Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Abano fighting battle others should have fought

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Investors the big losers when companies roll over and accept low offers, but Abano's directors are not giving in

Boards need to be aggressive in defence of their companies and shareholders when overseas interests offer a price that doesn't reflect the value of the concerns. Photo . Thinkstock
Boards need to be aggressive in defence of their companies and shareholders when overseas interests offer a price that doesn't reflect the value of the concerns. Photo . Thinkstock

The attempted takeover of Abano Healthcare by Archer Capital, a Sydney-based private equity firm, could be a turning point for the NZX.

This is because it represents one of the rare occasions where a New Zealand board of directors has taken a strong stance against an opportunistic bid from an aggressive foreign bidder.

Unfortunately, most New Zealand boards toss in the towel without putting up much of a fight. As a consequence a large number of our leading companies are now in foreign hands, as demonstrated by the accompanying list of former NZX-listed companies controlled by overseas interests.

Future generations will be highly critical of our willingness to sell these companies at a substantial discount to their current value and the NZX would be more than twice the size it is today if these had remained listed and owned by New Zealanders.

With this in mind Trevor Janes and his fellow Abano directors deserve a large bouquet for their strong opposition to Archer Capital's opportunistic offer.

Archer's approach has been ineffective, indicating that they expected the Abano board to roll over and accept the first offer.

The first move is the most important step in a takeover offer and based on Archer's unconvincing arguments it will have to offer a substantial premium to Abano's current share price if it is to be successful.

This story begins on July 30 when Abano released its May 31 year profit figures to the NZX and revealed that it proposed to raise about $15 million of new capital.

A week later Abano told the NZX it had received, and rejected, an unsolicited, non-binding indicative and confidential proposal from a third party which involved the potential acquisition (by way of a scheme of arrangement) of 100 per cent of the shares in Abano.

Under a scheme of arrangement a potential acquirer can go to 100 per cent once it receives approval from 75 per cent of the votes at a special meeting of the target company whereas under a takeover offer the bidder has to reach 90 per cent before it can move to compulsory acquisition. The August 6 announcement went on to state that the interested party "sought an exclusive and confidential period of due diligence from Abano ... and included a requirement of unanimous Abano board approval".

This column strongly opposes requests for due diligence of listed companies as existing shareholders do not have access to the same information.

The Abano board said the indicative price, which was not disclosed, "substantially failed to reflect Abano's value or prospects" and it looked forward "to the successful completion of the announced capital raisings".

The day before the August 6 announcement 508,936 Abano shares, representing 3 per cent of the company, were traded through the market at an average price of $5.82 a share. This was an unusually high number of shares and the following day the company's share price surged more than 10 per cent to $6.60.

On August 28 Abano announced that it had raised $9.25 million through the placement of 1.55 million new shares at $5.95 each and would raise a further $9.25 million through a share purchase plan for all shareholders, also at $5.95 a share.

The following week two representatives of Archer Capital requested a meeting to discuss their offer. Archer took the traditional approach, their representatives rubbished Abano's recent performance. They emphasised the following points in a glossy presentation:

• Abano's share price has underperformed since it sold Bay Audiology, Abano's New Zealand audiology business, in 2010.

• The company's dividend payout ratio exceeded 100 per cent of earnings in the 2010 to 2012 financial years.

• Abano's debt levels have increased in recent years - without a corresponding rise in free cash flow - and its return on equity has declined.

• The NZX company now focuses on its dental business but ebitda (earnings before interest, tax, depreciation and amortisation) margins from this operation are lower than 1300 Smiles, which is listed on the ASX, and Dental Corporation, a privately owned Australian company.

Finally, Archer said that Craigs Investment Partners had valued the company between $5.76 and $6.72 a share, a ridiculously low price range.

This week Abano announced that Archer had adjusted its indicative offer price down from an undisclosed figure to a range of $6.97 to $7.14 a share. The downward adjustment took into account Abano's recent 13.7c dividend and capital raising.

This offer is conditional on due diligence.

In addition Archer has the support of Peter Hudson, who owns 15 per cent of Abano and has been an Abano director since 2008. Hudson is also a 50 per cent shareholder in Bay International, the company that runs Abano's Australian and Asian audiology business.

The announcement also revealed that Abano's 50 per cent holding in Bay International would be sold to Hudson for a nominal sum if Archer's offer was successful.

Once again the non-conflicted Abano directors rejected Archer's low-priced offer.

Mid-week the two Archer representatives phoned me and started their conversation by saying that Abano's shareholders had been misled and the company should allow Archer to do due diligence.

For the next 12 minutes they reiterated that Abano was a poorly run company that would perform much better under Archer's ownership. Their arguments were clearly based on the desire to buy Abano at a deep discount to its potential long-term value.

There is little doubt that if Archer is allowed to do due diligence then it will use this information to argue that Abano is not performing as well as perceived by shareholders and, as a result, they should accept the low priced proposal.

It is bizarre that Archer continues to insist that it needs to do due diligence when it seems to have a close relationship with Hudson, a long-time Abano employee and director. Hudson should have a deep understanding of Abano although there is no indication that he has revealed any price-sensitive information to Archer.

It can be argued that Archer has had to offer a particularly low price for Abano because it has agreed to sell 50 per cent of Bay International to Hudson for a nominal sum if its offer is successful.

Abano has pumped about $30 million of equity into Bay International, which is debt-free.

On Thursday Abano announced that Hudson had resigned as a director of the company, effective immediately.

This creates potential problems for Abano because Hudson runs Bay International and it will be difficult to monitor this investment without Hudson sitting at the board table.

The clear message to Archer is that it should front up and make a takeover offer or shut up. Archer's presentations and phone calls are tedious as they keep repeating that Abano is a poorly governed and managed company.

This is a self-serving argument that most Abano shareholders would totally disagree with.

This approach has often worked on New Zealand directors and we have paid a high price in falling for this strategy.

While many sharemarkets were achieving record highs this week, based on capital indices, we are still nearly 35 per cent below our 1987 all-time high, in capital index terms, because we have sold the companies that would have driven this index higher.

These represent huge lost opportunities for New Zealand investors, mainly because directors haven't taken the same hard-headed approach towards low-priced offers as the Abano Healthcare board.


Brian Gaynor is an executive director of Milford Asset Management which holds Abano shares on behalf of clients. Milford's KiwiSaver and PIE funds also participated in the recent Abano placement and are sub-underwriters of the current share purchase plan.

- 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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