On February 3, 2010, Australia’s Federal Court rejected CSR’s de-merger proposals at its first court hearing amid concerns that the split-up of the conglomerate by distribution would compromise CSR’s ability to meet future asbestos liability claims. CSR, perhaps surprised by the ruling, has stated that it will review the judgment and consider all legal and commercial aspects of the matter.

The bottom line is that the de-merger of Sucrogen has abruptly been put on hold indefinitely, while CSR considers its options. These may include:

1) Appeal the ruling – However, this would probably take time, and with CSR believing that it has already given prudent and comprehensive consideration to the matter in its due-diligence, there is no guarantee that an appeal would result in a different outcome.

2) Sucrogen guarantees asbestos liability claims – Under this scenario, Sucrogen would be required to provide additional coverage on future potential asbestos claims (as was the case with Rinker, even though Rinker was incorporated in 1981, long after the last supply of asbestos to the US by any CSR company in 1966). However, this would have the effect of reducing Sucrogen’s appraised valuation.

3) Sale or IPO – CSR could go down the route of selling Sucrogen to a trade buyer or via an initial public offering. Sucrogen has already attracted interest from at least one potential suitor, China’s Bright Food Group. However, even allowing for the premise that the sale of Sucrogen would be less tax efficient to both CSR and its shareholders than a de-merger, there could be a restriction on the distribution of any proceeds to shareholders in light of the Federal Court’s concern about future asbestos liabilities.

4) Status quo – The rationale for the de-merger in the first place is to facilitate better recognition of the value of CSR’s portfolio of disparate businesses. In this respect, doing nothing, changes nothing.

While the valuation analysis incorporated in our Global Spin-Off Report on the planned de-merger, published on January 11, 2010, suggests a fair value in the A$1.87-A$2.00 per share, we expect the shares to do little better than drift and most likely weaken in the short term in the face of CSR’s current strategic dilemma.

On February 2, 2010, Cable & Wireless plc (CW/ LN) released its expected timetable for the completion of the proposed de-merger of its Worldwide unit.

February 2, 2010 – Publication of prospectuses for Cable & Wireless Communications Plc and Cable & Wireless Worldwide Plc.

February 25, 2010 – EGM to seek shareholder approval for de-merger.

March 22, 2010 – Listing of Cable & Wireless Plc shares replaced by Cable & Wireless Communications Plc shares.

March 25, 2010 – De-merger becomes effective.

March 26, 2010 – Trading in the shares of Cable & Wireless Worldwide Plc on the London Stock Exchange commences.

In its announcement, Cable & Wireless confirmed that agreement with the company’s pension trustees has been reached. The agreement calls for the pension assets and liabilities to be fairly evenly split between two de-merged entities. As part of the agreement, Cable & Wireless will contribute £105 million (indicating a further £30 million top-up on the £75 million already announced in November 2009, which is lower than most in the market had expected) toward the aggregate pension deficit of £305 million as of September 30, 2009. There is also a £200 million contingent funding agreement split between the two companies.

Management has also reiterated earlier EBITDA guidance for the separated units for fiscal year ending March 31, 2010. In terms of dividend policy, management confirmed that the combined dividend to be declared by the de-merged companies for fiscal year 2011 will be maintained at £0.095 per share, the same level as previously announced for fiscal year 2010, which represents a 6.5% prospective yield based on the prevailing share price of the bundled entity.

Cable & Wireless also announced a US$500 million bond issue, which completes the c.£1 billion refinancing package announced in November 2009 as part of the de-merger process. At the date of de-merger, Communications is expected to have net debt representing c.0.8x its fiscal year 2010 EBITDA guidance of US$880-US$900 million on a consolidated basis, while Worldwide will be virtually unleveraged.

Cable & Wireless is a UK-based telecommunications company with global operations contained in two operating divisions. The Worldwide unit has core operations in the UK, Continental Europe, and Asia, where it provides IP, data, voice, and hosting services to large enterprise, reseller, and carrier customers. The other operating division, which will make up Cable & Wireless Communications, is a full-service telecoms provider that operates through four regional business units – the Caribbean, Panama, Macao, and Monaco & Islands.

Under the terms of the proposed de-merger, Cable & Wireless shareholders will receive one share in Cable & Wireless Communications Plc and Cable & Wireless Worldwide Plc for every Cable & Wireless Plc share held. We intend to produce a detailed analysis of the prospective de-merger in the near future.

On January 25, 2010, Macquarie Infrastructure Group (MIG) began trading ex-MQA and the special dividend of A$0.10 per MIG share, and closed at A$1.25 per share, valuing the company (to be renamed Intoll from February 2, 2010) at c.A$2.83 billion/c.US$2.5 billion. This effectively values Intoll at a c.27% discount to pro forma NAV of A$1.71 per share. This valuation is within our expected initial trading range of A$1.20-A$1.40 per share, representing a peer-like 20% to 30% discount to NAV.

