Bradken investors embrace Hitachi bid

Investors welcome Hitachi Construction Machinery’s plan to acquire Australian rival Bradken. But some analysts say the deal means shareholders will miss out on a promising turn-around.

Japan’s Hitachi Construction Machinery (HCM) announced on Monday that it would pay A$3.25 per share to buy a 100% stake in Bradken. That gave investors a 34% premium to the last close and a 90% premium to the 90 days volume weighted average price.

The deal values the Australian company at $688.5 million on a market capitalisation basis, or at an enterprise value of A$976.1 million. It also brings to an end a roller-coaster ride for investors.

Bradken’s share price hit rock bottom at the start of the year after falling more than 90% since January 2012. But following a rapid rise in July, when chief executive officer Paul Zuckerman announced that the company would refocus on core markets, the stock is now up more than 550% this year.

“This is an incredible turnaround,” said a shareholder in the company. “Sometimes we just have to be patient.”

Some analysts said it was a shame for shareholders that the company was being acquired just as the going was getting good. Investors in the company enjoyed a 31% jump on Tuesday, after the stock reopened following the takeover announcement. But there could be more in store.

“It is somewhat regrettable that the company is likely to be acquired at a time when earnings appear to have bottomed and investors will not get to participate in the cyclical recovery or restructure,” Deutsche Bank analysts said in a note on Tuesday.

Still, Bradken always looked likely to be sold at one point or another. It has received offers from a mix of private equity firms, strategic investors and overseas corporations since 2014.

Pacific Equity Partners, Bain Capital, Koch Industries, Champ Private Equity and Sigdo Koppers have all been linked with acquisitions of Bradken. But they were all rejected after disagreements over how much the company was worth.

Approvals abound

HCM’s acquisition is not fully complete. The company needs to buy more than 50% of Bradken before the end of the offer period, but also needs clearance from various antitrust regulators including Australia’s Foreign Investment Review Board and two US bodies, the Directorate of Defence Trade Controls and the Committee on Foreign Investment in the US.

Antitrust agencies in Australia, Canada and South Africa also need to approve the deal.

Bradken's three biggest shareholders are US hedge funds Litespeed Master Fund and Delta Partners, which own 13% and 5.4%, respectively, and Australian boutique firm Paradice Investment, which owns 7.8%.

Bradken's board believes the proposal is attractive and recommends shareholders accept the deal. Investors have certainly done well from the offer so far.

The stock immediately shot up to A$3.19 after it started trading on Tuesday. Turnover surged to 4.2 million shares, some four times its normal trading volume. Tuesday’s closing price offers a 1.88% gross return to merger arbitrage investors.

HCM has agreed to provide an A$450 million 180-day unsecured credit facility to help Bradken manage any refinancing risk triggered by the change of control. The interest rate will be 6% if denominated in Australian dollars and 4% if US dollars.

The offer period will start on 24 October and will end on 12 December. The deal is expected to complete by May next year. A break fee of A$6.885 million will be paid to HCM by Bradken in certain circumstances.

Bradken makes a variety of products for miners, freight train operators, and other heavy industries. It employs around 3,500 people.

HCM, established in 1970 after Hitachi spun off its construction machinery business, is a leading global producer and supplier of construction and mining machinery. The company has more than 20,000 employees.

Bradken has picked Highbury Partnership as a financial adviser and Allen & Overy as legal adviser.

HCM has appointed SMBC Nikko Securities and Moelis & Co as financial advisers and Minter Ellison as legal adviser.

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