Leighton Bears at Two-Year High as Hochtief Lifts Stake

Options traders and analysts agree with short sellers on Leighton Holdings Ltd. (LEI)

A bid from Germany’s Hochtief AG for a bigger stake in Australia’s largest builder has been met with concern about corporate governance, pushing the cost of put options to the highest since November 2011 relative to bullish contracts, according to data compiled by Bloomberg. Leighton is the most shorted among the nation’s biggest companies, data compiled by Bloomberg and Markit Group Ltd. show, and none of the 17 analysts who cover it advise buying the stock.

“Our message is to sell now,” said Mark Lister, Wellington-based head of private wealth research at Craigs Investment Partners Ltd., which has about $7.4 billion under management. “All the benefits are in the price. As a minority shareholder, you’re going to be put in a more difficult position as you get these bigger shareholders running the business for their own benefit.”

Hochtief last month forced out the top two executives at Leighton and put its Chief Executive Officer, Marcelino Fernandez Verdes, in charge as it raised an offer to increase its stake in the builder. The German firm is seeking to boost its majority holding in the Australian company to as much as 74 percent and has said it would pay minority shareholders A$22.50 per share.

Money managers from Invesco Ltd., the Atlanta-based firm that has $787 billion in assets under management, to Banca Fideuram SpA, a Rome-based manager that runs $106 billion for clients, sold Leighton shares this month, according to data from the most recent filings compiled by Bloomberg.

Short-Selling

About 17 percent of Leighton’s freely-traded stock is on loan to short sellers, the highest proportion of companies listed on Australia’s S&P/ASX 200 Index with a market value higher than $5 billion, the Bloomberg and Markit data show. The next most-shorted company in the group, Fortescue Metals Group Ltd., has 11 percent of its shares on loan, the data show.

Of analysts tracked by Bloomberg with ratings on Leighton, 11 say to sell and six recommend holding the shares.

Standard & Poor’s and Moody’s Investors Service have both flagged the risk of ratings downgrades if Hochtief, currently with a 60 percent holding, increases its stake in the Australian company. Hochtief’s offer to buy three of every eight shares held by minority investors closes May 9.

“The outlook for Leighton has deteriorated,” said Nicholas Robison, a Sydney-based analyst at Morgan Stanley. “We expect a material selloff of the shares after the offer is completed.”

Leighton climbed 0.8 percent today. The shares have slid 14 percent since reaching a one-year high of A$23.09 on March 10. They remain up 24 percent this year, compared with a 1.3 percent advance on the benchmark S&P/ASX 200.

Rising Skew

Three-month put options protecting against a 10 percent drop in Leighton shares cost 19.5 points more than calls betting on a 10 percent rally yesterday, according to data compiled by Bloomberg. The price relationship known as skew has averaged 4.8 points over the past two years. It rose to 19.8 on April 9, the highest since November 2011.

Traders hold more bearish wagers than bullish ones, with the put-call ratio climbing to 3.3 on March 27, the highest since 2007, according to data compiled by Bloomberg. Put open interest totaled 44,026 on April 14 compared with 14,830 calls that day, the data show.

Fiona Tyndall, a Sydney-based spokeswoman for Leighton, declined to comment on the options trading. Christian Gerhardus, a Hochtief spokesman, said the German company couldn’t immediately provide comment.

Creep Provisions

Leighton builds infrastructure at coal mines for BHP Billiton Ltd., is erecting a casino hotel in Macau for Wynn Resorts Ltd., and is constructing parts of a natural gas export terminal for a venture operated by ConocoPhillips and Origin Energy Ltd. Its net income rose 13 percent to A$508.7 million ($476 million) in 2013 from a year earlier, while the value of work in hand fell 3 percent to A$42.2 billion as of Dec. 31.

Hochtief, which has been a Leighton shareholder since 1981, has been gradually increasing its stake since last June using provisions of Australian listing rules that allow large shareholders to add 3 percent to their holdings every six months.

Hochtief declined to make a full takeover offer after being pressed to do so by independent directors on Leighton’s board, the Australian company said last month.

Leighton may be removed from the S&P/ASX 200 if Hochtief’s stake rises to 74 percent, according to Morgan Stanley’s Robison. That would leave less than the 30 percent of investable shares needed to satisfy S&P’s conditions for index inclusion, he said.

“Uncertainty surrounding strategic direction and boardroom battles on leadership have distracted the company from the task at hand,” said Ross MacMillan, an analyst at Morningstar Inc. “A solid pattern of profitability needs to be established before investor faith will be fully restored.”

To contact the reporter on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net

To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net John McCluskey

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