A storm is brewing over the proposed restructuring of IT Capital, with a number of shareholders, particularly in the United States, objecting to the price being paid for three new acquisitions.
The issue is contentious because the shareholdings are being bought from David McKee Wright and Maurice Bryham, IT Capital's new
chief executive officer and chief operating officer, respectively.
There are several stages to the proposed restructuring:
IT Capital will acquire 40 per cent of Datasquirt, 50 per cent of Conceptual Solutionz, and 70 per cent of Sealegs from McKee Wright and Bryham for $5.5 million. The consideration will be 137.5 million IT Capital shares at 4c each.
McKee Wright and Bryham will buy 30 million new IT Capital shares at 4c each for a total cost of $1.2 million. They will also be granted 50 million options with exercise prices ranging from 8c to 18c.
Outside investors will buy a further 62.5 million shares at 4c, raising a further $2.5 million.
McKee Wright and Bryham will be given a three-year management contract at $150,000 each a year.
After the issue of new shares, but before the exercise of the options, McKee Wright and Bryham will own 42 per cent of IT Capital.
The main bone of contention is that the vendors are being paid $5.5 million for shareholdings in three unproven companies where shareholders have invested a total of just $150,400. IT Capital shareholders would be happier if the payment was deferred and based on the three companies' achieving pre-determined financial targets.
The vendors argue that the restructuring should be seen as a total package. This is not a third-party sale, as McKee Wright and Bryham are managing IT Capital, putting in $1.2 million of their own money, and their business associates are contributing a further $2.5 million.
Although a lower purchase price would be preferred, IT Capital shareholders are getting a reasonable deal. McKee Wright and Bryham have a proven track record at PC Direct and exo-net International. They are selling all their outside interests into IT Capital and will concentrate on the listed company. They also have the ability to attract new investors and investee companies to IT Capital and the company's share price has picked up from 4.5c to 6.3c since the deal was announced.
McKee Wright and Bryham were able to negotiate a favourable sale price for their three companies because IT Capital was on its last legs and had an extremely uncertain future without them.
Shareholders will be asked to approve the restructuring at the July 23 annual meeting in Auckland.
Fletcher Forests
Several parties are trying to paint a black and white picture of the Fletcher Challenge Forests/Central North Island Forest Partnership deal; if the transaction goes through, Fletcher Forests' share price goes up and if the proposal is rejected, the price drops below 20c.
This argument is probably simplistic and incorrect.
One of the best ways to value forest owners is on a net asset value (NAV) basis. This is because the forests are revalued to market at the end of each financial year or, in the case of Fletcher Forests, every six months.
As at December 31, Fletcher Forests had a NAV of 39c a share, after writing off its full investment in the Central North Island Partnership. At yesterday's closing price its ordinary shares were at a 41 per cent discount to asset backing and the preference shares at a 44 per cent discount.
This discount is in line with Opio Forestry Fund, a small listed trust with commercial forests near Invercargill and Dunedin that will not be harvesting its resource for 9 or 10 years.
The other two listed forest owners, Evergreen Forests and Nuhaka Forestry Fund, are now harvesting their forests and are trading at a discount of less than 20 per cent to NAV.
Why is Fletcher Forests' share price at a discount of 40 per cent instead of 20 per cent when it is more similar to Evergreen and Nuhaka than Opio?
Fletcher Forests is probably undervalued because of its past involvement with the partnership and the proposed repurchase of the assets. The company has already written off the $1.1 billion associated with the partnership and now proposes to take on a large amount of debt to buy back these assets. A highly geared balance sheet is inappropriate for a company that relies on volatile commodity markets.
There is also considerable uncertainty over its involvement with South East Asia Wood Holdings and Citic, neither of which have any expertise in forest ownership and may have a different agenda to Fletcher Forests' minority shareholders.
Fletcher Forests' obsession with the partnership has some similarities with Air New Zealand's passion for Ansett. Based on Air New Zealand's experience, it may be better to take the lower risk approach and forget the partnership.
There is a strong argument that if the partnership deal is rejected, and after the short-term traders have sold out, Fletcher Forests shares will trade at a similar discount to Evergreen and Nuhaka.
This would give the group a market value of around 31c a share, a vast improvement on yesterday's closing price.
Certified Organics
Shareholders attending Certified Organics' annual meeting in Auckland on Friday should pay close attention to item 4 on the agenda. Under this resolution, shareholders are being asked to approve the issue of up to one billion new shares at a discount of up to 30 per cent of the weighted average market price of the company's shares.
This follows two similar resolutions in the past 13 months:
At the 2001 annual meeting, shareholders approved the issue of up to 40 million shares at a discount of no more than 20 per cent of the market price.
Shareholders approved the issue of 400 million new shares at 1.1c each at a special meeting in August last year.
No shares were issued under the first resolution and 184.4 million were issued pursuant to the August 2001 meeting.
At Friday's meeting, shareholders are being asked to approve the issue of shares that will represent up to 29.5 per cent of the company's capital at a price that could be up to 30 per cent below the market price.
Shareholders should make sure they are fully aware of all the issues before they support the resolution because the proposed placement will be at a big discount to the market price and will result in a significant dilution of their interests.
* Disclosure of interest: Brian Gaynor is a Fletcher Forests shareholder.
* bgaynor@xtra.co.nz
Dialogue on business
A storm is brewing over the proposed restructuring of IT Capital, with a number of shareholders, particularly in the United States, objecting to the price being paid for three new acquisitions.
The issue is contentious because the shareholdings are being bought from David McKee Wright and Maurice Bryham, IT Capital's new
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