Takeover target PanAust Limited (ASX: PNA) confirmed the sector's worst kept secret – its shares are worth more than what its Chinese bidder is offering to pay.
The copper and gold miner engaged Ernst & Young to undertake an independent valuation of the company and the independent expert has declared that Guangdong Rising Asset Management's (GRAM) $1.71 per share offer was "neither fair nor reasonable".
But what it did confirm though is that GRAM is the smartest (or maybe luckiest) guy in the room.
GRAM, which owns 22.5% of PanAust, tantalised shareholders with $2.30 a share offer last May before withdrawing when PanAust's board dismissed the bid from its largest shareholder because it felt GRAM's offer was too low.
How many takeover offers have been too quickly dismissed by company boards over the past 12 to 18 months?
PanAust shareholders would kill for the $2.30 offer now, given that Ernst & Young values PanAust at between $1.84 and $2.04 a share.
No surprises that the miner has issued a formal defence against the bid today by recommending investors "reject" GRAM's amorous approach, although investors are taking the independent expert's report with a pinch of salt with the stock remaining well under the valuation range.
Shares in PanAust are up 0.6% at $1.75 during lunch time trade, compared with the 1.9% surge in the S&P/ASX 300 Metal & Mining Index (Index: ^AXMM) (ASX: XMM).
I suspect GRAM will come back with a sweetened offer but will still achieve a substantial discount to its first offer price. Even at $2 a pop, many will be falling over themselves to accept the deal despite the obvious lack of an obligatory 20%-30% takeover premium.
PanAust has thrown everything it has to fend off the bid with management issuing a solid quarterly report, upgrading its production guidance and going through pains to point out that GRAM's opportunistic bid comes at the lowest point of the commodity cycle.
The recent turn in sentiment towards resource stocks should lend support for an improved offer for PanAust.
Investors can expect more merger deals in the sector thanks to low interest rates and depressed asset prices. BHP Billiton Limited's (ASX: BHP) planned spin-off, South 32, could attract a bid while experts think Glencore could make a play for Rio Tinto Limited (ASX: RIO).
But I suspect we will see most of the merger & acquisition action at the smaller end of town as miners will need scale in the current environment.
