re: Ann: CVA: BGL:Intention to Make Takeover ... hanktanson, I...

re: Ann: CVA: BGL:Intention to Make Takeover ... hanktanson, I cant speak for Ivan, but you can get a rough idea about share numbers from announcements today. BGL will partly pay for the acquisition by issuing .35 BGL shares for every CVA share. The CVA annual report indicates there are circa 120 million CVA shares, so you are looking at circa 42 million BGL shares as part of the script component of the acquisition. BGL has around or will have circa 95 million shares (taking into account recent acquisitions) so 42 plus 95 is equivalent to 137 million BGL shares. Other issue is the cash component of the takeover bid, BGL has indicated it will pay 1.82 cents per CVA share which using above total CVA share numbers will result in a cash payment of AUD 2,184,000. The question is the extent to which BGL uses its balance sheet to pay for this amount or raises the funds through a placement. Assuming a fully dilutionary position if cash component is fully funded by a placement then you are talking about circa 11,500,000 extra shares assuming a placement price based on current SP. So you are looking at potentially a post takeover share capital for BGL of close to 150,000,000 shares. Obviously using WANOS you wont have that number for the FY11 period (as new shares will only be in issue for half the period) but may have an amount in that region for the FY12 period.

Dhukka I agree there is always a risk with a large (in a relative sense for the two companies) takeover like this, however I think there is a greater probability of upside risk for this transaction. The remaining CVA business is exactly what BGL have been excelling at. The technology and infrastructure is pretty much exactly the same so it makes sense for the more efficient management team (BGL) to take it over and run it better. There are considerable synergies to be realised - look through the CVA Annual report and look at admin expesnes and wages expenses etc they were always going to be lower for the FY11 period as the off net business was sold to MTU but they will be able to be lowered further still with BGL running a much tighter ship than CVA. Basically I would have thought that BGL management would have a good feeling about taking over the CVA on net business and getting the business in order so it starts producing the same attractive EBITDA and NPAT margins as BGL - in fact with the much large scale BGL may even be able overall to increase their margins - I dont think an NPAT margin of circa 25% once fully intergrated is out of the question. On top of synergies and cost savings the combination will remove BGLs biggest listed competitor, and will allow the combined entity to offer a wider (combined) customer base with better service offerings without as much price competition. BGL will get access to CVAs customers which include the likes of MTU which will be a great client to have.

This is a compelling takeover in a lot of respects and simply makes common sense. I agree the risks with acquisitions are often overlooked and that if you look at the empirical evidence sometimes acquisitions dont stack up but I dont think this is the case for the proposed BGL - CVA tie up.

The merger will aslo increase the market cap of BGL, increase the shareholder base, perhaps increase share liquidity and also likely bring the company to the attention of more in the investment community including brokers and institutional investors. This can only be a good thing as slowly one would think this will reduce the big value gap currently existing for BGL against its peers. I.e. the value gap should close and BGL become priced closer to its peers with the share price increasing.

Just from my rough calcs and assumptions I think EPS of $.035 is optimistic but very possible for FY12 and assuming a PER of 12 you are looking at a share price of circa .42 cents in around 19 months time. Not a bad position to be in when you can buy for circa .19 cents today (or on Wednesday). I am not sure the acquisition will have a huge positive impact on EPS for FY11 as it will take time for the synergies to be realised. Assuming the takeover goes well and is completed quickly BGL management will have say roughly 6 months max to realise synergies etc for the FY 11 period and Im not sure FULL benefits can be realised in that period. On top of that you are going to have some restructuring and transaction related costs which of course will be one off. I think an assumption of EPS of .025 for the FY11 period is sensible.

I will be going to the AGM as well and would be happy to discuss thoughts with any other shareholders.

The above is just my uneducated analysis from the announcements and from my own modelling and is posted for the purposes of generating discussion about the proposed transaction. If you are considering buying (or selling) BGL shares, based on the above or otherwise, please DYOR and consult your own financial advisor to determine if such a decision is suitable considering your personal financial circumstances.