobel unanimously recommends that Dyno Nobel shareholders vote in favour of the Incitec scheme, in the absence of a superior proposal," Dyno said in a statement.
The scheme is subject to shareholder approval and is expected to be implemented by the end of June.
Incitec has secured a $2.4 billion bank facility to fund the cash component of its offer and refinance existing Incitec and Dyno debt.
Incitec paid an average of $2.35 for its strategic stake last August and talks up till recently hadn’t gone anywhere. DXL had apparently been dreaming of a bid above $3 (it was floated by Macquarie Bank a couple of years ago at $2.78).
IPL’s fortunes have been buoyed by the surge in world fertiliser prices, a point it made in last week’s update. That saw its shares rise from around $66.05 last August, when it bought into DXL, to $149.36 on Tuesday and over $170 each in the aftermath of last week’s upgrade to earnings.
Based on Incitec’s Tuesday night price of $149.36 a share, Dyno is being valued at $2.80 a share, which is around 25% above Dyno’s weighted average price in the past month, and 48.9% above Dyno’s price before the sharemarket raid last August.
The scheme of arrangement gives them a capital gains tax-deferred rollover into Incitec on the share swap part of the bid which makes up 75% of the $2.80, and that is something no other offeror can do.
Incitec has committed to keeping its cash payment at 70c a share, regardless of what happens to its share price. It will issue more shares to top up the total value of the bid if its shares fall in value by more than 7.5%, from the pre-bid share exchange benchmark price of $149.36 to less than $138.16, by the time the merger is approved by Dyno’s shareholders and the courts.
Brokers say that puts an effective floor of $2.64 a DXL share, though if the IPL price falls 8% below a weighted average of $126.96 in the 10 days before court approval, the deal can be called off.
Incitec ECO, Julian Segal said in a statement that the combination of Dyno Nobel and Incitec will create a company with exposure to an explosives industry that is benefiting from a sustained commodities boom.
Mr Segal said the booming economies of China and India were driving the strong demand for fertilisers and explosives.
The merged group would leverage Dyno Nobel’s significant North American manufacturing capacity and distribution platform to increase sales into the fertiliser market.
"The combination of Incitec and Dyno Nobel will create a leading global chemicals company favourably positioned to benefit from the hard and soft commodity super cycle," Mr Segal said.
"Fertilisers and explosives fit together because of their commonality in underlying chemical processes and inputs."
"Nitrogen-based manufacturing chemical manufacturing is at the core of both companies."
Dyno chairman Geoffrey Tomlinson said Incitec’s offer was attractive, and gave shareholders the chance to own part of a combined entity with a strong outlook.
In all the upgrade comment last week to earnings as high as $730 million for the full year (and higher if you discount one-off costs), there was little mention of the benefit to IPL of a near normal winter grain harvest. It’s already too early to say.
But ABARE (The Australian Bureau of Agricultural and Research Economics) reckons that given near normal growing conditions, wheat farmers will have a crack at planting enough wheat to produce 26 million tonnes (although the big dry in South Australia is worrying for the strength of that forecast and for barley).
A solid winter grain harvest will need a lot of fertiliser from the likes of IPL.
