Brian Gaynor: Takeover manoeuvres near crossroads

With only a short time to go, it is difficult to tell whether AMP will obtain 50 per cent of Capital Properties or Graeme Hart will reach 90 per cent of Carter Holt Harvey and move to compulsory acquisition.

AMP, which has adopted an aggressive media and direct mailing campaign towards Capital Properties' shareholders, is making particularly slow progress.

It has 43.8 per cent of the target company after starting with 15.6 per cent and acquiring Kiwi Income Property Trust's 19.2 per cent. Kiwi accepted in respect of its shareholding after AMP raised the offer from $1.42 to $1.48 a share (the 19.2 per cent will have to be returned to Kiwi if AMP doesn't receive acceptances of more than 50 per cent of the target company).

Thus, excluding the Kiwi stake, AMP has received acceptances of only 9 per cent of Capital Properties and the offer closes next Wednesday. It cannot be extended unless AMP reaches 50 per cent.

The target company's independent directors continue to recommend that shareholders do not accept and they are not accepting in respect of their own holdings.

AMP has gone on the front foot and highlighted eight main reasons why Capital Properties' shareholders should accept.

One of its main points is that the target company's share price "could fall significantly if the offer lapses".

Baycorp Advantage, Restaurant Brands and Oyster Bay Marlborough Vineyards experienced share price falls after offers for them either ended or did not proceed.

But there have been several situations where share prices have risen after the bidder failed to reach its target. These include:

* In 2001, Edison Mission, which owned 51.2 per cent of Contact Energy, made an offer for the Wellington-based company at $4.14 a share (ex an 11c dividend). Grant Samuel valued the target company between $4.11 and $4.51, and Cameron & Co between $4.22 and $4.66. The independent directors recommended acceptance and gave the prospects of a share price fall if the offer lapsed as one of the main reasons. The offer lapsed on February 3, 2002, and the share price hit a low of $3.70 the next day. Contact Energy has been one of the best performing large capitalisation stocks in recent years.

* In mid-2003, Toll Holdings raised its offer for Tranz Rail from 95c to $1.10 a share and directors recommended acceptance. Tranz Rail's share price (it is now called Toll NZ) has traded well above the offer price since Toll Holdings reached 83.5 per cent and closed the offer.

* Late last year, Vector made an offer for NGC at $2.91 a share. Grant Samuel valued the company between $2.50 and $2.76 a share and said the bid was fair. NGC's independent directors recommended that shareholders accept the offer, but Vector fell short of its objective and came back with a $3.40 a share offer six months later.

Capital Properties' share price is expected to fall if the bid lapses, but this prediction is given too much emphasis by independent advisers and bidders.

The share price of poorly performing companies can fall materially after a bid lapses - Baycorp Advantage, Restaurant Brands and Oyster Bay are good examples of this - but the share price of a well-positioned and well-run company is usually more resilient. Capital Properties should fit into the latter category.

Hart's bid for CHH has made more progress, a development that is predictable but shortsighted.

CHH is an institutional stock and institutions are quicker to accept offers because they are more concerned about their short-term investment performance.

Shareholders with 50,000 or fewer shares own only 6.3 per cent of CHH, whereas this group owns 39.7 per cent of Capital Properties. As individuals who hold fewer than 50,000 shares are more reluctant to sell, particularly when the independent directors advise them to reject the offer, AMP will struggle to reach its 50 per cent minimum target, whereas Hart will find it easier reach 90 per cent of CHH.

This week's Fletcher Building annual meeting gave a clear reason why shareholders should reject Hart's offer.

In early 2001, Fletcher Building was considered to be a dog by most institutional investors and they supported a trade sale of the company as part of the Fletcher Challenge separation.

In May 2001, Ralph Waters was appointed chief executive and Fletcher Building has been a market star under his leadership. Waters told the annual meeting that the company's sharemarket value had risen from just $700 million in early 2001 to $3.6 billion this week.

Institutional investors are accepting Hart's offer, even though he has one of the best turnaround and value-creating records in Australasia. He is the closest we have to Waters, yet large investors prefer to take their money and run.

CHH's share price should remain resilient if Hart obtains more than 80 per cent but falls short of the 90 per cent compulsory acquisition threshold. A decline in the value of the dollar would have a positive impact on the forestry group.

The loss of CHH, which is valued at $3.3 billion at the $2.50 a share offer price, would be a big blow to the NZX.

The NZX is already one of the world's smallest markets in absolute and relative terms. A number of European stock exchanges have merged but, of the 20 OECD countries that still have their own exchanges, the NZX is the second-smallest in absolute terms (behind the Budapest Stock Exchange) and the fourth-smallest on a market value to gross domestic product (GDP) basis.

At the end of September, the NZX ranked ahead of only the Istanbul, Budapest and Warsaw exchanges in market value to GDP.

The formal takeover offer for Metlifecare at $3.90 a share was made on November 4, and Cliff Cook and the Todd family immediately accepted in respect of their shareholdings. This gave the bidder 59.45 per cent of Metlifecare and it declared the offer unconditional.

It will be interesting to see if associates of the bidder replace the two Todd board representatives who resigned yesterday. This would give the offeror control of the target company at an early stage of the bid process and replicate the controversial developments at CHH when Hart took effective control of the board one week into the bid process.

At this stage, Metlifecare's independent directors have advised shareholders to take no action until the independent adviser's report is available next week.

Finally, Peter Yealands has shown great determination in challenging Delegat's successful offer for Oyster Bay Marlborough Vineyards. He has also announced he will make an offer for 50.01 per cent of the grape grower at $4.50 a share.

The Takeovers Panel application to the High Court to allow shareholders who accepted Delegat's $4 a share offer the opportunity to revoke their acceptances has been adjourned until November 28.

The outcome will determine whether Yealands has any chance of either proceeding with, or having any chance of being successful with, his new $4.50 a share offer.

* Disclosure of interest: Brian Gaynor is a Carter Holt Harvey shareholder and an executive director of Milford Asset Management.