Brian Gaynor: Takeover fever hits the sharemarket

Insurer Tower says the aftermath of the Christchurch quakes is still 'a complex and difficult situation'. Photo / Christchurch Star

Tower and TeamTalk latest in bout of acquisition fever.

The NZX has been hit by a serious bout of takeover fever, with bids for Tower and TeamTalk this week. This follows full or partial offers for Abano Healthcare, Airwork Holdings, Antipodes Gold and Hellaby Holdings in recent months and the strong possibility that Tenon will delist after the sale of its main business.

The clear message from these bids is that many of our listed companies are undervalued as far as predators are concerned, even though many commentators argue that share valuations are too high and the market is overvalued.

On Thursday morning, Tower issued a trading halt that was quickly followed by trading update revealing an offer from Toronto based Fairfax Financial Holdings at $1.17 a share. The offer is under a scheme of arrangement, whereby shareholders will be asked to approve the transaction by a 75 per cent majority at a special meeting in April.

The trading announcement stated that "Tower's results for the three months ending 31 December 2016 remain in line with the company's update on 29 November 2016" but "Canterbury continues to present a complex and difficult situation for all insurers, claim costs continue to develop caused by additional 'overcap' claims being received from EQC and growth in the level of litigation and customer disputes".

Fairfax, which is a holding company with activities in property, casualty insurance, reinsurance and investment management, has a Toronto sharemarket value of C$14.3 billion ($15.2b). Tower will almost certainly disappear from the NZX because the offer is unanimously supported by directors and the 18.1 per acceptance level in the accompanying table represents the agreement by Salt Funds Management and ACC to vote in favour of the Fairfax proposal.

There is also a strong probability that a scheme of arrangement, which requires a 75 per cent majority at a special meeting, has a greater chance of being successful than a takeover offer, which requires 90 per cent acceptances to move to compulsory acquisition.

Tower, formerly known as the Government Life Insurance Corporation, was established in 1869 as a government department selling life insurance policies and pensions. The company was demutualised in 1999 and was listed on the NZX later that year after distributing shares to members and issuing shares to the public at $5.65 each. This gave Tower a sharemarket value of $920 million at the IPO price.

Tower was a highly controversial company post listing, partly because of its disappointing performance, a number of contentious issues when Sir Ron Brierley's GPG had an effective 35 per cent controlling stake and the impact of the Christchurch earthquake in recent years.

Shareholders have been hugely disappointed with the company's performance as reflected in total shareholder numbers, which have fallen from 142,532 post-listing to 59,546 in November 2007 and only 28,432 at the end of last year.

Although Tower has had a number of spinoffs and capital repayments, a takeover value of just $197m is hugely disappointing compared with the IPO value of $920m.

It has a number of similarities with Bank of New Zealand, another former Crown owned entity established eight years before Tower in 1861. BNZ was also sold to foreign interests well below its IPO price. Sir Ron Brierley also had some involvement as he was chairman of BNZ when it listed in 1987 and Brierley Investments made an unsuccessful attempt to purchase the Crown's controlling interest a few years later.

Earlier this week Spark NZ announced its intention to make a conventional takeover offer for 100 per cent of TeamTalk at 80c a share.

TeamTalk was established by David Ware in 1994 with funding from a US venture capital company. The Wellington based company launched its mobile radio service from sites in Auckland and Wellington later that year.

A few years later, Active Equities, which was controlled by former Brierley Investments executives Sir Paul Collins and Dame Patsy Reddy, acquired a 50 per cent stake after the US venture company experienced financial difficulties.

In May 2001, TeamTalk purchased Spark's mobile radio businesses and, in return, Spark acquired a 19.9 per stake in TeamTalk.

The mobile radio company listed on the NZX in May 2004 following the issue of shares to the public at $1.75 each. Spark had sold out at that stage but Active Equities still had a 50.8 per cent stake.

TeamTalk's share price hit reached an all time high of $3.20 in early 2013 but it has been all downhill since then. The company's investment in Farmside, a business providing broadband to the rural sector via satellite, has not performed well and TeamTalk has also been affected by increased competition and lower margins.

Active Equities disposed of its remaining shares in 2011, David Ware resigned as managing director in April last year and the company's share price hit an all-time low of 38c late last year.

In contrast to Tower, Spark's offer has been strongly rejected by TeamTalk's directors. This indicates that Spark will probably have to raise its offer if the bid is to be successful.

Antipodes Gold's bid for Chatham Rock Phosphate is essentially a mopping up exercise by two companies that Chris Castle, a former Brierley Investments executive, has a strong influence over. These two listed companies are extremely small and Antipodes Gold will have a theoretical value of less than $0.5m after the scrip offer is completed.

Many of our listed companies are undervalued as far as predators are concerned.

On November 4, Peter and Anya Hudson and James Reeves announced their intention to make a partial takeover offer that would raise their Abano Healthcare shareholding to 50.01 per cent. As the Hudson/Reeves partnership current owns 19.02 per cent of Abano, its offer is for 30.99 per cent of the listed entity at $10 a share.

The Hudsons and Reeves claim that the $10 a share offer is attractive but it is important to note that their bid is for only 30.99 per cent of Abano: it is not for the outstanding 80.98 per cent they did not own at the time of the offer.

Abano's directors have aggressively opposed the offer and the Hudson/Reeves partnership has gained almost no traction as their shareholding has increased from 19.02 per cent to only 20.04 per cent. The offer's closing date has been extended from February 13 to March 3.

The partial offer to acquire 75 per cent of Airwork Holdings by Zhejiang Rifa has been successful, with the offeror now sitting on 88.0 per cent. In accordance with rule 28 of the Takeovers Code, the offer has been extended to March 5 to allow all shareholders to accept. After the closing date, acceptances will be scaled back to 75 per cent.

Bapcor has issued a compulsory acquisition notice after reaching over 90 per cent of Hellaby Holdings but the target company has been a story of lost opportunities in recent years.

In 2011, Hellaby was presented with the opportunity to look at purchasing GPG's remaining 19.4 per cent stake in Turners Auctions. Although it seemed to be consistent with Hellaby's stated desire to have a stronger position in the automotive sector, the company's management team declined the proposition.

GPG subsequently sold its 19.4 per cent holding for $6.1m or $1.15 a share.

Three years later, Dorchester Pacific made an offer for Turners Auctions with a $3.00 cash or scrip option. Dorchester Pacific changed its name to Turners and the original 19.4 per cent GPG stake, which realised $6.1m in 2011, is now worth nearly $25m.

Meanwhile, Hellaby purchased Contract Resources, a specialist oil and gas services business, at the top of the energy cycle and the Perth based company has underperformed since the acquisition.

New Zealand shareholders, as demonstrated by most of these takeover offers, have paid a high price for some poor decisions at our board and management levels.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management which holds shares in Tower, Abano Healthcare and Turners on behalf of clients.