Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Shareholders feel T&G bid not quite ripe

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Turners & Growers promotes kiwifruit and apple varieties. Photo / Supplied
Turners & Growers promotes kiwifruit and apple varieties. Photo / Supplied

Two highly controversial takeover bids remain open as 2011 draws to an end.

George Kerr has reached 47.1 per cent of Pyne Gould Corporation in his quest to attain at least 50 per cent of the investment company while the Turners & Growers' independent report and directors' recommendation have been criticised by a number of shareholders.

This includes a shareholder complaint to the Financial Markets Authority that the grower, distributor, importer and exporter of fresh horticultural products has not complied with the NZX's "continuous disclosure" rules.

Turners & Growers was established by Edward Turner in 1897 and merged with the Auckland Provincial Fruitgrowers' Co-operative in 1921 to form the existing group.

In 1992, Noboa, the Ecuadorian owner of the Bonita banana brand, became a substantial shareholder and now owns 12.3 per cent.

In 1994 Guinness Peat Group (GPG) became the largest shareholder and now holds 63.5 per cent.

Turners Car Auctions was spun off as a separate listed company in 2002, Enza was acquired in 2002 and Turners & Growers listed on the stock exchange in September 2004.

The horticultural company's performance has been poor since listing as demonstrated by the following figures:

* Earnings before interest, tax, depreciation and amortisation (ebitda) has risen from $38.5 million in the December 2004 year to just $40.2 million in the December 2010 year.

* Net profit after tax has fallen from $9.7 million to $6.3 million over the same period.

* The annual dividend has declined from 12c to 10c a share.

* The CEO's remuneration has risen from $700,000 to $784,000.

* There are now 92 employees paid $100,000 or more compared with only 48 in 2004.

* Total director fees have increased from $313,000 to $363,000.

Turners & Growers' poor operating performance has had a disastrous impact on shareholder returns as the company's share price traded between $3.20 and $3.42 in September 2004, its first month on the NZX, and has never been as high since. The organisation's poor investor relations have also contributed to its abysmal sharemarket performance.

On November 10, the German group BayWa Aktiengesellschaft gave notice that it intended to make a takeover offer for the company at $1.85 a share compared with Turners & Growers' pre-bid share price of $1.70 and a net asset backing of $2.47 per share as at June 30.

GPG announced that it would be accepting the $1.85 a share offer for its 63.5 per cent shareholding.

KordaMentha's Independent Adviser's Report valued Turners & Growers as follows:

* It believes that the company is worth between $2.04 and $2.29 a share on a discounted cash flow (DCF) basis.

* It is worth between $1.65 and $1.84 a share on an ebitda multiple basis.

* KordaMentha believes Turners & Growers is worth between $1.86 and $2.10 a share on an orderly realisation of assets basis.

Taking these three methods into account KordaMentha assessed Turners & Growers overall valuation range between $1.75 and $2.10 a share, with a mid-point of $1.93.

Company valuations are a complex issue that require detailed analysis not appropriate for Christmas Eve. Nevertheless it seems strange that KordaMentha should value Turners & Growers in the $1.75 to $2.10 range when the DCF valuation is between $2.04 and $2.29 and KordaMentha, then called Ferrier Hodgson, wrote in its Independent Adviser's Report on Enza in 2002 that "the preferred method of valuation is the discounted cash flow (DCF) method".

The 2002 report was written in response to Turner & Growers' bid for Enza, which was successful.

As far as the BayWa offer is concerned the orderly realisation of assets approach is not appropriate because Turners & Growers is an ongoing concern so we are left with the ebitda multiple, or capitalisation of earnings, method.

KordaMentha values Turners & Growers between $1.65 and $1.84 a share based on an ebitda multiple of between 6.5x and 7.0x. This compares with an ebitda multiple of 7.7x when Direct Capital purchased a 79.7 per cent stake in Scales Corporation from South Canterbury Finance a few months ago.

Scales is a South Island fruit marketer which can also trace its origins back to 1897.

A 7.7x ebidta multiple would value Turners & Growers at $2.10 compared with the $1.85 offer price.

Scales announced on Thursday that it had acquired 5.95 per cent of Turners & Growers at $1.90 a share and had entered into an option to acquire a further 4.03 per cent.

These transactions are an embarrassment to the independent directors who recommended that shareholders should accept the $1.85 a share offer from BayWa. They will be embarrassed because a takeover offer should only by recommended by target company directors when the offer price fully reflects the value of a company and includes a premium for control.

If Scales is prepared to pay $1.90 a share for a minority stake, which doesn't contain a premium for control, then there is a strong argument that $1.85 a share is too low particularly as BayWa should make a far better fist of running Turners & Growers than GPG.

There are a number of other aspects to the offer that have annoyed Turners & Growers shareholders:

* The company refuses to disclose its financial projections because they are commercially sensitive and confidential. This is consistent with the company's poor investor relations which has depressed its share price in recent years

* The KordaMentha report reveals that there could be a significant write down in the value of the company's assets, in the range of $20 million to $30 million. One Australian shareholder has complained to the FMA that this should have been disclosed to the NZX under the continuous disclosure rules

* Chief executive Jeff Wesley wants to convert his options into ordinary shares and accept the offer in respect of these ordinary shares even though the conditions of his options do not allow him to do so unless BayWa reaches 90 per cent

* The independent directors recommend acceptance because the $1.85 offer price represents a premium of 22.3 per cent over VWAP (the volume weighted average price) of Turners & Growers share price. However this $1.51 a share VWAP refers to a one-month period before February 11, when GPG announced it was going to undertake an orderly realisation of its portfolio, rather than the one month before the BayWa offer was announced.

Turners & Growers shareholders have to decide whether to accept the $1.85 a share offer. They can be reasonably sure that BayWa will not reach 90 per cent because of the presence of Noboa and Scales on the company's share registry. In addition BayWa couldn't possibly be worse at running the company than GPG.

Meanwhile George Kerr is slowly but surely creeping towards 50 per cent of Pyne Gould Corporation, which is the minimum shareholding required under the Takeovers Code. This week he announced the offer would be extended from January 6 to January 31 and he had acceptances for 47.1 per cent of the company.

Kerr should achieve 50 per cent but he will not reach 90 per cent, be able to move to compulsory acquisition and delist Pyne Gould. In this regard the Pyne Gould offer should have a similar outcome to the Turners & Growers' bid.

However, the big difference between the two is that Turners & Growers will get a new controlling shareholder with specific industry expertise whereas Kerr has been calling the shots at Pyne Gould for a number of years.

*Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management. bgaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular 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 Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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