IPL Stalks DXL.

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IPL Stalks DXL
August 30 2007 - Australasian Investment Review – (AIR)

One up, one down as a week’s speculation about Dyno Nobel came to a head yesterday when fertilizer group, Incitec Pivot, revealed itself as the stalker of the world’s second-largest explosives company.

As a result, the market in both companies went crazy: Dyno (DXL) saw its share price rise 34c, or more than 13% to $2.39, while Incitec’s (IPL) share price fell 5% or $3.0 to $66.05.

More than 132 million DXL shares were traded as punters of all shapes and sizes hopped into a rare (these days) takeover situation.

Speculators had been earlier disappointed by the decision of Coates Hire to reject takeover approaches, a deal which saw its shares sold off on big turnover. Just over 600,000 IPL shares were traded.

IPL revealed it had bought 13% of Dyno Nobel, raising speculation of a takeover. Attention was snared a week ago by the crossing of a 4.5% stake in DXL. IPL was the best from market stories, but no confirmation until yesterday.

IPL said it had bought the shares in Dyno between August 24 and August 29 at an average price of $2.35.

But the shares dropped sharply on August 23 after Dyno said it will cost more and take longer to build an ammonium nitrate plant in Queensland. The shares fell to under $2 twice last week in the wake of the announcement. IPL obviously didn’t take advantage of the lower price if it averaged $2.35.

That raises the suspicion that it has bought shares from major holders (only Westpac has so far confirmed that it has cut its stake by around 9 million shares) and has paid above market.

Dyno Nobel has performed indifferently in a surging market since being floated last year by Macquarie Bank at $2.37 a share. It hit a high of $2.74 but fell to a low of $1.88 last week after the news of the cost overruns in Queensland and a lower than expected profit.

If it had not been for the IPL statement yesterday it would still have been below the issue price.
DXLannounced last Thursday a lower than expected $US43.4 million ($52.7 million) profit, and revealed that construction costs for its ammonium nitrate plant at Moranbah in Queensland’s Bowen Basin would significantly exceed its original $520 million estimate.

Investors were worried thatDyno did not or could not put an upper limit on the cost blow-out, and that opened the way for Citigroup to soak up DXL shares from nervy investors.

Incitec Pivot says it will now seek talks with the board of Dyno Nobel.

There is considerable logic in IPL’s move. It is well funded, its earnings are growing sharply, it produces ammonium nitrate (among other products) for its fertilizers, the same raw material that Dyno uses for its explosives (ANFO), and it has expertise in acquisitions and mergers, having bought Southern Cross Fertilizers more than a year ago and successful integrated it.

It is looking to diversify away from the rural sector in Australia: it has plans to expand in Indonesia through an $800 million dollar deal which could get the greenlight in the first quarter of 2008.

Incitec Pivot announced in June that it would investigate the feasibility of a project to boost the output of three fertilizer plants in Indonesia which are currently producing well below capacity because of a lack of gas feedstock.

The company said the project offers it “the opportunity to secure offtake of ammonia and urea in return for investing in a coal gasification plant in Aceh, Indonesia. If it is built, the facility would provide synthesised gas feedstock to support the three fertilizer manufacturing plants in Aceh”.

IPL had a market cap of around $3.3 billion at yesterday’s close. DXL is valued at just over $1.8 billion.

It’s yet another sign that private equity no longer has the firepower to do deals, leaving the field clear for good, old fashioned trade buyers such as IPL, or Wesfarmers at Coles.

Copyright Australasian Investment Review.
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