Brian Gaynor: Wild card appears in GPG bid for Tower

The controversy over GPG's proposed acquisition of a controlling interest in Tower has taken a new twist with the revelation that Eric Watson and Mark Hotchin have acquired a 4.3 per cent stake in the life insurance group.

This shareholding, which has been taken through Hanover Portfolio, could have an important influence on the outcome of the special meeting on July 4 as Tower has 117,885 shareholders and a very high percentage of them will not vote.

Watson and Hotchin started buying three to four months ago with a view to acquiring a 10 per cent holding, the maximum allowed under the shareholder cap. They had taken a positive view of Tower and believed it was undervalued.

A Computershare Registry printout on Monday night revealed that Hanover had a 3.97 per cent holding but additional shares were purchased on Friday which have not yet been registered, bringing their total up to 4.3 per cent.

Hotchin said yesterday that they had not decided how to vote at the July 4 meeting. They will study the notice of meeting and independent appraisal report, which was posted on Tower's website yesterday, but their preliminary assessment is that GPG has obtained a particularly favourable deal. Hotchin said that Hanover would have been delighted to purchase Tower shares at $1.35, the price they are being issued to GPG, and to partially underwrite a pro rata rights issue.

A member of Hotchin's staff has had informal talks with AXA and AMP over the GPG/Tower issue. There have also been numerous discussions between large shareholders and the Shareholders Association as opposition to the deal mounts.

Grant Samuel's independent adviser's report is more likely to inflame than defuse this opposition. The following key paragraph may have an important influence on shareholders: "It is arguable that a better form of the recapitalisation may have been a pro rata rights issue for the full funding requirement, but to be effective and meet the certainty required by Tower the rights issue would still have required an underwriter. The board of Tower advised Grant Samuel that no other underwriter was prepared to consider an underwrite of the rights issue in the time available."

But the big question is: what attempt did the Tower board make to find an external underwriter?

The GPG proposal can be defeated if resolution 1, the proposal to remove the 10 per cent shareholder cap, is rejected. This requires a 75 per cent majority with all shareholders entitled to vote.

A key shareholding is the 6.61 per cent held by Tower Financial Services. A Tower representative said these shares, which are held in different accounts, cannot be voted by, or be directed by, the Tower board. Independent trustees will determine their voting.

If AXA, Hanover, AMP and the Shareholders Association make a determined effort to defeat the GPG proposal, they could succeed. The alternatives are a pro rata rights issue for the full funding requirement, a suggestion raised by Grant Samuel, or GPG going to 19.9 per cent instead of 29.9 per cent with the remainder raised through an underwritten pro rata rights issue.

Owens While Tranz Rail is hogging most of the headlines, two other transport companies, Mainfreight and Owens, are having an interesting tussle on the sidelines.

On May 28, Mainfreight announced that it had acquired a 10.08 per cent shareholding in Owens at 96c a share. The shares were bought the previous day from members of the Owens family.

This was just after Toll Holdings had acquired a 10.1 per cent stake in Tranz Rail but before the Melbourne company had announced it intended to make a full takeover offer for the rail operator.

It was also before the Government announced its plans to buy back the rail infrastructure and to take a 35 per cent holding in Tranz Rail.

On Friday Mainfreight revealed that its Owens shareholding had increased to 15 per cent after buying a further 2.78 million shares at an average price of 99.3c.

Mainfreight has not given any reason for its Owens acquisition but it is probably Tranz Rail/Toll Holdings related. There has been fairly widespread speculation that Owens was hoping to acquire Tranz Link, Tranz Rail's road freight operation, and then either merge, or form an alliance, with Toll Holdings.

A proposed merger or alliance between Toll, Owens and Tranz Rail would have serious implications for Mainfreight, particularly as the Melbourne company has been giving Mainfreight a torrid time in Australia.

Mainfreight managing director Don Braid now has important decisions to make regarding Owens, the first of which is the proposed sale of Hirepool.

At the annual meeting, to be held on July 8, Owens shareholders are being asked to approve the sale of 51 per cent of Hirepool to JBWere New Zealand Private Equity and 24.5 per cent to Tenby Powell and Sharon Hunter with Owens retaining the remaining 24.5 per cent. The total consideration is $46.4 million.

But why is Owens retaining 24.5 per cent? What will be the impact of the sale on net earnings? What will the company do with the proceeds?

Owens has been struggling for years and this trend continued in the March 2003 year. The company reported a loss in Australia and an operating profit of only $4.6 million on total revenue of $427.7 million, a margin of just 1.06 per cent. It also has a relatively weak balance sheet with all of its $25.2 million debt due within 12 months.

But directors are well looked after. Two retiring directors received total retirement allowances of $270,000, equal to 5.8 per cent of the company's operating profit.

Owens badly needs a shake-up, and next month's annual meeting will give a strong indication whether Mainfreight is willing to lead from the front or its 15 per cent holding is just a defensive play.

Independent Newspapers

Grant Samuel has given the thumbs up to the proposed sale of Independent Newspapers' New Zealand publishing interests to John Fairfax Holdings for $1.188 billion. The sale is a foregone conclusion as News Ltd, Telecom New Zealand and Todd Communications, which own 69 per cent of INL, have indicated they will vote for the sale.

The notice for the June 30 special meeting explains that INL's directors had been concerned for years that the company's share price did not reflect the underlying value of its assets. They tried initiatives including a share split (2000), special dividend (2000), share buyback (2001), a higher dividend payout, senior management changes, the acquisition of new magazine titles (Cuisine) and major changes (the merger of the Dominion and Evening Post) but nothing worked.

Fairfax made an unsolicited offer that the directors could not refuse. Grant Samuel has concluded that the assets are worth between $1.14 and $1.27 billion and the $1.188 billion offer is fair.

The inability of INL to generate a high return on its assets is a major concern. It was easy prey for Fairfax and will be a major loss to the New Zealand sharemarket. Banking and media represent more than one-third of the value of the Australian sharemarket, yet Sky Network Television, which is 66 per cent owned by INL, will be the only banking or media company on the NZX after the sale of INL's publishing assets.

A disappointing feature of INL's notice of meeting is that it gives no indication how the surplus funds, $754 million after the repayment of debt, will be used.

The deal was originally announced on April 11, yet over two months later, INL's directors have given no clear indication what they intend to do with the proceeds.

* Email Brian Gaynor