Brian Gaynor: Share schemes need reform

Graeme Bulling and Bruce Sheppard had chairman Bill Falconer on the back foot at the Restaurant Brands annual meeting. In contention was the issue of 1.5 million shares to chief executive Jim Collier at $2.09 each and a loan to finance the purchase.

The shares will be held in trust until Collier repays the loan in three years' time. They will be transferred to the chief executive only if Restaurant Brands' share price exceeds $3.02 less the aggregate amount of all dividends paid over the three-year period.

Falconer argued that the main objectives of the scheme were to give Collier a sense of ownership and to align his interests with shareholders. This sounds logical but in reality chief executives normally opt out of schemes that are "out of the money" and sell most of their new shares if they are "in the money".

When Restaurant Brands was floated five years ago, Collier was given a $550,000 loan to buy shares at the issue price of $2.20 a share. The loan was due to be repaid on June 11, 2000, but the company's share price was only $1.14 at the time and Collier walked away from the loan, leaving the company to take the loss.

The chief executive was also given 340,909 options at the time. These can be exercised at $2.42 a share until July 1, 2007, and he will participate in a one-for -12 bonus on these new shares.

Collier, like many other executives, may immediately sell a high proportion of his new shares received through the options scheme or the loan agreement approved at last week's annual meeting.

It is hard to agree that the interests of management and shareholders are fully aligned when executives can walk away from some schemes and immediately sell their new shares in others. The best arrangement would be to pay a bonus to managers when they meet certain performance targets and insist that half of this is used to buy shares on-market.

The scheme's advantages are:

* The costs are immediately taken into account by the company.

* No new shares are issued and there is no selling pressure when executives are forced to sell shares to fund their acquisitions.

* The interests of management and shareholders are fully aligned because senior executives have bought shares with their own money.

But the biggest attraction, as far as company chairmen are concerned, is that this scheme does not need shareholder approval and they can avoid in-depth cross-examinations by Bulling and Sheppard.

Baycorp

The early signal, at least from a sharemarket perspective, is that the Baycorp/Data Advantage merger has not been a success.

The deal was consummated on December 17 and Baycorp Advantage's share price finished the year at $7.45, giving it a market value of $1741 million. At yesterday's closing price of $4.40, the group had a capitalisation of only $1004 million, a whopping $737 million loss since December 31.

The poor performance has been strongly influenced by Dun & Bradstreet's intention to establish a consumer credit information business in Australia. Baycorp's consumer credit information activities are extremely profitable and the group has a virtual monopoly in Australasia.

Managing director Keith McLaughlin insists that Dun & Bradstreet is no threat and the market has completely overreacted. He claims that none of his major customers has signed up with the new market entrant and the major banks, which are both suppliers and users of Baycorp's consumer credit information services, do not want another information provider.

McLaughlin is extremely confident about Baycorp's future and says that the June quarter is tracking much better than the March quarter.

But the reality is that Baycorp Advantage's share price was overvalued at $7.45. Based on figures contained in the Grant Samuel report the company should have been priced between $3.75 and $4.50 when compared with a similar range of companies in the United States.

Baycorp's market capitalisation has fallen 42 per cent since the merger and the aggregate market value of the four Australian companies Grant Samuel compared it with - Computershare, Collection House, RMG and Credit Corp Group - has fallen by 45 per cent over the same period.

These US and Australian figures suggest that Baycorp Advantage is probably fairly priced at current levels but its share price will pick up if McLaughlin and his team can deliver the anticipated merger synergies and concerns over Dun & Bradstreet prove to be unfounded.

Fletcher Forests

The proposed deal between Fletcher Challenge Forests and Citic, in which the former will bid for the Central North Island Forest Partnership assets on its own accord, raises more questions than answers.

Why have two long-term antagonists agreed to come together and will the new arrangement fall apart at some future date?

Will the Vela brothers' bid for the partnership assets fail and enable Fletcher Forests to make an offer?

Why is Citic paying 37c for Fletcher Forests shares when the market price was only 20c when the deal was announced?

What price will Rubicon receive for its 17.6 per cent Fletcher Forests shareholding and will this offer be made to all other shareholders?

Why is Rubicon buying forests from Fletcher Challenge when its objective is to concentrate on biotechnology?

Most analysts believe that this is a done deal but they may have jumped the gun. Many shareholders will not want to give effective control of Fletcher Forests to Citic when the two companies have had a tempestuous relationship and a joint bid for the partnership assets would appear to make more sense.

eVentures

Craig Heatley's partial takeover offer for eVentures has been criticised by some shareholders but they have nothing to complain about.

Heatley will make a 60c-a-share offer to all shareholders who acquired no more than 10,000 shares in the original float and who remain on the register in respect of those shares. Heatley is under no obligation to make this offer.

The offer is conditional on shareholder approval under the Takeovers Code and a resolution to liquidate the company. As eVentures had net current assets of 34.4c on December 31 and will have earned a further 0.7c in interest by June 30, shareholders should receive around 35c a share after costs.

Several shareholders who bought more than 10,000 shares at 60c each in the original float have complained because Heatley's offer will not be made to them. But they should have been more careful before investing because the prospectus was overflowing with cyber hype. It also pointed out that Heatley and Softbank were paying just 15c a share and the company's net asset backing was a mere 24c a share.

eVentures shareholders will get back a much higher percentage of their money compared with any other internet share bought in the first half of 2000. They should be grateful for that.

* Disclosure: Brian Gaynor owns shares in Baycorp Advantage, eVentures, Fletcher Challenge Forests, Restaurant Brands and Rubicon.

* bgaynor@xtra.co.nz