Brian Gaynor: Cheers, say Lion's minority shareholders

Brian Gaynor

The takeover offer for Lion Nathan could be dubbed "the revenge of the minority New Zealand shareholder".

This title is apt because there have been a number of transactions involving the company where minority shareholders have felt they have been poorly treated by directors.

But the shoe is now on the other foot as the directors who jumped the queue and sold out to Kirin in 1998 have missed out on a staggering $1.149 billion, with former chief executive and chairman Doug Myers forgoing $857 million.

The biggest disappointment is New Zealand investors will obtain limited benefits from the Kirin offer as we now only own 4.3 per cent of the company.

The company's origins can be traced back to the Hobson Bridge Brewery, which was established by John Logan Campbell and William Brown in Auckland in 1840.

In 1898 it merged with Albert Brewery, founded by Louis Ehrenfried in 1878, to form Campbell and Ehrenfried.

The new company was run by Arthur Myers, Ehrenfried's nephew and Doug Myers' grandfather.

In 1914 Campbell and Ehrenfried merged with the Great Northern Brewery, which had the Lion brand, and in 1923 10 breweries came together to form New Zealand Breweries. Campbell and Ehrenfried, which was predominantly owned by the Myers family, remained a separate company after merging its brewing interests into New Zealand Breweries.

In the 1920 to 1970 period, when New Zealand's male society was dominated by rugby, racing and beer, the breweries were powerful commercial organisations with strong and domineering individuals at the helm.

But by the late 1970s they were asset-rich, badly run and earnings-poor. They were ideal targets for the new wave of young entrepreneurs, led by Ron Brierley, who were buying controlling interests in poorly performing companies.

Doug Myers joined this group on November 16, 1981 when he purchased 19.9 per cent of Lion, which had changed its name from New Zealand Breweries a few years earlier, for $28 million. This was a first come, first served offer with most of the shares purchased from institutional shareholders before the market opened. Individual shareholders had little opportunity to participate in Myers' offer.

Myers was a controversial figure in the early 1980s because of a bitter family dispute over his takeover of Campbell & Ehrenfried.

In 1972, when he was managing director of the company, Myers made a successful takeover offer for Campbell & Ehrenfried, which cost him $5.65 million. Immediately after the takeover, a Queen St property was sold for $3.7 million and Myers received a capital dividend of $5.3 million.

A number of family members took court action against Myers, in a high-profile case known as Coleman v Myers. These family members claimed that Myers had not disclosed the true situation regarding the company and that he had prior arrangements to sell assets above their disclosed values.

Justice Peter Mahon decided in favour of Myers but on August 11, 1977 the Court of Appeal reversed the decision when it found Myers guilty of fraudulent misrepresentation. The Court ordered Myers to pay an additional $2.20 for each Campbell & Ehrenfried share, plus interest of 7.5 per cent per annum, above the $4.80 he paid five years earlier.

Myers annoyed minority shareholders again in 1988 when Lion made a takeover offer for L. D. Nathan by offering Fay, Richwhite & Co $9.20 per share for its 35 per cent holding and all remaining shareholders one Lion share for every L. D. Nathan share. As Lion's share price was only $5.60 at that time, Fay, Richwhite received 64 per cent more than all other shareholders.

The controversial offer generated a huge amount of debate about the rights of minority shareholders. Members of the Myers' camp argued that small shareholders were free-loaders and there should be no obligation to offer them the same deal as the wealth creators in a company in a takeover offer.

Malaysian Breweries, which owned 22 per cent of Lion, objected to the price paid to Fay, Richwhite.

It claimed that Fay, Richwhite was effectively warehousing shares for Myers; he had personal liabilities in respect of this 35 per cent shareholding and was transferring these liabilities to Lion.

The Courts found in favour of Myers and subsequent enquiries by the Securities Commission and stock exchange also found in his favour.

The controversial takeover left a sour taste with many Lion shareholders, including Malaysian Breweries which sold out and purchased a controlling stake in arch rival DB Group.

In the early 1990s Lion made an astute purchase of the Australian brewing assets owned by Alan Bond. But the company continued to disappoint as far as its earnings were concerned and failed to achieve the profit forecasts made at the time of both the L.D. Nathan and Australian brewing acquisitions.

In the mid-1990s, when Kevin Roberts played an important role as chief operating officer, Lion Nathan had constant management changes, a decline in market share in Australia and more disappointing results.

The next big controversy occurred on April 27, 1998 when Kirin announced it was making an on-market bid for 45 per cent of Lion Nathan at $5.40 a share.

This partial offer, which was in the pre-Takeovers Code period, compared with the $9.20 paid to Fay, Richwhite 10 years earlier and the $5.60 market price at that time.

The offer was in three separate parts; 15.6 per cent from Myers, 5 per cent from small shareholders with fewer than 10,000 shares and 24.4 per cent from large shareholders.

Myers said he wanted the separate offer for small shareholders to avoid "all the crap we took last time [the L. D. Nathan offer]".

Large shareholders should have been able to sell approximately one-third of their shareholdings but the directors jumped to the top of the queue and sold most of their shares with many institutions, particularly those based offshore, missing out completely.

The Australian Financial Review made the following comment: "One suspects that if a corporate Titanic sank in New Zealand waters, the captain and the officers would be the first to safety, all quite legal of course."

The irony of the 1998 Kirin offer is that the ship has performed much better since Myers and most of his fellow directors jumped into the life boat.

The passengers who had little option but to stay on board have had a rewarding experience, particularly since Lion Nathan moved its head office to Australia in 2000.

The directors who dumped their shares in April 1998 have missed out as follows compared with the latest Kirin offer of A$12.22 ($15.40) a share:

* Myers, who sold 85.66 million shares at $5.40, has missed out on a whopping $856.6 million.

* Robin Congreve, who sold 3.84 million shares, has forgone $38.4 million.

* Chris Mace sold 16.74 million shares and has missed out on $167.4 million.

* Geoff Ricketts, who is the current chairman, sold 5.89 million shares and has forgone $58.9 million.

* Kevin Roberts sold 0.33 million shares and has missed out on $3.3 million.

* Mike Smith has missed out on $24.3 million after selling 2.43 million shares.

These former directors may have generated fantastic investment returns from their April 1998 sale proceeds in the 1998 to 2009 period but it would have been difficult to beat Lion Nathan.

As Ricketts told the stock exchange this week: "For non-Kirin shareholders who did not exit the business through Kirin's initial acquisition in April 1998, the offer consideration implies a total shareholder return of 338 per cent, compared to 101 per cent for the ASX-200 over the same period."

It is a great pity that more New Zealand investors haven't participated in Lion Nathan's great performance over the past decade.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and a Lion Nathan shareholder.

bgaynor@milfordasset.com