The value unlocker

Every billionaire has his ups and downs, but media and heavy equipment mogul Kerry Stokes found himself on a bit of a personal rollercoaster last week.

As chairman of the famous Perth Telethon, Stokes was all set for a personal triumph last weekend as the amount raised hit a record $13.4 million thanks to a $1 million donation from James Packer’s Burswood casino and a $1 million donation from a mystery Perth family.

But pleasure turned into pain for Stokes, who missed his chance to personally hand over a $1.5 million check in support of the fundraiser after he fell down some stairs at the Perth Convention and Exhibition Centre and was rushed to hospital.

Stokes was back at work a few days later and said a few bruised ribs couldn’t wipe off the smile on his face from the Telethon’s success.

But the telethon isn’t the only reason for Stokes to smile at present.

Last week a blog by veteran Perth mining writer Tim Treadgold uncovered a fascinating fact about one of Stokes lesser-known investments in mining minnow Iron Ore Holdings, which may be sitting on a $500 million windfall that is yet to be recognised by the market.

That might change if Stokes can live up to his recent record of unlocking hundreds of millions of dollars in value in different parts of his empire.

Release the value

Last week’s injury wasn’t enough to prevent Stokes pulling off another big feat – refinancing $1.95 billion in debt held by Seven West Media, the Perth-based media company that houses the Seven television network, Pacific Magazines and The West Australian.

In a tough market that isn’t looking all that kindly on media stocks, the relative ease with which the deal was done is impressive.

The refinancing deal can be seen as part of a major reshuffling of Stokes in the past two years.

In 2010, he orchestrated the $2 billion merger of Westrac – owner of the Caterpillar equipment franchise for Western Australia and a part of China – with Seven Media to form Seven Group Holdings.

Earlier this year, he reshuffled again, merging Seven Media Group with West Australian Newspapers in a $4 billion deal.

At the heart of these deals was a desire to unlock the value of Westrac and bring his media interests together in a separate vehicle. And it’s worked.

Since 2009, the value of Stokes’ fortune has increased from $1.9 billion to $2.55 billion, according to BRW.

This does leave his fortune below the $2.76 billion BRW recorded in 2008, but we should remember that the value of media assets have plunged between now and then.

For example, since the start of February 2008, the value of Ten Network Holdings and Fairfax Media Group has fallen by 66% and 78% respectively.

Had the Seven Network remained a separate listed entity and its value fallen by a similar amount (however unlikely this might have been, given the ratings lead the network has enjoyed in the last few years) the value of the company could have fallen from $2.95 billion to $885 million.

Consider the impact that could have had on Stokes’ fortune. Back in 2008, about $1.4 billion of his $2.76 billion fortune was based on the value of his media assets, while the remaining $1.36 was based on the value of his unlisted assets, primarily Westrac.

Had Stokes not reshuffled and had Seven Network suffered the same falls as Ten Network and Fairfax Media, as much as $1 billion could have been wiped off the value of his fortune.

Instead, by reshuffling, Stokes has managed to unlock the value of Westrac, dodge a major crash in media asset values and boost his total fortune by more than half a billion dollars.

Iron Ore Holdings – a rising star?

Iron Ore Holdings appears to be another company with hidden value, although it is still very much a minnow, with a market capitalisation of $225 million. Stokes owns 50.5%.

In recent weeks the company has pulled off two impressive deals that Treadgold argues shows it is worth much more than the current price of about $1.35 – as much as $6 a share under Treadgold’s calculations.

The sale of two lots of iron ore tenements to Rio Tinto’s Hamersley Iron and fellow miner Mineral Resources for a total of $74 million leaves IOH with $116 million in the bank – almost half of its market cap is covered in cash.

But IOH still has a flagship project called Iron Valley up its sleeve. The mine, which has a resource of 259 million tonnes, is well regarded given it is boarded by mines owned by Rio, BHP Billiton and Fortescue Metals Group.

“IOH claims it is moving towards a decision to mine Iron Valley with a pre-feasibility study scheduled for completion in the middle of next year, potentially leading to a mine producing up to 15 million tonnes of ore for between 12 and 15 years,” Treadgold says.

Using the deal with Rio Tinto as a template – where IOH received $3.32 per tonne of iron ore – then Iron Valley could be worth $859 million, or 3.8 times the current market capitalisation of IOH.

Add that to the current cash pile, and IOH could be worth more than $1 billion – taking the value of Stokes’ stake from about $112.5 million to over $500 million.

There are some big “ifs” in these assumptions, but Stokes does have the runs on the board when it comes to getting the market to recognise value.

Another value-unlocking move?

Another company Stokes appears to see extra value in is equipment rental group National Hire.

Seven Group Holdings already owns 67% of the company, but Stokes wants to spend $180 million mopping up the rest. Stokes has offered $3 a share in cash, rising to $3.60 if it acquires more than 91.55% of the company.

But the hidden value Stokes can see hasn’t quite stayed as hidden as he might have hoped. An independent expert has valued the company at $3.66-$4.00 and declared the offer fair, but not reasonable.

As a result, Stokes’ bid has met opposition in the form of Dale Elphinstone, a rich list member from Tasmania who owns 22% of National Hire and co-incidentally is also a Caterpillar distributor.

Elphinstone won’t sell at $3.00 and doesn’t appear like he wants to sell at $3.60. Stokes has already had to back down on a threat to delist the company if he doesn’t gain full control and he may face a bigger battle than first thought to grab this asset.