Richard Inder: Wild card loose in Vertex game

SILVER LINING

The emergence of new bidder for Vertex is the second blow this week to the Stewart family's ambitions for the plastics firm.

Early in the week, an appraisal by accountants Grant Samuel cast a cloud over the Christchurch family's $1.90 a share offer by suggesting it was as much as 49c short of fair valuation. The family fought this setback with arguments suggesting Grant Samuel had made a mistake.

Family spokesman Mark Stewart made the case well. In a notice to the stock exchange, he said: "We are very surprised by this high valuation, given the track record of this company both in terms of its share price, which has never traded above its $2.05 listing price, and its earnings performance.

"On the face of it, shareholders, and indeed Vertex's independent directors, are being asked to believe in a lot of blue sky in accepting this valuation. This is territory the company has never achieved before."

However, the arrival of what Vertex chairman Tony Frankham calls an industry buyer prepared to pay within the Grant Samuel valuation range for the entire company blows this rhetoric out of the water.

The Stewart family's end game was to merge Vertex with its rival, Alto Plastics, a company in which they have a 51.2 per cent stake, and book the savings. Certainly, they retain a 19.9 per cent blocking stake and could use this to extract a higher price for Vertex or engineer a deal that would wrap their stakes in Alto and Vertex with a larger consolidation.

But these outcomes are less than optimal. The family's bargaining power would be much stronger if it merged the two by itself. The proceeds from any later sale would also be much higher.

Whatever happens, the saga clearly has some way to run. Even if the new offer does not materialise, shareholders will probably be emboldened by the trade buyer's interest to hold out for more.

At the very least, the family have set a floor under the share price, so shareholders should wait and see.

TOPPY MARKETS

It has been a bad week for any investors expecting the stock market to continue its strong run.

First, the Westpac McDermott Miller consumer confidence survey showed early signs of wavering consumer confidence. Although optimism is just shy of record levels, the survey was heavily influenced by the widespread belief that now is a good time to buy big-ticket items abroad - the effect of the strong dollar.

Then, on Wednesday, it emerged that New Zealand spent $9.4 billion more overseas than it earned last year, taking foreign claims on the economy to $123 billion.

Borrowing by itself is not bad. However, what is worrying is that this borrowing is not being used to fund assets that would improve the prospects for the economy. Instead, it has largely funded the housing boom.

Thursday brought hints that the long-awaited slowdown had begun. Growth in the fourth quarter of the year was 0.4 per cent, below the market and Reserve Bank Governor Alan Bollard's estimates.

Meanwhile, the effects of the strong dollar, now trading at post-float highs against the greenback, are still to come home to roost, with many of our biggest exporters protected by hedges put in place when the dollar was lower.

These hedges are set to roll off. And even if the dollar weakens, as many expect, it still looks set to remain at levels damaging to the export sector for some time.

Externally, the picture is also not all brilliant. A warning from the US Federal Reserve this week that inflationary pictures are beginning to build up stoked fears it will lift interest rates faster than many had expected. Higher US interest rates lead to weaker global demand and slower economic growth all round.

Although the New Zealand stock market fell only a little on the warning, jitters across the Tasman sent the Australian market into a dive, the largest one-day fall since February 2003, just before the war in Iraq started.

After a rise of more than 25 per cent in the past year, the New Zealand market is looking toppy. Excluding mining stocks, it is trading at a multiple of 26 times earnings - a rating normally associated with high growth.

The economy, while set to remain robust, looks unlikely to fit that description in the immediate future. Earnings in such an environment are likely to ease and, as a result, valuations will follow.

VECTOR RUCTIONS

Perhaps there is no better indication that an increasing number of investors share this view than the enthusiasm for Vector's bonds.

The Auckland lines company plans to float this year to pay for the $877 million acquisition of a 66 per cent stake in gas pipelines group NGC.

The bonds, issued to pay for the acquisition of UnitedNetworks, give holders the right to subscribe for 50c of new Vector shares at a 2.5 per cent discount to the offer price for every dollar they have invested.

The bonds offered a yield of around 7 per cent late last year, but now offer just under 5 per cent. The reason: utility stocks are a defensive play in a falling market - demand for electricity is expected to grow whatever the immediate outlook is.

The one risk to such a play is the ructions between Vector's owner, the Auckland Energy Consumer Trust, and the board, as revealed by the Herald today.

Certainly, Vector will be an attractive investment. But the market will clearly price the shares at a discount to their potential if the company and, more to the point, the Government, does not move to resolve its convoluted governance.