Jenny Ruth: Can't see the rules for the forests

COMMENT


After the decades of discussion about corporate regulation, the need to lift standards and the more recent changes at the New Zealand Exchange wrought by chief executive Mark Weldon, it is surprising to find that the rules do not apply to some publicly-listed companies.

The takeover bid for Opio Forestry Fund by Dunedin City Council-owned City Forests has highlighted what an anomaly Opio and its stable-mate, Nuhaka Farm Forestry Fund, are.

For a start, the exchange's takeover rules don't apply to Opio. When most listed companies are subject to a takeover, once the acquirer reaches 90 per cent, it can compulsorily acquire the remaining shares. With Opio, there is no compulsory acquisition.

This may change. The exchange was reviewing its listing rules, including the exemptions granted to group investment funds such as Opio and Nuhaka, said spokeswoman Bridgit Vivian.

Most companies' share registers are readily available and can be copied by anyone who wants them. But a change to Opio's trust deed in 1996 mentions only a right to view the register and is silent on the right to copy. The right to copy was in the original trust deed when Opio was formed in 1981.

Peter Baynes, chief executive of Opio's trustee, Perpetual Trust, takes the view that he can do only what the trust deed specifically allows and, therefore, he can't let City Forests copy the register.

"We operate the fund in accordance with the trust deed as we are required to do," he says.

"The fact that this does not suit City Forests is unfortunate, but is certainly something that they could have checked with us before launching their offer."

Baynes, who has been in his job for only six months, said he could not track down why this change was made to the trust deed.

Baynes claims to be neutrally applying the rules, but he is clearly opposed to City Forests' bid.

He drew a spurious analogy between giving out copies of Opio's register and a bank giving lists of clients and their investments.

City Forests chief executive Phil Taylor says Perpetual has forwarded everything his company wanted to send to Opio's unit-holders, but that isn't the same as being able to communicate with them directly. "Where we've made some statements that the trustee disagrees with, they've been able to immediately counter them. Our message has effectively been censored."

City Forests asked the exchange to help it gain access to the register but the exchange declined.

City Forests is offering 85c a unit.

Units were trading at 58c immediately before the offer was announced and their highest price over the previous four years was 60c.

But Perpetual is recommending that while some unit-holders may wish to accept a price "that may be otherwise hard to achieve", unit-holders who have invested in the fund for the long term and who are prepared to wait for their investment to mature between 2008 to 2013 should hold on to their units.

Perpetual contracted Opio's auditor since 2002, Chandler Fraser Keating, (CFK), to value its forests.

This resulted in a 93.4c a unit valuation at August 31.

That was lower than the $1.02 March 31 valuation in Opio's annual report, but City Forests is arguing it still over-values Opio and questions many of the underlying assumptions.

Taylor disputes CFK's discount rate - the valuation method estimates the eventual proceeds from selling Opio's wood and discounts that back to present value - of 11.5 per cent.

The discount rate chosen has a big effect on the final valuation.

A rate of 10 per cent would make the forests worth $13.9 million. A rate of 13 per cent would mean a valuation of $11.5 million.

In choosing 11.5 per cent, CFK considered all the sales since 1997 in the range of 7.6 per cent to 15.5 per cent with a mean of 10.3 per cent.

"CFK judges the specific risk profile of Opio forest to be negative compared with the average, owing to the small nature of the estate, compressed age class and risk of wind damage," it says.

Taylor points out that 11.5 per cent is the average of the discount rate applying to the sales, even though CFK thinks Opio's forests are worse than average.

He reckons the rate should be at least 12 per cent - which would reduce the forest's value from $12.6 million at 11.5 per cent to $12.2 million - and possibly as much as 13 per cent.

He also questions CFK's assumption that log and pulp prices will return from their current depressed levels to the five-year average. Its valuation assumes log prices for pruned logs will be 11 per cent above current prices.

Taylor said removing that 11 per cent premium alone would decrease the implied net asset backing per unit to 84c.

CFK says that its pricing assumptions are justified because harvesting won't start until 2008, the New Zealand/US exchange rate is much higher than the long-term average and shipping costs are high but expected to fall.

Taylor also takes issue with the fact that CFK takes a "cop out" by giving a range of values.

CFK says there is a 95 per cent probability that Opio's tree crops will be worth between $6.5 million and $13.4 million.

Taylor says if the bottom figure is the outcome, the net asset backing per unit will be only 75c.

Baynes said City Forests could have had a much easier time had it approached the trustee first, rather than starting its "hostile" takeover out of the blue.

He contrasts City Forest's experience with Rotorua-based GMO Renewable Resources' offer to buy Nuhaka's forests.

Nuhaka's investors are due to vote on the offer in late October.

Perpetual has not disclosed what it will recommend to Nuhaka's investors, but the offer is serious enough for it to have decided to allow GMO to conduct due diligence and to put the offer to the vote.

"If City Forests had approached us in the same way in respect of Opio, they would have received the same response," Baynes says.

"Why they chose instead to launch a public offer for the units in the fund is hard to comprehend."

Ross Macdonald, of GMO, says his company "has found Perpetual to be professional and businesslike in all of its dealing with us. It has provided responses to our requests for information in a timely manner."

But isn't part of the point of being listed that management is always subject to the discipline of the possibility of being taken over?

And while friendly takeovers might be more desirable, nothing in the rules says they are the only way to go.

Taylor said the bid was not intended to be hostile. His company considered going through the trustee but decided it wanted to "cut out the middle man" and communicate directly with Opio's unit-holders.

Baynes view is that even if City Forests had access to the register, it wouldn't have made any difference.

"I have had numerous calls from unit-holders, and letters too, with all but one saying that they were not interested in City Forests offer."

Taylor counters that eight of the top 10 unit-holders have accepted the offer. But City Forests has acceptances for only 42.6 per cent of the units and its bid, due to close next Friday, has a 75 per cent acceptance condition.