COMMENT:

The defining comment at Methven's special meeting on Tuesday was one simple word: "Why?".

The one-word shareholder question opened a proverbial Pandora's box as it had many potential meanings, including:

• Why have the directors recommended a takeover offer from ASX-listed GWA Group at $1.60 a share?
• Why has Methven performed so poorly since listing in 2004?
• Why have so many NZX companies capitulated to overseas bidders in recent years?
• Why can't the NZX hold onto its existing companies and attract new listings?

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Methven chair Alison Barrass decided the "why?" question was in relation to the GWA offer. She replied that the proposal was fair and it offered shareholders "compensation for upside potential now without the risk that this potential wouldn't be achieved".

She added that the GWA offer was good for New Zealand.

Most of the 50 to 60 shareholders in attendance didn't agree with Barrass. They asked nearly 20 questions, most of which were swatted away with comments that there were no other offers on the table, GWA would be good for Methven and the New Zealand company "is worth what it is worth".

The scheme of arrangement meeting lasted just 35 minutes, with 98 per cent of shares voted in support of the $1.60 a share offer. The company will delist from the NZX early next month.

Methven was established by George Methven in Dunedin in 1886 and listed on the stock exchange in 1930. It de-listed six years later and evolved into a munitions manufacturer during WWII.

The company was a major beneficiary of the post-war building boom, which lasted from the mid-1940s to the early 1960s, and was acquired by the UK-based McKechnie Brothers in 1962.

In 1998, the business was sold to Australian interests but returned to New Zealand ownership in 2001 when AMP Capital backed a management buyout.

In November 2004, Methven issued a prospectus for the sale of 25.3 million shares to the public at $1.43 each. Following the share issue the company was 47.5 per cent owned by the public, 27.5 per cent by senior management and 25 per cent by AMP Capital.

Chairman Richard Cutfield wrote: "Methven believes it is the largest supplier of tap and showerware to the New Zealand market, with an estimated market share of more than 40 per cent, and also the second largest supplier of domestic water control valves to the Australian plumbing market".

He went on to write: "Methven's international growth aspirations extend beyond Australia, albeit with a focus on selling products and technologies relating to better delivery of water into the shower environment. For example, we believe our latest innovation, 'SatinJet' shower technology, offers international potential".

Methven listed on the NZX for the second time on November 30, 2004.

Its ambitious global expansion plans were revealed in July 2007 when the company announced it had a conditional agreement to purchase Deva Tap, the UK's largest independent and privately owned showerware supplier, for an enterprise value of $59 million.

The purchase would be partly funded by a one-for-eight rights issue at $1.75 a share.

The July 2007 stock exchange release noted that Methven anticipated group revenue of $124m after the Deva Tap acquisition and earnings before interest, tax, depreciation and amortisation (Ebitda) of $22m.

The UK acquisition started well but the NZ company has experienced a bumpy ride since then.

For example, Methven reported revenue of $105m and Ebitda of only $14m for its June 2018 year compared with revenue and Ebitda forecasts of $124m and $22m respectively in mid-2007.

Nevertheless, Methven has remained positive, with chair Barrass and CEO David Banfield jointly writing in the 2018 annual report: "We will be communicating our detailed plans through FY19 as we accelerate our journey to disrupt the global shower and tapware industry from New Zealand".

Barrass and Banfield also made optimistic statements at the October 31 annual meeting, with Barrass stating we "have significant upside to our current business model over time".

These upbeat statements ended on December 14 when Methven announced that it had entered a scheme of arrangement whereby GWA Group would acquire the company for $1.60 a share, subject to shareholder approval.

The $1.60 a share offer meant that Methven's share price, after adjusting for the 2007 rights issue, had appreciated by only 9.2 per cent since listing 14 years and two weeks earlier, while the NZX50 Capital Index increased by 47.2 per cent over the same period.

The $1.60 a share offer values Methven at $118m compared with GWA's current ASX value of A$850m.

Grant Samuel's independent report valued the company between $1.41 and $1.60 a share and Methven's independent directors unanimously recommended that shareholders vote in favour of the scheme.

The main lines of questioning at Tuesday's formal proceeding were: why were the directors recommending a bid by an Australian company; what would GWA bring to Methven; and why didn't the directors negotiate a higher price?

Barrass hid behind the Grant Samuel valuation and argued that it valued the company at what it was worth today. She said GWA had committed to maintain Methven's Auckland innovation centre and would invest in the NZ operations.

However, she admitted GWA had no legal obligations regarding these commitments.

Barrass also stated that Methven had agreed that it wouldn't seek a higher bid and would have to pay $1.2m in compensation to GWA if this occurred. When asked about the $600,000 Callaghan Innovation grant received by Methven, Barrass said the company doesn't have to pay this back when it is acquired by GWA.

The post-meeting discussion were informal and far more revealing.

One of the directors believes that Methven and other New Zealand companies are struggling offshore because they lack distribution capabilities. They produce good products but distribution and marketing are just as important and most NZ companies are deficient in these areas.

Another director blamed fund managers for the company's poor sharemarket performance. He said New Zealand fund managers were impatient and sold their shares when a company failed to achieve its revenue and earnings forecasts.

He said his only regret was that "Methven should never have listed, it should have remained a private company".

There is some truth to these fund manager comments but the best shareholding structure is a mix of fund managers and retail investors, with the latter willing to take a long-term view.

Fund manager performances, including KiwiSaver funds, are measured monthly and these portfolio managers don't have the luxury of holding onto companies that continue to miss their revenue and earnings targets.

But the main problem with Methven is that the original pre-IPO shareholders lost confidence in the tap and shower company.

AMP Capital, which had a 25 per cent stake when the company listed, seems to have sold all its shares and five senior managers, who also owned 25 per cent among them, seem to have reduced their combined holdings to just 1 per cent.

How can directors expect fund managers to be long-term holders when their senior management team, which owned a combined quarter of the company after the IPO, sold more than 95 per cent of their holdings?

The problem facing the NZX is that New Zealanders have a glass half empty approach to the domestic sharemarket. Retail investors have traditionally had a stronger bias towards fixed interest securities and property, with the notable exception of the 1980s when their NZX was the main attraction.

Methven's poor execution — and the woeful performance of CBL, Orion Health, Wynyard and many other IPOs — will continue to discourage New Zealanders from investing in small NZX companies.

- Brian Gaynor is a director of Milford Asset Management.