Wesfarmers borrowing, after all: the old patterns return already

After pleasing us all so greatly with their reassuringly old-fashioned purchase of Coles Group (Cash + Shares, like it used to be done when stocks were traded according to the worth of the company, not the worth of a share to a leveraged speculator), Wesfarmers is after a loan, after all.

Australian conglomerate Wesfarmers has begun the syndication process of a $10 billion loan to finance its acquisition of retailer Coles Group, a joint underwriter said today.

“In an environment where everyone is scared, corporations still have the capacity to finance very large acquisitions and also to finance them in a market where it’s been very difficult for financial institutions to do the same,” said Craig Saalmann, credit strategist at JPMorgan.

The financing consists of three parts, a $4 billion 1-year bridge loan, a $5 billion 3-year loan and a $1 billion 1-year revolving loan.

Both 1-year tranches will pay 37.5 basis points (bps) over bank bill rates (BBSY) while the 3-year tranche will pay 50 bps, according to Basis Point, a Reuters company.

The margin of the 3-year portion was increased from 45 bps to make the offer more attractive.

Why? Well, a funny thing happened, on their way to the car:

SMH Markets wesfarmers

Yes, boom indeed. It is rather hard to impress when half your bid price is tanking shares. The similar turn-around of Coles Group:

SMH Markets Coles

Reinforces (sadly) a comment I saw yesterday about people being willing to own risk again. By the looks of this, they were probably right, at least in this instance. It also re-establishes that “old pattern” – a declining stock being bouyed by talk of a buy-out (even though that buy-out is leveraged).

I would love to know how many traders on how many floors actually do believe in the ludicrous 7 Percent Rule. Again, though, the core of value-investors is growing ever-smaller: like currency trading, people aren’t interested in whether the stock price truly represents the value of the company, because they’ve no intention of keeping it long enough to find out. Just long enough to flip the stocks and keep the difference (which is pretty much where the 7 Percent Rule comes in handy – you can offload a company whose numbers suddenly look good to people who can’t see the numbers that suddenly look bad; like turnover, labour/capital ratios, new workplace agreements or morale).

I should point out that these are Australian-listed – and traded – companies. We have appreciating currency, increasing pressure on interest rates (partly because of the currency; mostly due to the domestic economy) and a stock market bouncing near all-time highs (hopefully having narrowed consideraby our exposure to the US’ problems, in the interim). The attitude on the ground is somewhat different to that on, say, other ground.

A lot of this, though, is still moving with the assumption that Bernanke’s side-step of a full half-percentage-point cut on his funds-rate target will fix everything. Wesfarmers still had to add an extra year of interest, at (also half a percentage point) over the market rate of interest (which ought to be increasing again), in order to attract the loan. Three banks are under-writing it.

Perhaps we’re willing to own risk, but we’re learning once more to insist it be appropriately treated as such.


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