Rubicon opens door to better Tenon takeover deal

By PAM GRAHAM

Rubicon is letting shareholders who accept its partial takeover offer for Tenon change their mind if a better full takeover offer comes along.

Rubicon's offer mailed at the weekend has a withdrawal clause never used before in New Zealand.

Tenon is expected to comment today and will release the independent report by Grant Samuel as soon as it is ready.

"You have no downside in accepting our offer should a higher cash offer for 100 per cent of Tenon on no less favourable terms and conditions than our offer be made prior to our offer being made unconditional," Rubicon said in the offer document mailed on Saturday.

Rubicon, a box of assets left over from the breakup of Fletcher Challenge, is bidding $1.85 a share to take its 19.9 per cent stake in Tenon, the wood processing and distribution remnant of Fletcher Challenge, to 50.01 per cent. It is doing so with the support of its once-dissident shareholder Guinness Peat Group.

The offer, which was mailed on the last possible day since giving notice, is seen as an attempt to flush out bidders for Tenon and is less than the $1.88 the shares closed at on Friday.

Though Rubicon is letting shareholders withdraw if a better full takeover comes along, a full takeover can succeed only with Rubicon's support as a 19.9 per cent shareholder.

Rubicon's offer has just a couple of paragraphs on its plans for Tenon, saying it wants to build the business up.

While it is hostile in that it is unsolicited, Rubicon chooses not to attack Tenon's management team, or raise the issue of whether the head office has been downsized as much as the company.

Its offer is an essay on valuation but also highlights that Tenon secured only 60 per cent of its wood supply when it sold its forests and that its status as the old core Fletcher Challenge company is "unlikely to be a valuation positive".

"There must be a risk that either the availability of certain log grades, or the pricing of those grades, for 40 per cent of the company's requirements, may negatively impact on its profitability in the future," the offer document says.

Rubicon argues that the share price of Tenon is inflated by speculation, that the multiples being applied to earnings are high for an unproven company and that the earnings themselves are inflated by foreign exchange gains.

Fletcher Building, a larger company with a proven track record, trades at a lower multiple than used by Tenon to get a valuation of $2.06 to $2.32 a share. Rubicon strips out foreign exchange gains to get a range of $1.72 to $1.92.

It says that the average analyst's valuation of the company, excluding Tenon adviser ABN Amro's valuation, is $1.89 and that the company has historically traded below brokers' valuations when there is no takeover speculation.

It also argues that the $1.15 a share shareholders are getting from Tenon's forest sale is not guaranteed and that shareholders are 5c a share better off by accepting a cash offer now than getting the return of capital in the second half of the year.

It argues that the building cycle is at a peak and interest rates are rising, essentially that current performance may be as good as it gets.

Rubicon, managed by former Fletcher Challenge executive Luke Moriarty, is unusually not using an adviser and it is also not disclosing the provider of bridging finance. It will ultimately fund the offer from a return of capital from Tenon's forest sale.

Rubicon's bid has been criticised because it is only a partial one and because it leaves two former Fletcher companies listed. Rubicon's current holding in Tenon makes up 65 per cent of its asset base and that will rise higher if the offer is successful, making it even more of a holding company for Tenon.

AMP is Tenon's largest institutional shareholder and is waiting for the independent report, in keeping with the advice to shareholders from Tenon.

Rubicon's offer closes on June 3 and has a range of conditions, including confirmation that contracts do not change on a change of ownership of the company.

Who's who

TENON: Formerly Fletcher Challenge Forests. Sold its forest estates this year to focus on wood processing. Products include plywood, lumber, solid wood mouldings, engineered products such as roof trusses. Market capitalisation: $175 million.

RUBICON: Created from left-over assets in the break-up of Fletcher Challenge. Owns stakes in treestock companies ArborGen and Horizon2. Its biggest asset is a 19.997 per cent stake in Tenon. Market capitalisation: $237 million.