Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Low-ball offers frustrating - even if legal

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Highly discounted share deals meet disclosure requirements but leave a distasteful impression.

Brian Henry, now linked with Arria, resigned as a director and CEO of Diligent the day after its listing. The Financial Markets Authority has filed civil proceedings against him.
Brian Henry, now linked with Arria, resigned as a director and CEO of Diligent the day after its listing. The Financial Markets Authority has filed civil proceedings against him.

Low-ball offers are a particularly frustrating feature of the NZX.

There have already been two this year, one for GuocoLeisure, formerly known as Brierley Investments, and the other for Allied Farmers.

Bernard Whimp was in the spotlight three years ago when the High Court ordered him to return shares that were acquired through these "low-ball" offers.

Many of Whimp's offers were made to elderly investors at well below the market prices and the High Court handed down orders preventing him from making any more of these low-priced offers.

This year's offers have been made by Zero Commission, a Waiheke Island-based company jointly owned by Roy Jackson and Philip Briggs.

The GuocoLeisure offer is at 71c a share, a 10.1 per cent discount to the 79c share price at the time of the offer.

Zero argues that it charges no commission whereas brokers will charge a brokerage fee of between $30 and $100.

Thus Zero will pay $355 for 500 GuocoLeisure shares compared with $395 at a price of 79c a share. Zero believes that $355 is better than $395 because commission fees will substantially reduce the latter figure even though Direct Broking, which is owned by ANZ Bank, charges a minimum of $29.90 per trade up to $15,000 in value.

The Allied Farmers offer is at 4.1c a share, a 16.3 per cent discount to the 4.9c-a-share market price.

Zero's offers are subject to the Securities Market (Unsolicited Offers) Regulations 2012.

Under these regulations an offeror has strict disclosure requirements and shareholders have the right to cancel any acceptance of the offer up to 10 working days after the date of acceptance of the offer.

Shareholders accepting Zero's offer can expect to be unsecured creditors of Zero during the period between when their shares are transferred to Zero and they receive full payment.

With this in mind, it is important to note that Zero appears to be a $100 capital company with Jackson and Briggs contributing just $50 each.

Zero's offers are legal because they meet the disclosure requirements of the Securities Market (Unsolicited Offers) Regulations but, in my opinion, it is sad to see Jackson and Briggs trying to make a few dollars from deeply discounted offers to shareholders in poorly performing companies.

Jackson was a member of the NZX and a principal of stockbrokers Morrow & Benjamin, which was extremely high profile and profitable during the 1980s sharemarket boom.

Briggs founded NZ Investor Monthly and was one of the original directors of Direct Broking, the low-fee broker.

It is a shame, in my view, that these highly successful businessmen cannot find a more meaningful way to use their extensive sharemarket experience.

Brian Henry and Gerard Henry, two individuals who also have a long association with the NZX, are back in the news again with the listing of Arria NLG on AIM, a market operated by the London Stock Exchange.

The brothers were associated with Energycorp, one of the more controversial and spectacular boom and busts of the 1980s.

The February 1987 Energycorp prospectus revealed that Gerard Henry, who was a major driving force behind the company, had been involved in six failed companies in the early 1980s.

Energycorp soared, crashed and burned in less than a year under a mountain of debt.

The Henry brothers appeared on the scene again in 2007 when Diligent Board Member Services listed on the NZX following an IPO at $1 a share.

The shares listed on December 12, 2007, and closed that day at 90c.

The following day Brian Henry offered his resignation as a director and CEO of Diligent with the company announcing "that, with the benefit of hindsight, he [Henry] regrets not having disclosed his relationship with Energycorp, and its receivership in the 1980s, which resulted in his subsequent bankruptcy".

Diligent's share price was adversely affected by this news, particularly as Henry didn't fully resign as a director until December 2008, and its share price plunged to a low of just 7c.

Henry sold 9.1 million of his 16.5 million Diligent shares in 2008.

Brian Henry was back in the news last year with the announcement that the Financial Markets Authority had filed civil proceedings against him "alleging market manipulation of shares in the NZX-listed Diligent Board Member Services".

According to the FMA "the proceedings contain six claims alleging certain orders and trades made by Mr Henry in 2010 breached the market manipulation provisions of the Securities Markets Act".

The High Court has allocated two weeks, starting on September 15 this year, for the FMA to present its market manipulation case against Henry.

There were numerous media reports last year that Arria NLG, the Henry brothers' latest company, would list on the NZX in 2013.

Arria is a software development business. The company's target "is to be the global leader in the development and deployment of mission critical, core industrial, enterprise level generation software technologies".

Company representatives visited New Zealand a number of times to assess investor interest but they received a lukewarm response because of the extremely complex nature of Arria's activities. However in December Arria announced that it was listing on AIM, which is the London Stock Exchange's international market for small growth companies.

According to the company's press release "Arria has raised US$40 million in private fundraising since inception, with the last round taking place at US$1.60 (approximately 1) a share to raise 9.85 million. Approximately 6.1 million of the recent private round was conditional on a listing, but otherwise the company has not sought to raise funds as part of this flotation."

Arria's largest shareholders are Gerard Henry with 6.5 per cent and Brian Henry with 6.2 per cent. However neither of them is listedas having any ongoing company role, either at board or managementlevel.

Arria has an unusual capital structure as well as a complicated business model. The company has ordinary shares, B ordinary shares, A preference shares, B preference shares and warrants. Potential investors need a great deal of concentration to trawl through the 134-page listing document to fully understand the company's capital structure and pre-listing capital contributions.

Arria listed on AIM on December 5 and closed that day at 1.625 a share on turnover of 221,280 shares.

The following day it closed at 2.825 after 306,681 shares were traded at an average price of 2.91 each.

Since then Arria's share price has fallen steadily and finished January at 1.15. Share trading volume also dropped off sharply towards the end of last month.

On January 23 the company released its result for the 12 months ended September 30, 2013.

It showed that the company had a net loss of 12.4 million for the year on revenue of just 0.82 million. Total revenue for the second half of the year was 0.61 million.

Thus Arria had a sharemarket value at the end of January of 117.6 million and annualised revenue of 1.2 million, based on second-half September 2013 revenue of 0.61 million. This gives the company a market value to revenue ratio of 98 times.

On the same day Xero had a sharemarket value of $5292 million and annualised revenue of $72.1 million giving it a market value to revenue ratio of 73 times.

There is plenty of argument over whether Xero is overvalued, fairly valued or undervalued but there is no disagreement that New Zealand investors are far better off to have Xero listed on the NZX rather than Arria.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management, which holds Xero shares on behalf of clients.

- 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.

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