COMMENT:

Fiona Oliver, the chair of Tilt Renewables' independent directors' committee, is mounting a strong defence against the takeover of her company.

The offer, which has been made by an Infratil/Mercury NZ joint venture entity, is at $2.30 a share for the 29 per cent not owned by the JV partners prior to the offer.

The bid values Tilt at $720 million.

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Oliver went on the front foot after Northington Partners' Independent Adviser's Report determined that Tilt shares were worth between $2.56 and $3.01 each.

The Target Company Statement had DO NOT ACCEPT in bold on the front cover with Oliver writing: "The Independent Adviser believes the offer price is 'lower than the underlying value of the company' and has concluded 'the offer price is not compelling'."

She went on to write: "Shareholders can be assured that none of the independent directors will be accepting the offer for any of the Tilt Renewables shares they own or control."

The Tilt offer has received limited media attention but it is an insight into company valuations and the cut and thrust of a conventional takeover offer.

Tilt is a vehicle to facilitate the demerger of the Australian and New Zealand wind generation assets from the hydro generation operations of Trustpower, the Tauranga-based energy company.

The new company's name is derived from its vision and value statement: "We tilt with the wind, and will tilt towards the sun to generate greener energy."

The demerger was recommended for several reasons including:

• It would allow both Tilt and Trustpower to pursue targeted, independent business strategies, supported by separate boards and management teams.
• It would provide Tilt with equity raising options dedicated to its development options.
• The proposal would allow Tilt and Trustpower to optimise their capital structures and dividend policies to suit their respective businesses.
• The demerger would allow existing Trustpower shareholders the opportunity to decide whether they wanted to have more investment emphasis on Tilt or Trustpower.

The demerger was effected by investors receiving one Tilt share for every Trustpower share.

Infratil and the Tauranga Energy Consumer Trust (TECT), which owned 51.0 per cent and 26.8 per cent of Trustpower respectively, ended up with the same Tilt shareholding.

Tilt's directors are chairman Bruce Harker, Paul Newfield, Fiona Oliver, Phillip Strachan, Geoffrey Swier, Anne Urlwin and Vimal Vallabh.

Harker, Newfield and Vallabh are non-independent directors because they are employees of HRL Morrison & Co, Infratil's manager.

The other four are independent directors although there is a widespread view that directors in these situations aren't truly independent because they rely on the vote of the major shareholders, in this case Infratil, to be on the board.

Oliver, who is chair of Tilt's independent committee assessing the Infratil/Mercury NZ offer, has clearly dispelled this notion.

What has happened since the demerger?

Tilt's shares started trading on the NZX on October 28, 2016 with limited investor interest. Only 15,000 shares traded on the first day with the share price closing at $2.25.

It was clear from the beginning that retail investors had a stronger preference for Trustpower shares, mainly because it is a well-established company whereas Tilt was still in a development stage.

This is demonstrated by the total number of Trustpower shareholders increasing slightly, from 12,357 to 12,411 since 2016, while Tilt shareholder numbers have declined from 12,357 to 11,109 over the same period.

Tilt's 2017 annual report showed that it had the following operating and planned windfarms;
• Two operating windfarms in New Zealand with 146 turbines and a maximum capacity of 197 MW.
• Three operating windfarms in Australia with 160 turbines and maximum capacity of 386 MW.
• Three New Zealand pipeline development projects with approximate capacity of 530 MW and five in Australia with 1059 MW of estimated capacity.

The 2017 report stated that its goal was "to have over 1200 MW of consented projects in Australia and 530 MW in New Zealand by the end of 2017".

The March 2018 year annual report, which was released on June 27, showed that the company had a net loss of $2.8m for the year compared with a net profit of $16.4m for the previous year.

The loss reflected "the low wind and an increase in depreciation charges following an increase in asset value in the previous year". However, "operating cash flow remained healthy with net cash from operating activities of $85.9m delivered".

New Zealand's operating capacity remained the same at 197 MW while Australian capacity had increased from 386 MW to 440 MW with the development of the Salt Creek Wind Farm in Western Victoria.

Meanwhile, the development pipeline had grown to 3500 MW with planning approval in place for more than 1600 MW of that.

Six weeks before the release of the 2018 annual report Mercury NZ announced it had acquired 19.99 per cent of TECT's 26.8 per cent stake at $2.30 a share.

This was the maximum Mercury NZ could purchase under the Takeovers Code but Mercury NZ also acquired an option to purchase TECT's remaining 6.8 per cent at the same price over the following six months.

Tilt's share price was $1.85 just prior to this announcement.

On August 15, when Tilt received notice of the proposed takeover offer from the Infratil/Mercer NZ JV, its share price was $2.13. Northington's Independent Adviser's Report mid-point valuation of $2.785 a share compares with the offer price of $2.30.

The $2.785 a share valuation comprises $2.19 for existing operating assets, $0.385 for the Dundonnell project and $0.21 for pipeline development assets.

The Dundonnell wind farm is a A$560m ($611m) fully permitted project in Western Victoria, which will have total installed capacity of 336 MW.

The development is expected to receive Tilt board approval by the end of the year after the Victorian Government agreed to enter a support arrangement for approximately 37 per cent of the Dundonnell wind farm's output.

Earlier this week Infratil released a report that it commissioned from Grant Thornton.

Grant Thornton wrote: "We have not been privy to the financial model used by Northington in the preparation of the Independent Adviser's Report. Instead, we have relied on a model provided to us by Infratil and prepared by H.R.L Morrison & Co, which provides Infratil's best estimates of the cash flows arising from the Company's assets. Our adjustments have been applied to these best estimates, and we have assessed the impact of our inputs on Northington's assessed valuation range."

Grant Thornton's report, which is highly technical, concluded that Tilt's valuation range was between $1.87 and $2.46 a share. This represented a mid-range price of $2.165 compared with Northington's $2.785, a significant difference.

Will shareholders back their independent directors or a report commissioned by one of the bidding JV partners?

The offer is unconditional and the JV has increased its shareholding by 7.4 per cent, from 71.0 per cent to 78.4 per cent. But as 6.8 per cent of this 7.4 per cent acceptance represents the call option Mercury NZ obtained from TECT, the JV has received acceptances for only 0.6 per cent of Tilt from the public.

The rules of the game from here are that the JV either acquires 90 per cent of Tilt, and moves to compulsory acquisition, or it finishes somewhere between the 78.4 per cent and just below 90 per cent.

If the latter occurs, Tilt will remain listed on the NZX and the JV can use the "creep provisions" of the Takeovers Code to acquire an additional 5 per cent per annum without making a formal takeover offer.

However, once the JV reaches 90 per cent under the creep provisions it can move to compulsory acquisition.

If this occurs, the compulsory acquisition price will be determined by an independent party with Tilt shareholders hoping that this will be Northington, rather than Grant Thornton.

- Brian Gaynor is an executive director of Milford Asset Management.