Brian Gaynor: Shareholders rarely see a perfect ten

Independent reports have become an increasingly important feature of the sharemarket, particularly since the Takeovers Code was introduced on July 1, 2001.

These documents are of mixed quality with some listed issuers commissioning detailed reports, even when not required. Others have a fairly frugal attitude towards full disclosure.

Independent assessments are important, particularly for shareholders of Independent Newspapers, Tower and Owens, who all meet in the next 10 days to consider issues covered by independent reports.

Reports on Affco and Tranz Rail, which will be published in the next few weeks, are also awaited with interest.

Independent reports, called appraisal reports, are required under a number of Stock Exchange listing rules, particularly when a listed issuer is involved in a transaction with related parties.

Listing rule 1.2.2 sets out requirements for these reports, which include an assessment of the merits of a transaction and whether it is fair to shareholders.

Rule 1.2.3 states that an issuer has only to circulate a summary of the full report.

There is no requirement to release the full report to shareholders, even if it is requested.

Under the Takeovers Code an independent report, called an adviser's report, is required under rule 7 (when shareholders are asked to approve the acquisition of a controlling stake without an offer being made to all shareholders) and rules 8 and 9 (a full or partial offer to all shareholders).

The independent adviser must comment on the merits of the offer and if a summary report is sent to shareholders a full report must be made available to any person entitled to attend the meeting.

Independent Newspapers shareholders will meet on Monday to approve the sale of the group's New Zealand publishing assets to John Fairfax for $1.188 million.

Stock Exchange listing rule 9.1, which applies to the disposal or acquisition of assets, says the notice of meeting containing the resolution to approve any transaction must contain or be accompanied by such information, reports, valuations and other material as holders of securities need to appraise the implications of the transactions.

There is no requirement to have an independent appraisal report under listing rule 9.1 but a high level of disclosure is required.

Independent Newspapers has met these requirements by publishing an 81-page report, which includes a 63-page analysis by Grant Samuel.

The Grant Samuel document, which is not required under any regulation, is called an expert's report.

Grant Samuel's reports have a standard format and its report on INL is no exception.

It states the report is based on financial and other information provided by INL and the information provided to Grant Samuel included forecasts of future revenues and expenditures, profits and cash flows prepared by the management of INL.

The reliance on management forecasts is a weakness of all independent reports. Management has the capability to adjust profit and cash-flow forecasts depending on its preferred outcome, although there is no evidence that this has occurred with INL, Tower or Owens.

One of the strong points of a Grant Samuel report is its analysis of industry valuations and transactions. On this basis John Fairfax is getting a fairly good deal.

Grant Samuel's valuation range is $1.14 billion to $1.27 billion, compared to the actual price of $1.188 billion.

But based on the price paid for Wilson & Horton and current Australian sharemarket values, plus a 20 per cent premium for control, it would be easy to justify a price of at least $1.37 billion, 15 per cent above the Fairfax offer.

The deal requires 75 per cent approval but this will be easily achieved because News Ltd, Todd Corporation and Telecom, which own 69 per cent of INL, support the sale.

It is extremely disappointing that our only remaining New Zealand publishing operation is being sold to John Fairfax on lower valuation multiples than the four listed Australian newspaper groups included in the Grant Samuel report.

It is also hugely disappointing that INL's directors have given no indication what the company will do with the $754 million net proceeds after the repayment of debt.

How can minority shareholders fully assess a transaction with a huge cash element when they are given no indication how this cash will be used?

The Tower report, which was also prepared by Grant Samuel, is a requirement under the Takeovers Code (GPG proposes to go above 20 per cent without making an offer to all shareholders) and listing rules (GPG is a related party).

As a consequence it is called an Independent Adviser's Report and Appraisal Report.

The document is extremely disappointing as it does not address the central issue, which is whether there is a better alternative to the current proposal.

The bulk of the report is about Tower's operations and its debt position.

There is no dispute about the group's debt problems but there is huge disquiet about the rescue plan, particularly the placement of 50 million shares (20 per cent of the group) to GPG at $1.35.

Under the related party provisions of the listing rules, Grant Samuel had to assess whether the proposed recapitalisation was fair to shareholders not associated with GPG, the related party.

Grant Samuel endorsed the proposal based on information it received from Tower that GPG was the only party able and willing to provide the certainty of timing and funding that is clearly necessary.

But the independent appraiser admitted it was beyond the scope of this report to consider whether an alternative recapitalisation or similar refinancing proposal could have been developed or put to shareholders at an earlier time.

Why did Grant Samuel not investigate the prospects of an alternative offer when that is the main concern of shareholders? Its tendency to look at the recapitalisation from a company rather than shareholder perspective has riled some institutions and their alternative proposal is now being reviewed by the Tower board.

There is a strong possibility that the current proposal will be dumped and will be replaced by a pro-rata underwritten offer for the full entitlement.

An announcement to this effect, including the cancellation of Friday's special shareholders meeting, is expected early next week.

Owens has commissioned an independent adviser's report to assess the sale of Hirepool for $46.4 million.

The document is not required under listing rule 9.1 but there is a requirement that such information, reports, valuations and other material as are necessary to enable the holders of the securities to appraise the implications of the transactions be sent to shareholders.

Owens' notice of meeting contains a totally unsatisfactory four-page summary of Deloitte Touche Tohmatsu's independent adviser's report.

The summary contains no information on Hirepool or any indication how the sale proceeds will be used.

By comparison Southern Capital issued a comprehensive 51-page PricewaterhouseCoopers report when it purchased the remaining 50 per cent of Hirequip a few months ago.

A spokesperson for Deloitte said that its full report had yet to be finalised and would be sent to Owens next week.

An Owens spokesperson said the final report was for directors, not shareholders, and would not be made available to the Business Herald.

Mainfreight managing director Don Braid said he was disturbed with the quality of disclosure in Owens annual report, notice of meeting and summary independent report.

Braid, whose company owns 15 per cent of Owens, also expressed concerns over the use of the Hirepool proceeds and the proposed issue of up to 11.3 million new shares (20 per cent of the capital) "for the purpose of fully funding an acquisition or investment in businesses, assets or shares by the company".

Owens falls well short of best practice disclosure standards and some shareholders are expected to make this point at the company's annual meeting, which will be held on July 8.

* Disclosure of interest: none.

* Email Brian Gaynor