Toll Holdings' shares leap on Japan Post bid

The Australian transport firm’s share price surged after Japan Post's bid, reflecting the bumper 49% premium on offer.

Toll Holding's share price rose 48% after Japan Post offered A$6.5 billion for the Australian freight and logistics firm on Wednesday, the biggest offer for an Australian company from Japan ever.

The Australian company's board recommended the all-cash takeover offer from state-owned Japan Post at A$9.04 per share. The shares closed on Friday at A$8.97.

Japan Post’s offer implies a 49% premium to Toll’s share price close on February 17 of A$6.08 and a 53% premium to the shares’ three-month VWAP.

“With what we consider a generous offer, we believe it is unlikely the proposed takeover will fail,” said Andre Fromyhr, an analyst at CBA.

“We see it unlikely a rival bidder will emerge that finds more strategic value in Toll than Japan Post, and is willing to offer a higher price,” he added.

Analysts at CLSA agreed, noting Japan Post is willing to cough up such a large premium because of Toll's Asian footprint and its strategic value to Japan Post ahead of its IPO later this year. The deal also highlights how cheap financing is for Japanese bidders and how low the Aussie dollar has fallen.

Analysts generally expect regulators to approve the deal given that a number of foreign firms operate in the Australian logistics market, including DHL, UPS, FedEx and local competitor Linfox. 

The proposed deal is the largest transportation sector acquisition globally so far this year, according to data provider Dealogic. If it goes through it would also become the biggest Australia inbound purchase since State Grid Corp of China's $7.5 billion bid for SPI (Australia) Assets Pty in May 2013.

M&A volume in the Asia-Pacific region has already reached $139.1 billion this year, the fastest start on record.

Source: Dealogic

Japan Post plans an IPO this year and is diversifying into faster growing markets than its own to attract potential investors.

Sayonara Toll
Toll shareholders on the register as of March 4 will also be entitled to a 13 cent interim dividend. Including the dividend the premium rises to 51%.

Japan Post’s offer for Melbourne-based Toll implies a 2016 enterprise value/Ebitda multiple of 10.7 times and P/E multiple of 20.4 times, according to analysts at Goldman Sachs; well above Toll’s five-year median EV/Ebitda of 7.1 times and P/E of 12 times. It also compares favourably with the ASX 100 industrials ex-financials 2016 EV/Ebitda of 9.6 times.

Goldman Sachs raised its 12-month share price target to A$8.86 from A$6.07 following the bid, bringing it into line with where Toll’s global peers trade at an enterprise value of 10.3 times forecast 2016 Ebitda.

The two largest global players in this space are US-listed United Postal Service Inc and FedEx. Toll's takeover EV/EBIT multiple of 18.2 times compares with 13.5x and 12.6 times for UPS and FedEx Corporation respectively. The takeover multiple appears more in line with Japanese listed players, Nippon Express on 17.7 times EV/EBIT and Yamato Holdings Co on 15.8 times EV/EBIT.

Key provisions include a "No talk, no shop" restriction on Toll and Japan Post must be notified of any competing approach. It also has the first right to match any competing offer.

There is a $65 million break-up fee payable to Japan Post if any director fails to recommend the offer or a competing bidder acquires a 30% or greater stake in Toll. However, analysts said the fat premium made a competing bid unlikely.

“We do not foresee any material difficulties in satisfying standard conditions precedent – regulatory approvals, shareholder/court approval,” said analysts at Evans & Partners.

A warning by the Australian Competition and Consumer Commission on Thursday of Toll’s planned A$45 million sale of Toll Marine Logistics may adversely affect some customers but did not adversely affect Toll’s share price.

Toll has hired Lazard as its financial adviser and Herbert Smith Freehills as legal adviser. Japan Post is using Gresham Partners and Mizuho.

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