COMMENT
Another week and two more listed companies are destined for foreign control. If we include the last day of the previous week, then three companies have succumbed to foreign buyers in the past six working days.
* On Friday, August 6, Pacific Retail shareholders voted in favour of the sale of Noel Leeming and Bond & Bond to Retail Investments Group, a Sydney-based fund, for not less than $138.5 million.
* On Monday, the New Plymouth District Council, Taranaki Electricity Trust and Powerco Wanganui Trust announced the sale of their combined 53.6 per cent stake in Powerco to Prime Infrastructure, a Brisbane-based fund, for $365 million.
* The next day, Dominion Breweries' independent directors recommended shareholders accept the takeover offer from Asia Pacific Breweries.
As far as foreign sales and the independent advice on these transactions are concerned we don't have a good track record. We either sell at a low price or to the wrong party.
Fourteen years ago, Telecom was sold to a United States consortium for just $1.81 a share and sold back to us at nearly $9 a share.
Brierley Investments, Qantas, Japan Airlines and American Airlines bought Air New Zealand. The three international airlines sold out for a healthy profit and Brierley, which was hopelessly inexperienced, made a terrible mess of our national carrier.
Another US-led consortium bought Tranz Rail at an effective cost of less than 50c a share, issued new shares to the New Zealand public at $6.19 each and sold all of their own shares for $3.50 plus. When Toll Holdings made an offer for Tranz Rail at $1.10 a share, Grant Samuel advised shareholders to accept, yet the share price is now well in excess of $2.
American interests took control of UnitedNetworks and sold its assets back to us for a huge profit.
Have we learned from these mistakes? Will the latest sales be more advantageous to us?
Pacific Retail's retail operations are being sold on an estimated historical enterprise ebitda (earnings before interest, tax, depreciation and amortisation) multiple of 5.4. This is a low price but it was approved because Eric Watson owns 76.9 per cent of Pacific Retail and he strongly supported the deal.
In 2000, the Singapore-based Asia Pacific Breweries made a takeover offer for Dominion Breweries at $2.80 a share. PricewaterhouseCoopers determined that the fair market value of DB shares was between $3.19 and $3.61 and the offer was not fair.
Although directors recommended that shareholders reject the offer, Asia Pacific received a large number of acceptances and increased its shareholding from 58.4 per cent to 76.6 per cent.
According to PricewaterhouseCoopers, listed international brewers trade in the range of 10.8 to 13.8 times prospective ebitda multiples, including a 20 per cent control premium. But it valued DB on a 5.5 to 6 multiple because the New Zealand company was small, was in a competitive market and didn't have an international brand.
These assessed discounts are extremely frustrating for investors as IPOs are usually priced on a comparative international basis but, when companies are subject to a takeover offer, we are told they are worth much less than their international peers.
PricewaterhouseCoopers determined that international wine companies had a prospective ebitda multiple between 9.6 and 12 times, including a 20 per cent control premium, but applied an 8 to 9 multiple to Corbans. A few months later, DB sold Corbans for $151 million compared with PricewaterhouseCoopers' mid-point valuation of $138.5 million.
Later that year, DB distributed the proceeds from the Corbans sale to shareholders through a one-for-two capital repayment at $3 a cancelled share.
On July 24, Asia Pacific Breweries made another offer for DB at $9.50 a share.
This time, PricewaterhouseCoopers has valued DB between $8.81 and $9.87 a share based on a prospective ebitda multiple between 9 and 10 compared with prospective international multiples between 8.5 and 13.7.
How has the ebitda multiple on DB's brewing operations risen from 5.5/6 range to the 9/10 range during the past four years when international multiples have fallen? Is this a case of the valuation following the offer price instead of being determined on a totally independent basis?
The Asia Pacific offer will be successful because DB's directors have recommended acceptance and the bidder is close to the 90 per cent compulsory acquisition target.
Prime Infrastructure will acquire 53.6 per cent of Powerco at $2.15 a share and make an offer to remaining shareholders at the same price. Prime claims that its purchase price represents an ebitda multiple of 10, although it looks to be much closer to 9 based on Powerco's March 2004 year annual report. This compares with an historic multiple of between 8.2 and 8.9 used by Grant Samuel when assessing Vector's offer for UnitedNetworks.
PRIME claims that it is paying 1.8 times ODV (optimised deprival valuation of electricity line businesses) compared with 2.1 times and 1.9 times paid by Vector and Powerco respectively when they bought UnitedNetworks electricity line assets.
But the Powerco offer is a combination of 62.5 per cent cash and 37.5 per cent vendor debt. These debt securities, which are called SPARCS, are unsecured, subordinate and have no fixed redemption or conversion date. They make our existing junk bonds look like prime securities but have an indicative interest rate of only 8.5 per cent per annum. This is far too low for an extremely high-risk security.
Prime Infrastructure was listed on the Australian Stock Exchange in June 2002 after the issue of 284.5 million stapled securities. Prime is a complex organisation with a separate management company and an extremely high fee structure. It will pay A$48 million ($52.17 million) in fees and financing costs in relation to the Powerco acquisition.
Prime's major investment is an operating lease over the Dalrymple Bay coal terminal, a huge port facility that services the Bowen Basin coal-mining region in central Queensland. This represents 73 per cent of total assets before the Powerco acquisition.
Its other major investments are 50 per cent of Ecogen, a 960MW gas-fired power plant in Victoria, and 50 per cent of Redbank, a 145MW coal tailing fired power plant in New South Wales.
Prime's two potential problems are its dispute with mining companies over the coal terminal's user fees and its highly leveraged balance sheet. The fee dispute has gone to arbitration and the Queensland Competition Authority is due to make an initial determination in the next few weeks.
If the decision goes against Prime, it could have a big impact on the group's financial position, particularly as it will have only A$594 million of shareholder funds, compared with A$2.79 billion of total assets after the Powerco acquisition.
Will Prime be able to maintain its New Zealand electricity and gas network in top-rate working order if it comes under financial pressure in Australia? Should local politicians in Taranaki be concerned about capital reinvestment in the region's electricity network as well as the price they receive for their assets?
Why is the New Plymouth Mayor willing to accept 37.5 per cent of the consideration in the form of perpetual junk bonds when he wants to build a diversified investment portfolio?
The New Plymouth District Council is not an investment company or an infrastructure fund. It has obligations that go far beyond realising the highest price for an asset sale. One of these is to ensure that the region has a secure electricity supply.
The Crown sold Air New Zealand and Tranz Rail to consortiums that had more expertise in financial engineering than operational management. Hopefully, local politicians in Taranaki have not made the same mistake.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
* Email Brian Gaynor
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