Scepticism over Hanover-Allied deal

Allied's John Loughlin says swapping Hanover debentures for Allied shares would give investors control. Photo / Dean Purcell

The $400 million deal by the $12 million Hawera-headquartered Allied Farmers to buy assets from Hanover Finance was greeted with scepticism yesterday.

Bruce Sheppard, chairman of Hanover's Shareholders Association, spoke out strongly against it, saying it would be great for Allied but extremely bad for Hanover investors and those in its subsidiary United Finance.

Hanover and United have more than 13,000 investors owed more than $500 million. Hanover investors face getting 70c back for every dollar invested, and United investors 90c.

Today, Sheppard will plead with Commerce Minister Simon Power at a meeting in Wellington for Government help to stop the deal and to encourage him to step in.

Appointment of a statutory manager was investors' only hope, Sheppard said. "Power needs to intervene. He can't rely on the Hanover bondholders because they're dumb," an angry and upset Sheppard said yesterday.

Sale of assets by Hanover to Allied was tipped in the Business Herald in last Friday's Stock Takes, and yesterday Allied chairman John Loughlin and managing director Rob Alloway explained the mechanics of the deal.

Allied, the listed rural services and finance company, has proposed a shares-for-debentures swap which would see it buy assets from Hanover and United.

Investors would swap their debentures for shares, which Allied chairman John Loughlin predicted would give the investors control once again.

"They can now make decisions based on their own circumstances and requirements about their investment rather than being locked into a moratorium for five years," Loughlin said.

Allied, with a $12 million market capitalisation, declared a $34 million net after-tax loss for the year to June 30.

Under the deal, Hanover secured depositors would be able to exchange their debentures for Allied shares. The ratio would be determined by the volume weighted average price over the five trading days leading up to the deal's completion.

But Sheppard lashed out, predicting Allied's already-low share price would collapse further from 30c to under 10c, and Hanover investors would get only a fraction of their money back.

"It will be a great deal for Allied. It will effectively fill up their balance sheet with over-valued assets that will generate some cash and restore their solvency.

"It will also be a great deal for [Hanover owners] Eric Watson and Mark Hotchin. They will have all of Hanover's debts taken out of the Hanover balance sheet, thus relieving them of any obligations to put the $20 million in."

The $20 million in guarantees had been committed by Watson and Hotchin as part of a delayed repayment plan approved by investors in December last year.

"The related-party loans will be left in that balance sheet for them to own outright, thus never having to repay them. Any cash still in the Hanover balance sheet will be available to the shareholders for their use.

"Bond holders will have to decide for themselves whether becoming Allied shareholders is good for them or not. On track record, the investors' decision making is far from perfect, and I for the moment am through with giving them any guidance," Sheppard said.

Brian Gaynor of Milford Asset Management also questioned the proposal, which he called "bizarre in many ways" and quite complex, although some parts of it had merits.

"It's extremely hard to work out. It looks attractive in theory because people will be able to trade their shares, assuming the share price doesn't completely collapse," he said.

Allied had 37 million shares on issue and would issue 890 million new shares to complete the deal, giving the Hanover and United debenture holders 96 per cent of Allied, Gaynor said.

Debenture holders would be issued with Allied shares worth the equivalent of 78c per dollar owed, "so if the Allied share price is 39 cents, they will get just over two shares".

The big question was what would happen to the Allied share price, he said. But the way the Hanover situation was heading, gradual deterioration was inevitable and investors might only get 30 to 35 cents in every $1 back.

The Allied deal was therefore better than that, he said.

Many Hanover investors would want to sell immediately to recover what money they could, he predicted. But others might wait and the share price could increase, giving them more money back.

Gaynor met Loughlin after yesterday's announcement and said he had encouraged him to seek institutional investor support.

Loughlin said the deal was conditional on approval by both Allied and Hanover/United investors. If it goes ahead, he said land at the $2 billion Five Mile project near Queenstown would be sold, and development work at the $1 billion Kawarau Falls hotel complex nearby would not continue on to the next phase.

THE AGREEMENT


* Allied Farmers to buy assets from Hanover Finance.


* Allied shareholders meet early December.


* More than 50 per cent of them must approve


* Hanover and United investors meet mid-December.


* More than 75 per cent of them must approve.


All will vote on a debenture-for-shares swap.


* The firms say Hanover debenture holders will get shares worth 78c for every dollar owed.