By BRIAN GAYNOR
St Lukes Group will very possibly become fully controlled by Westfield Trust after its general meeting on Tuesday week.
This will end New Zealand ownership of the country's premier shopping mall company.
The history of St Lukes has been characterised by strong earnings growth and controversial ownership-related transactions.
Its story also includes human tragedy, Fay, Richwhite, a dawn raid, fat management fees, a partial offer and the latest unconventional takeover offer.
The group's short Stock Exchange listing is an excellent illustration why so many New Zealanders are reluctant to invest in their own sharemarket.
St Lukes was registered as a public company on October 21, 1993, and immediately acquired nine shopping malls from Fletcher Challenge for $446.5 million. Four weeks later, it issued a prospectus to raise $346 million to partly finance the acquisitions.
Investors were offered two convertible notes at 100c each for every one ordinary share issued at 110c.
John Hood, an executive officer of Fletcher Challenge and now vice-chancellor of the University of Auckland, was the original chairman. Graeme Bringans, a high-profile 1980s property developer and post-crash Fletcher Challenge executive, was appointed managing director.
Tragedy struck on February 5, 1994, when Mr Bringans died suddenly while playing tennis in Wellington. He was replaced by Paul Preston, from accountancy firm Price Waterhouse.
The first serious bid came two months later when a company associated with Sir Michael Fay and David Richwhite offered to buy 100 million convertible notes, representing 29.9 per cent of St Lukes, for 115c a note.
In a typical Fay, Richwhite tax-driven deal, the noteholders were offered another security, which would convert into St Lukes ordinary shares but Fay, Richwhite would receive all the interest paid on the notes until the conversion date. The offer did not reach the minimum threshold and all acceptances were returned.
Bankers Trust Australia (BT) acquired 8.25 per cent in the 1993 float and immediately began increasing its holding. By July 1995, BT owned 26 per cent and on August 8 entered the sharemarket, seeking to raise its shareholding above 50 per cent.
The offer, called a dawn raid, was 130c an ordinary share (compared with the previous closing price of 117c) and 115c a convertible note (101c).
Institutions rushed to accept the bid and 24 hours later BT's ownership had increased to 50.4 per cent. Subsequent records show that many of the institutions that accepted the BT offer rebought St Lukes shares and notes at lower prices.
In none of the world's successful sharemarkets can a bidder obtain a controlling interest through the market without making an offer to all shareholders.
One month later, Mr Hood resigned and Bill Falconer replaced him as chairman. BT continued to buy shares and by the end of 1996 its shareholding had increased to 54.2 per cent and five of the seven directors were either BT people or BT nominees.
Tragedy struck again in February 1997 when Mr Preston announced he would resign on April 30 because of an illness that proved fatal.
On April 10, Mr Falconer told the Stock Exchange that Sydney-based Westfield Holdings had been appointed to manage and develop the group's shopping centre portfolio. The contract, initiated by BT, was effected the day after Mr Preston's resignation.
Westfield negotiated a fee structure:
Management fee - 5 per cent of gross revenues.
Development fee - 3 per cent of project cost.
Design fee - 10 per cent of project cost.
Leasing fee - 10 per cent of first year rent.
Construction margin - market rate.
The contract has been extremely lucrative for Westfield. In the year ended June 30, 1999, St Lukes paid the Australian company $14.5 million.
Shareholder approval of the contract was not required, even though BT owned 16 per cent of Westfield Holdings and the managing director of BT was on the Westfield board. (Certain aspects of the development/leasing arrangement were confirmed at a St Lukes shareholder meeting in June 1999.)
BT sponsored the deal. St Lukes' share price responded positively to the news.
BT continued to buy St Lukes securities but in mid-1998 reversed this trend and began selling.
On October 22, 1998, BT told the Stock Exchange it had received an offer to sell a 46.6 per cent interest in St Lukes to Westfield Trust. The Sydney-based trust paid 165c for each ordinary share and note compared with market prices of 169c and 161c respectively.
Both securities had risen more than 20 per cent, on heavy turnover, in the three weeks before the announcement.
On most successful sharemarkets, with the notable exception of the United States, the acquirer has to make an offer to all shareholders when it buys a controlling shareholding from one party.
On May 31, 2000, Mr Falconer told the Stock Exchange that St Lukes proposed to merge with Westfield Trust, which now owns 46.4 per cent of the company.
A merger, as opposed to a takeover, is far less satisfactory to non-controlling shareholders for several reasons. These include:
The threshold for compulsory acquisition is 75 per cent compared with 90 per cent in a takeover. As Westfield Trust holds 46.4 per cent and cannot vote at the August 8 meeting, it has to acquire 75 per cent approval of minority shareholders instead of 81.3 per cent of minorities in a conventional takeover.
Far less information is required in a merger and there is no obligation to commission an independent report. Directors may requisition a report but it can be relatively unsubstantial.
St Lukes shareholders have a difficult decision ahead of them. Several conflicting factors will influence their course of action. These include:
The offer is well above recent sharemarket prices but below July 1999 levels. Yet St Lukes' 2000 interim profit surged 32 per cent and its net asset backing rose by more than 5 per cent in the June 2000 year, according to PricewaterhouseCoopers.
St Lukes has one of the best earnings records of any listed company, yet minority shareholders have felt battered and bruised by the dawn raid in 1995, Westfield's management contract, the partial bid by Westfield Trust in 1998 and the latest unconventional offer.
The independent directors recommended acceptance of the merger before PricewaterhouseCoopers' flimsy independent report was completed.
But the Achilles' heel of the transaction could be the convertible noteholders, who must approve the merger at a separate meeting.
According to the trust deed, the notes can be converted into ordinary shares within 21 days of a takeover offer or a similar proposal.
The accrued interest on the notes is paid on conversion and the holder can then accept the offer for their newly issued ordinary shares.
At the end of last month St Lukes notes had accrued interest of 3.5c. Thus, if noteholders converted into ordinary shares they would be entitled to 173.5c instead of the 170c proposed by Westfield Trust.
The provision to convert does not apply if an independent expert provides an opinion that the offer to convertible noteholders is at least as favourable to holders as if the convertible notes had been converted to ordinary shares and those shares had been subject to the takeover offer (or merger).
St Lukes claims that the report from PricewaterhouseCoopers provides this opinion but there is some doubt that it does.
If convertible noteholders decide that St Lukes' unwillingness to honour the conversion provision and the general attitude of the controlling shareholders towards minorities over the past five years are sufficient reasons to vote against the merger, then the outcome of the August 8 meeting is not a foregone conclusion.
* Disclosure of interest: Brian Gaynor is a St Lukes ordinary and convertible noteholder.
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