Macquarie Atlas Roads (MQA) began deferred settlement trading on the Australian Stock Exchange (normal T+3 trading in MQA begins on February 9, 2010), closing its first day at A$0.615 per share (equivalent to c.A$0.12 per MIG share), valuing the stock at c.A$278 million/c.US$250 million. This represents a discount in excess of 80% to pro forma NAV of A$3.35 per share. While the stock price is expected to be highly volatile in the coming weeks (we would anticipate an overhang of stock from risk-averse MIG shareholders as well as funds restricted by MQA’s size), we believe that MQA at this value offers a reasonable entry point for investors with a high risk tolerance as it represents a relatively cheap option on improving global credit market conditions and a bet on the eventual successful refinancing of MQA’s assets. The degree of justifiable discount to its NAV is a highly subjective judgment, but a c.50%-60% discount, equivalent to the largest discounts at which MIG has historically traded, would imply an MQA share price of A$1.35-A$1.70 per share, a more than doubling of the share price from initial trading levels.

For a more detailed analysis of the prospective restructuring of MIG, please refer to our Global Spin-Off Report, published on January 22, 2010.

On January 25, 2010, Macquarie Infrastructure Group (MIG) began trading ex-MQA and the special dividend of A$0.10 per MIG share, and closed at A$1.25 per share (down from A$1.48 per share as of January 22, 2010). This effectively values Intoll at a c.27% discount to pro forma NAV of A$1.71 per share. This valuation is within our expected initial trading range of A$1.20-A$1.40 per share, representing a peer-like 20% to 30% discount to NAV.

The implication is that Macquarie Atlas Roads (MQA) is being valued at more than A$0.13 per MIG share (A$0.65 per MQA share) based on MIG’s last closing cum-price of A$1.48 per share. This represents a discount to the pro forma NAV of A$0.67 per MIG share in excess of 80%. Should the MQA shares trade at these levels when trading of the stock on the Australian Stock Exchange commences on February 9, 2010, we believe this would represent a relatively cheap option on improving global credit market conditions and a bet on the successful refinancing of MQA’s assets, offering high risk tolerant investors potentially significant upside.

The expected time line for the restructuring process is as follows:

January 25, 2010 – MIG trades ex-MQA and special dividend of A$0.10 per MIG share.
February 1, 2010 – Record date for distribution of MQA shares and special dividend.
February 2, 2010 – MIG renamed Intoll.
February 9, 2010 – Trading in MQA shares on the ASX commences.

For a more detailed analysis of the prospective restructuring of MIG, please refer to our Global Spin-Off Report, published on January 22, 2010.

On January 14, 2010, CSR announced that it continues to progress discussions with the Australian Securities and Investment Commission (ASIC) with regard to the disclosure of asbestos liabilities in the scheme booklet for the proposed de-merger of Sucrogen. As a consequence, CSR and ASIC have agreed to a second adjournment of a court hearing in the Federal Court for approval to dispatch the de-merger documentation to CSR shareholders ahead of an EGM. Originally scheduled for mid-December 2009, and then delayed to January 15, 2010, the court hearing is now expected to take place in the week beginning January 18, 2010.

While this may cause some concern about a possible slippage in the de-merger timetable, CSR remains insistent that the de-merger can be implemented on schedule by the end of March 2010.

For a more detailed analysis of the prospective de-merger, please refer to our Global Spin-Off report published on January 11, 2010.

On January, 8, 2010, Hutchison Telecommunications International (HTIL) announced that its principal shareholder, Hutchison Whampoa (13 HK), which owns 60.36% of the company, has proposed to buy out HTIL minorities at a price of HK$2.20 per share. This represents a c.33% premium over the pre-suspension share price of HK$1.65 (suspended on January 4, 2010, pending an announcement on the potential offer), and a c.38% premium over the average HTIL share price of HK$1.59 since October 28, 2009, when HTIL completed the sale of its stake in Israeli mobile phone operator, Partner Communications (PTNR TV / PTNR US). Under the company’s articles of association, the privatization will require 75% of voting minority approval and not more than 10% of minority dissention.

We believe the offer is generous and will likely be accepted. Our sum-of–the-parts analysis suggests that the offer values HTIL’s emerging businesses at a 1.7x estimated end 2009 NAV (see exhibit below). Given the lack of visibility and perceived risks – none of these businesses is generating profit and all are draining cash – we think the offer is very reasonable. Furthermore, there are two additional reasons why we believe the offer should be accepted: 1) Hutchison Whampoa has categorically stated that it will not raise its offer; and 2) the announcement indicates that, should the offer lapse, HTIL would not pay out a special dividend from the proceeds of the Partner stake sale as all cash would be retained to fund continued investments in its growth businesses in Vietnam, Indonesia and Sri Lanka.