KEY POINTS:
It's hard not to feel a little uneasy about the way vodka maker 42 Below has decoupled itself from its US distributor Panache.
The deal is so closely linked to international drinks giant Bacardi's $140 million takeover offer for the Kiwi vodka maker that one question looms large.
Are the principals of Panache, Shane McKillen and James Dale, who are also major shareholders in 42 Below, getting an offer from Bacardi better than the deal available to all other shareholders?
Now let's first be clear. 42 Below and Bacardi have got all their documents in order. Corporate adviser Grant Samuel has put its name to an independent analysis of the agreement and argues McKillen and Dale are not getting a better deal. The report also appears to have satisfied the Takeovers Panel, which would step in if it thought otherwise.
Moreover, in securing Bacardi as a buyer, 42 Below's founders Geoff Ross, Grant Baker and Steve Sinclair have achieved a remarkable feat - the creation of a $140 million suite of brands almost out of thin air.
Nevertheless, these factors should not rule out shareholders raising questions.
Under the terms of the Panache settlement 42 Below has agreed to pay US$9.76 million ($14.23 million), give up a 25 per cent stake in an internet venture, Clubland, and forgive a US$570,000 loan to the internet venture. After the transaction Panache will have a 50 per cent stake in Clubland. In addition, the 42 Below founders have agreed to pay Panache a further $1 million.
In return McKillen and Dale have agreed to give up distribution in the US and - most importantly - sell their strategic 6.9 per cent stake in 42 Below to Bacardi as part of the latter's takeover offer.
42 Below's chief vodka bloke Geoff Ross was upfront about the arrangement, telling the Business Herald the deal would "ensure" the Panache shares would be surrendered into the offer.
Ross said: "The value was derived from three components: the money from Bacardi, Clubland ... [on] which we forgave a loan and a top-up payment, from myself Grant and Steve, which meant that the overall value Panache [McKillen and Dale] required was achieved, and then together the overall transaction could be completed, because they would surrender their shares."
However, the mere fact that McKillen and Dale's shares were brought into negotiations and - more to the point - were part of the deal suggests Bacardi and the founders attached some value to McKillen and Dale selling.
Remember, McKillen and Dale's combined stake of 6.9 per cent is a long way along the road to the 10 per cent threshold at which they could block Bacardi from compulsorily acquiring the outstanding shares.
The Grant Samuel report also revealed McKillen had been increasing his shareholding in the face of the Bacardi offer and initiated court action to prevent 42 Below releasing any information on Panache to the UK company.
Under such pressure, could Bacardi be forgiven for thinking of ways to make the problem go away? While the dispute with Panache lingered it would not have been able to bring 42 Below's products under the umbrella of its existing distribution arrangements.
Certainly Ross, Baker and Sinclair were aware of the threat. How else to explain their decision to tip $1 million into the deal? If Bacardi failed to get to 90 per cent, it had the option to pull out of the takeover altogether. And even if this was an unlikely outcome, getting the deal done quickly would ensure they would get their hands on their cash sooner rather than later.
Grant Samuel also recognised this in its report. It said: "McKillen's 6.9 per cent shareholding will be very important to determining the success of the Bacardi offer."
Grant Samuel glosses over all these factors by saying the total value of the compensation was in line with the projected cash flows from the agreement. As a result, the deal satisfied the Takeovers Panel's test that compensation had to be based purely on the contract's intrinsic value.
That may be so. But valuation is far from a precise science.
Imagine, for example, if Grant Samuel valued the threat of McKillen and Dale not selling at 1 per cent of the compensation package - the equivalent of $160,000. In this case the gain is trifling and well within the noise of the valuation.
But what if McKillen and Dale's threats represented 5 per cent of the package - the equivalent of $800,000 or a premium of 1 per cent on the value of the business? At this level shareholders might start to feel a little antsy.
Such a fluctuation is not out of the bounds of imagination. Even Grant Samuel's value on the contract swings 3.5 per cent from the bottom end of the valuation range to the top.
And cash aside there is principle at stake. McKillen and Dale's decision to sell their 42 Below shares should not have entered the negotiations over the Panache contract. It is as simple as that.
NZOG Admission
New Zealand Oil & Gas's disclosure over the boardroom split at its soon-to-be-floated coal mining project Pike River has been poor.
Talk - sufficiently well sourced to justify publication - emerged on Wednesday that the independent directors had resigned. But the oil and gas explorer - which owns 61 per cent of Pike - took more than a day to come clean.
The delay on Pike also follows NZOG's delay notifying the market last month about its planned $40.5 million cash call. This newspaper took calls on the capital raising well ahead of the formal stock exchange announcement.
Meanwhile, NZOG has given little hint of the cause of the boardroom split, saying only that the directors had resigned for personal reasons.
This is a phrase that catches all explanations - from a director "wanting to spend more time with his cats" through to one who feels "unable to discharge his fiduciary duties".
Such an explanation glosses over the seriousness of the departures.
Even if the fact that NZOG and the other Pike investors intend in three months to ask the public to put cash into the business is discounted, the loss of three independent directors is highly unusual. In the absence of any more information, shareholders are right to assume the split is over a significant matter.
The poor disclosure is also counterproductive. Investors - backed up by an army of analysts and financial advisers - can handle bad news. They expect business hurdles and slip-ups, but they also expect to be kept in the loop, so they can make up their own minds on the prospects of their investments.
Poor disclosure adds to risk and as a result pushes up a company's cost of capital. Unless NZOG lifts its game it should expect its shares to reflect a disclosure risk. It should also expect less enthusiasm for Pike should it ever come to market.
