IT IS 13 days since Valspar, a United States-based paint manufacturer, approached Wattyl with a takeover proposal pitched at $1.30 a share. While the Wattyl board is hunkered down in detailed valuation analysis and is yet to respond to the offer, nervousness in the paint industry regarding the possible ramifications of a deal is building.
In particular, more than 120 independent owners of Paint Place stores, Wattyl's preferred trade and retail outlets, fear their businesses will be damaged by a deal. If Valspar is buying Wattyl with an eye firmly on supplying the big-box hardware store venture of Lowe's and Woolworths, there is an expectation that the new hardware chain will seek exclusive access to Wattyl's best brands, such as Solagard.
This could leave Valspar running different brands in each channel, possibly promoting Solver Paints as the leading brand for Paint Place.
However, more significant to Wattyl shareholders is the question of how central the Wattyl product line-up is to the Lowe's and Woolworths strategy.
Paint industry chatter suggests that while the Valspar offer looks a little undercooked, the Wattyl board should be wary of overplaying its hand. It may be feasible for Lowe's to arrange imported paint from Valspar, while a dark horse to watch in any paint industry contest is Haymes Paint of Ballarat.
A fourth-generation family company, Haymes is the only significant independent paint maker in the market. Haymes could either emerge as a supplier of exclusive product to Lowe's/Woolworths, or possibly be left to pick up the pieces through supplying the Paint Place group if its members feel disenfranchised following the acquisition of Wattyl.
Renovators delight
A NATION of home renovators will be watching Valspar's tilt at Wattyl with almost as much interest as Wattyl shareholders, hoping a changing competitive dynamic in the Australian hardware market makes the Saturday trip to the hardware store a little less expensive.
Curiously, retail paint buyers in the United States pay about half as much for paint as they would from Australian hardware store shelves.
But industry insiders believe it's going to take more than a change in control at Wattyl for retail paint prices to come down. The reason that Wattyl's profit margins have been skinny for years, despite high retail prices, is that Australian paint suppliers give too good a deal to trade buyers. A commercial painter will typically pay the same price for 10-15 litres as retail buyers pay for a four-litre can.
Meanwhile, chatter from the paint trade suggests that new Wattyl management, led by Tony Dragicevich, is more disciplined than the old guard in resisting the temptation to dress up the books at year end.
Last year, Wattyl dumped stock into the trade channel at up to half price leading up to the June year-end in an effort to make its forecasts.
This year, there are limited quantities of discounted Solagard available, but that's about it.
Gold-digging
SOMETIMES it takes a takeover offer to shine a light on an unloved and undervalued corner of the market.
That's how it seems at North Queensland Metals (NQM), where a $58 million cash and scrip offer from Conquest Mining announced last Thursday should prompt investors to pay attention to the profit outlook for the small narrow vein goldmine operator.
Unhedged exposure to a rising gold price and tight cost management position NQM for bumper profitability. The company's 60 per cent-owned Pajingo Mine, south of Charters Towers, produces 60,000 ounces of gold each year and has just completed projects to push cash costs down to $700 an ounce.
At the current gold price of about $1480, this translates to about $28 million annual cash flow to NQM, which also boasts $17 million cash and no debt.
Factor in planned mine expansion over the next 15 months, increasing production to 100,000 ounces, and the situation gets even brighter.
With those metrics, it's little surprise that NQM's smaller shareholders are rallying against the Conquest bid, labelling it highly opportunistic. They believe that Conquest is looking to take advantage of NQM's depressed share price at a time when management has been more focused on operations than external promotion.
The bid comes just as NQM is set to start posting strong quarterly cash flow reports. For its part, the NQM board is yet to respond to the offer. However, recent company presentations have highlighted the market's valuation of Pajingo as being out of step with comparable mines.
NQM identifies two comparable narrow vein mines held by Australian listed companies - Mount Monger and Norseman. Like Pajingo, these two have plans to increase annual production to 100,000 ounces.
But while Pajingo is valued at less than $1000 for each ounce of annual production, the other two are valued at between $2000 and $3000.
With these valuation metrics at its fingertips, it's hard to see a majority of the NQM board welcoming the Conquest bid.
However, possibly creating some tension around the table will be Donald Walker, an NQM director who has entered into a pre-bid acceptance agreement with Conquest in relation to a 19.9 per cent shareholding in NQM.
