Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Higher bid price a credit to F&P directors

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Sale to Haier compares well to takeovers of other firms, including BNZ 20 years ago.

Haier's $1.28-a-share offer values F&P Appliances at $927 million. Photo / Glenn Jeffrey
Haier's $1.28-a-share offer values F&P Appliances at $927 million. Photo / Glenn Jeffrey

Haier achieved full control of Fisher & Paykel Appliances (FPA) on Tuesday, exactly 20 years after National Australia Bank (NAB) acquired the Bank of New Zealand (BNZ).

The coincidence is ironic because the BNZ takeover also created considerable media attention and Haier's takeover offer coincided with profit announcements by our major overseas owned banks, including the BNZ.

FPA has been in the doldrums for a number of years and its share price hit a low of 33c on December 27 last year.

However, it gradually picked up this year and on August 22, the day before its annual meeting, the price reached 65c. The meeting was extremely optimistic and FPA's share price climbed to 75c on September 7.

Before the market opening on September 10, FPA announced that Haier had expressed "an interest in making a takeover offer for the company" although no offer had been received.

FPA's share price immediately jumped 29 per cent, to 97c, which is consistent with normal takeover premiums of between 20 to 35 per cent above the pre-bid price.

Two days later Haier announced its intention to make an offer for FPA at $1.20 a share, 60 per cent above the pre-announcement price of 75c.

The final offer of $1.28 a share represented a 71 per cent premium to the September 7 price and a 97 per cent premium to the pre-annual meeting 65c a share.

There were numerous comments about FPA's status as a national icon. However, the truth of the matter is that FPA operates in a highly competitive industry, has had major financial difficulties and hasn't paid a dividend since 2008.

Haier's $1.28 a share offer values the company at $927 million compared with forecast March 2013 net earnings of $47.6 million. This is a prospective price/earnings multiple of 19.5, which is very attractive for an appliance manufacturer in the current environment.

FPA's independent directors deserve a bouquet for the way they handled the situation, particularly their positive outlook at the annual meeting and their determination to extract a high premium from Haier.

The Fisher & Paykel names remain on the NZX through Fisher & Paykel Healthcare (FPH), which has been far more profitable than its sister company in recent years. FPH has a sharemarket value of $1.3 billion, which is $375 million above FPA's takeover value.

Haier announced it had reached 90 per cent of FPA, and was moving to compulsorily acquire the remaining shares, on November 6.

This was 20 years to the day after NAB announced it had reached 90 per cent of the BNZ.

NAB launched a bid for BNZ on July 21, 1992 at just 80c a share compared with the pre-bid price of 79c a share.

The offer valued the bank at $1.48 billion.

The Crown (which owned 57.3 per cent) and Fay, Richwhite (27 per cent) immediately announced they would accept the bid.

The takeover had a number of contentious features including:

The bid premium was miniscule.

BNZ's independent directors, unlike the FPA directors, made almost no attempt to convince NAB to raise its price.

The independent evaluation report was prepared by Baring Brothers Burrows, a Sydney-based firm, even though the offer was being made by an Australian company.

Baring assessed future BNZ maintainable earnings between $135 million and $180 million even though the company had net earnings of $171.1 million for the March 1992 year.

The NZX required Baring to prepare an additional supplementary report following shareholder complaints.

A hugely attended extraordinary general meeting, called by shareholders, was held at the Michael Fowler Centre in Wellington on October 30, 1992. However, as the Crown and Fay, Richwhite held over 84 per cent, NAB was able to reach 90 per cent and move to compulsory acquisition seven days later.

It is hard to get upset about the FPA acquisition when compared with a number of other takeovers, particularly the BNZ.

FPA competes on global markets whereas the BNZ operates in a cosy domestic environment and was always likely to substantially exceed Baring's "future maintainable earnings between $135 million and $180 million".

BNZ has remitted dividends of $5521 million to NAB since 1992 and reported net earnings of $741 million for the September 2012 year. BNZ has a current value of approximately $8500 million based on the valuations of ASX listed banks.

Thus, for a total outlay of just $1481 million, the BNZ has delivered value of more than $14,000 million to NAB. The latter figure includes dividends and the current estimated value of the New Zealand bank.

An article by Kirk Hope, chief executive of the Bankers' Association, in Monday's Business Herald was a rather lame attempt to justify the banking sector's enormous profitability. Hope is a former Westpac employee.

He wrote: "Our banks earn realistic returns for their shareholders considering the size of their business and their risk profiles."

According to Hope the profitability of our major banks should be applauded because they make a huge contribution to our economy.

He concluded: "While providing a return to shareholders is important in terms of on-going investment in New Zealand, banks do a great deal more than that."

If banks are so important and profitable why did we sell them to the Aussies at deeply discounted prices?

As the accompanying table shows, the four major Australian owned banks reported net cash earnings of $3501 million for the 2011/12 year, a 16.6 per cent increase over the previous year.

By comparison the four largest NZX listed companies - Auckland International Airport, Contact Energy, Fletcher Building and Telecom - reported net earnings of only $1054 million for the same period, just 30 per cent of the four banks' total.

Three of the four largest NZX companies were formerly Government-owned, partly because we are not creating many high growth companies in the private sector.

One of the reasons for this is that our major banks are slow to support start-up businesses because they make far too much money lending to individuals to purchase over-priced residential property.

Hope pointed out that the banks provide a wide range of services including ATMs, branch networks, online banking, mobile banking, general insurance, life insurance, investment funds and KiwiSaver schemes.

Our two largest KiwiSaver providers, appointed by the Government, are ANZ Bank's OnePath and ASB Bank.

A number of bank KiwiSaver funds invest the cash component of their portfolios, which can be substantial sums of money, back in their bank. This money is then on lent by the banks to their customers.

It is little wonder that our major banks are so profitable.

It is important that our banks are profitable but there should be a better balance between the profitability of the four major Australian-owned banks, our New Zealand-owned banks and NZX listed companies.

Kiwibank reported net earnings of $79 million for its latest financial year, substantially below the earnings reported by the four major Australian-owned banks.

It is a huge disappointment that the Bolger government and Fay, Richwhite were so determined to sell the BNZ - near the bottom of its earnings cycle - 20 years ago.

Brian Gaynor is an executive director of Milford Asset Management. bgaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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