KEY POINTS:
The takeover offer for Open Country Cheese has the ingredients of a fascinating and controversial story, including:
* National Party leader John Key pitching against former National Government ministers Wyatt Creech and John Luxton.
* Private equity manager Geoff Taylor criticised for his failure to deliver in NZX-listed
Dairy Equity.
* The secretive Talley family with its large fishing interests, control of meat processor Affco and latest attempt to grab a slice of the dairy sector.
* The botched takeover strategy of the Affco/Dairy Trust/Dairy Investment Fund consortium
* A strong indication that Open Country directors jumped the queue and sold shares into a high-priced partial bid by a Singapore company before telling shareholders that this offer was available.
If the latter is correct then we haven't made much progress since the dark days of the Kirin/Lion Nathan debacle in 1998.
This story begins on March 12 when Dairy Trust announced it would acquire three production sites from Affco and a fourth from the Invercargill City Council.
The new company plans to use these plants to process dairy products.
The purchase price for the three Affco sites would be $26 million, in the form of 26 million Dairy Trust shares at $1 each. In addition Dairy Trust would issue a further 15 million new shares to Affco for a cash payment of $1 each.
On March 27 Dairy Trust announced it had entered into a subscription agreement to conditionally issue additional shares to:
* Dairy Investment Fund, a private equity fund, which has a number of large shareholders, including Hugh Green, National Party leader John Key and Geoff Taylor (see accompanying table), 11.7 million shares at $1.34 each.
* Balle Bros Holding, the Balle family in Pukekohe, 2.9 million shares at $1.34 each.
* Waipahi Dairy Farms, owned by Grant Paterson of Dunedin, 2.9 million shares at $1.34 each.
After the issue of these shares, which have yet to be registered at the Companies Office, the shareholding of Dairy Trust will be: Affco 70 per cent, Dairy Investment Fund 20 per cent, Balle Bros 5 per cent and Waipahi Dairy Farms 5 per cent.
On May 7 Dairy Trust announced it would make a full offer for Open Country Cheese on the basis of 1.68 Dairy Trust shares for every one Open Country share. Dairy Trust said this valued Open Country shares at $2.25 each. The $2.25 valuation is based on the belief that the $1.34 a share paid for the 17.6 million shares to be acquired by the three new Dairy Trust shareholders is more appropriate than the $1 a share that Affco has to pay for its 15 million Dairy Trust shares.
Open Country shares had been trading at $2.25 on the unlisted trading facility immediately before the bid announcement.
Dairy Trust revealed that the Talley family, which owned 29.9 per cent of Open Country, would accept the offer as would Dairy Investment Fund, which has 9.6 per cent of Open Country, and Balle Bros, which owns 3 per cent.
So Dairy Trust had commitments for 42.5 per cent of Open Country but this excluded the stakes held by Hugh Green and two former National Government ministers, Wyatt Creech and John Luxton.
Creech and Luxton, who own 1 per cent and 3.9 per cent of Open Country respectively, were the driving force behind the Waharoa-based cheese company.
On June 8 Open Country revealed that Ferrier Hodgson, the independent adviser, had determined that the cheese company had a valuation range of $3.10 to $3.47 and Dairy Trust shares were worth $1.10 instead of the $1.34 that the bidder was claiming. So Ferrier Hodgson's mid-point valuation was $3.29 per Open Country share, compared with Dairy Trust's offer of $1.85, assuming the bidder's shares were worth $1.10.
Open Country's independent directors, chairman Duncan Milne, Bruce Clothier and Creech, recommended that "shareholders do not accept the offer".
On June 14, 3.6 million Open Country shares, representing 9.5 per cent of the company, were traded through Unlisted at between $3.10 and $3.20 a share.
The following day Creech sent a most unusual email to shareholders. He said chairman Duncan Milne was overseas and he had taken on the responsibility for updating shareholders.
The email gave the impression that Creech had been abandoned by his fellow independent directors as he used the word "I" 12 times and made no reference to Clothier. He said he understood from Macquarie, the purchasing broker, that Singapore-based Olan (the correct name is Olam) had purchased 19.9 per cent of Open Country at $3.20 a share.
His last two sentences were the most revealing: "Our legal advice is that there is no constraint on any shareholders, including directors, selling their shares in this circumstance. All will have to make their own personal decisions as to whether to sell at this price or hold."
Did any director sell to Olam and, if so, why didn't they give other shareholders the same opportunity by announcing Olam's intentions through Unlisted? What was the point of telling shareholders they could accept the Olam offer when its order had already been completed?
Why hasn't Open Country's chairman updated shareholders since the Creech email on June 15?
The end result is that Dairy Trust botched the takeover because its offer was too low. One of the prerequisites of a successful bid is to pitch it at a low price but at a level that gives shareholders some enticement to sell and is high enough to discourage other parties from counter-bidding. The offer did not meet this basic criteria and the Singapore company has been able to stifle Dairy Trust's ambitions.
A notable feature of the dairy sector is that the same individuals keep cropping up, particularly Geoff Taylor who is a director of Open Country and the newly formed Kaimai Cheese.
Taylor and Nigel Atherfold, a Dairy Trust director, jointly own GT & Co, which was one of the promoters of Dairy Equity's IPO. GT has a 50 per cent interest in Dairy Equity's management company and Taylor was its managing director.
Dairy Equity's management fee is 1 per cent of committed capital, effectively 2 per cent of paid up capital. As Dairy Equity has more than 80 per cent of its assets in cash, shareholders are effectively paying 2 per cent for cash management.
Taylor left Dairy Equity in March, with the company falling well short of its IPO aspirations, and GT is trying to sell its 50 per cent stake in the listed company's lucrative management contract.
GT also has the management contract for Dairy Investment Fund, which has played a key role in the Open Country bid.
Dairy Investment Fund owns 7.4 per cent of Kaimai Cheese, which is trading at $2.75 compared with the recent issue price of $1.50, but it doesn't seem to own any shares in the poorly performing Dairy Equity.
Taylor is a wheeler and dealer with so many balls in the air that it is often difficult to know what side he is on. He didn't deliver for the small-shareholder-dominated Dairy Equity but the well-heeled investors in Dairy Investment Fund, which include a potential future Prime Minister, have probably done better based on Kaimai Cheese's performance.
Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
bgaynor@milfordasset.com
