Brian Gaynor: Questions Telecom should be asked

COMMENT

Shareholders at tomorrow's Telecom annual meeting are expected to question a related party transaction involving director Patsy Reddy and Paul Collins' Active Equities.

According to Telecom's 2001 annual report, Telecom sold its mobile radio business (including Fleetlink) to TeamTalk. The sale price was not disclosed. At the time of the sale, Active Equities, of which Reddy is a shareholder and a director, held about 62 per cent of TeamTalk.

Subsequent to the sale, Telecom acquired 19.9 per cent of TeamTalk. No price was disclosed.

On June 30 this year, Telecom sold its 19.9 per cent back to TeamTalk at book value. Again the price was not disclosed.

According to Active Equities' 2001 annual report, TeamTalk purchased the mobile business from Telecom for $36 million. This was partly funded by $30 million of non-recourse bank debt and $2.4 million from Telecom for the purchase of its 19.9 per cent TeamTalk stake.

Questions Telecom shareholders should be asking about TeamTalk include:

* Was the mobile business put up for tender and sold to the highest bidder?

* Why weren't the details of the sale disclosed? Surely details of a $36 million asset sale to a party related to a director should be fully disclosed?

* Why didn't Telecom disclose the price it received for the sale of its 19.9 per cent TeamTalk stake back to the company?

Telecom shareholders should be given far more details of related party transactions, particularly when the related party is a director.

TRANZ RAIL

Friday is D Day as far as Toll's $1.10-a- share offer for Tranz Rail is concerned. The bid is conditional on the Australian company acquiring 90 per cent and, as of yesterday, it had 61 per cent.

If Toll doesn't reach 90 per cent by Friday, it has three options under the Takeovers Code. They are:

* Abandon its takeover offer, return all the shares accepted under the bid and end with just 19.99 per cent of the rail operator.

* Waive the 90 per cent requirement, close the offer and decide to stick with whatever acceptances it receives.

* Waive the 90 per cent requirement and extend the offer.

Under the code, Toll will not be able to stick to its 90 per cent condition and extend the offer.

Small shareholders are usually more reluctant to sell into these offers, but Tranz Rail has never been a popular stock with this group, mainly because its initial float price was at $6.19 a share. In 2000 it had just 4204 shareholders, 3330 in 2001, 4000 in 2002 and 5304 at present, according to the recently released annual report.

Most of the new shareholders are traders that bought when the company's share price dropped as low as 30c this year.

As only 4.6 per cent of Tranz Rail shares are owned by shareholders holding 9999 or fewer shares, some large shareholders will have to reject the offer if Toll is to fall short of its 90 per cent condition.

Even if Toll doesn't reach 90 per cent, it is unlikely to walk away.

Last week the Australian company released a prospectus to raise up to A$250 million ($287.7 million) through the issue of reset preference shares. The prospectus gave the strong impression that Toll was committed to Tranz Rail. On this basis it is reasonable to assume that if Toll doesn't reach 90 per cent it will waive this condition and hold on to all acceptances.

RESIDENTIAL PROPERTY

The latest Reserve Bank figures give a clear view of the registered banks' contribution to the housing boom.

As the table (above right) shows, total bank lending on residential mortgages increased by $1172 million to $78,141 million in August. In the past three months the banks pumped an additional $3561 million, a staggering $38.7 million a day, into the housing market compared with just $135 million in the same three months last year and $1058 million in 2001.

In the first eight months of this year the banks have increased their exposure to housing by $7605 million compared with $5411 million in the full 2002 year and $4377 million in 2001.

Some commentators argue that financial institutions have no influence on housing market conditions, they only respond to demand. This is incorrect as one of the major objectives of any commercial organisation is to stimulate demand for its products. Coca-Cola is hugely successful company because it has stimulated demand for its soft drinks.

Registered banks in this country have promoted their mortgage lending capabilities through direct marketing, television and other forms of advertising.

The public has responded and, as a consequence, we are in the midst of a huge, bank-funded housing boom.

CEDENCO

SK Foods' botch-up of its Cedenco takeover offer has created a new situation for shareholders under the Takeovers Code.

Cedenco shareholders who have not accepted the offer can object to the $2.30-a- share compulsory acquisition price with the prospect of receiving a higher consideration for their shares.

On July 11, SK Foods, which owned 59.1 per cent of Cedenco, made an offer for the rest of the company at $2.05 a share. Grant Samuel assessed the target company's value between $2.14 and $2.74 a share. On August 14, SK Foods raised its offer to $2.15 a share.

On August 29, SK Foods told the stock exchange that it was raising its offer to $2.30 a share and had acquired a 16 per cent stake by private treaty (outside the formal offer), mainly from Murray McPhail.

The importance of this is that, under Rule 56, if a bidder does not acquire 50 per cent of its shares under the formal offer the remaining shareholders can object to the compulsory acquisition price.

On September 10, SK Foods reached 90.5 per cent and the following day announced it was moving to compulsory acquisition at $2.30 a share. This was inconsistent with the code as SK Foods started with 59.1 per cent and now had 90.5 per cent, a gain of 31.4 percentage points, but had acquired 16 per cent outside the formal offer.

SK Foods was too fast out of the blocks, it should have waited until it reached 91.2 per cent before it formally announced it was moving to compulsory acquisition at $2.30.

The Takeovers Panel has determined that if shareholders holding a total of 127,473 shares object to the $2.30 price the matter will be referred to an expert appointed by the panel to determine the compulsory acquisition price. If sufficient shareholders object, the new price will apply to all shareholders that sold to SK Foods after September 12 and have yet to accept.

Shareholders have a reasonable chance of obtaining a higher price if they object as Grant Samuel's mid-point valuation is $2.44.

In addition, the stock exchange's pre-code rules allowed shareholders to object to the compulsory acquisition price and, under this provision, none of the independent experts determined that this price was less than the formal takeover price (under stock exchange rules objecting shareholders were supposed to pay for the additional independent report if the new price was lower, but under the code SK Foods pays).

Some shareholders are annoyed at the way SK Foods has handled this offer. They may be willing to take a risk and object to the $2.30-a-share compulsory acquisition offer.

* Disclosure of interest: Brian Gaynor is a Tranz Rail, Telecom and Cedenco shareholder.

* Email Brian Gaynor