Gaynor: Australians see disadvantage

By BRIAN GAYNOR

Signs of opposition to the Baycorp-Data Advantage merger are beginning to appear across the Tasman.

A number of Data Advantage shareholders want a better deal after their company reported a threefold increase in earnings whereas Baycorp's result for the year to June 30 was lower than expected after adjustments for a number of accounting items.

Baycorp reported a net profit of $26.9 million for the June 2001 year, including a $13.7 million revaluation of its 9.3 per cent Data Advantage shareholding.

This was a non-operating item that masked a slowing of growth in the second half.

Another concern was the deterioration in net operating cash flow. Cash flow for the year was only $10 million compared with $14.1 million last year. In the second half it fell to just $2.6 million compared with $7.4 million for the same period a year earlier.

As well, Baycorp's accounting policies for its debt acquisition business will have to be changed when it moves across the Tasman. This means a reduction in earnings under Australian standards.

The proposed merger requires approval by both companies' shareholders, and the notice of meeting and accompanying documents will have an important influence on the outcome.

The merger is in the best interests of Baycorp and Data Advantage and both boards of directors will be hoping that the rumblings of discontent in Australia don't turn into more widespread opposition.

Rubicon

The frantic pace of Rubicon's share buyback scheme is a perfect illustration of the different regulatory systemse in New Zealand and the United States.

In the world's biggest financial market, share buybacks are governed by Rule 10b-18, which has been promulgated under the Securities Exchange Act of 1934.

Under this rule, a company undertaking a share buyback must not buy on any given day more than 25 per cent of the average trading volume in the previous four weeks.

This was enacted to prevent a company from engaging in, or being seen to engage in, market manipulation.

By contrast, no rules govern share buybacks in this country, and Rubicon has been buying with its ears pinned back.

Between June 30 - the day the buyback began - and August 17, the company bought 27.1 million, or 78 per cent, of all shares traded through the market. Last week the Fletcher Challenge offspring bought 84 per cent of all shares traded.

Rubicon has done nothing wrong, but why has it adopted such an aggressive strategy?

As the main objective of any share purchaser is to buy cheaply, why doesn't Rubicon step back for a few days and let the market find its natural level?

Brokers argue that the company is taking the right approach because it is buying at a discount to its estimated asset backing of $1 to $1.05 a share. This argument does not take into account that most investment companies sell at a discount to asset backing.

Share buy backs are usually beneficial to shareholders, but they can have a negative long-term impact if the purchase price is too high. In 1997, Telecom bought back 138.1 million shares at an average price of $7.25, a strategy that now haunts the group's remaining shareholders.

AQL Holdings

The colourful history of AQL Holdings - formerly Regal Salmon, Queen Charlotte Holdings and Aquaria 21 - is about to take another turn with the proposed acquisition of Organic Interceptor Products.

OIP's first product is a spray that controls grasses, weeds, moss and lichen. It is a start-up company, but the directors have produced bullish revenue and earnings forecasts.

Within three years OIP is expected to have worldwide revenue of $36.2 million and net earnings of $4.4 million.

AQL will acquire OIP for $5.15 million, a combination of 1950 million shares issued at 0.25c each and the payment of $275,000 in cash.

After the acquisition AQL will place 400 million new shares at 1.1c each, giving the company a total of 2601 million shares.

The directors of the post-acquisition company will be Ray Thomson, chairman of Wellington Drive Technologies, Rodney and Stewart Innes and chief executive Earl Stevens, formerly head man at Eric Watson's Excell Corporation.

At its current price of 1.6c, AQL has a market value of $35.2 million, based on post-acquisition, pre-placement capital. Deloitte Touche Tohmatsu assess the fair value of AQL shares to be in the vicinity of 0.24c a share and believes "the current share price largely reflects option (or hope) value rather than investment fundamentals".

AQL's long-suffering shareholders are due for a lucky break, and only time will tell whether the company will be successful in its fourth reincarnation.

RMG

On the topic of back-door listings, the latest result from Receivables Management (RMG), formerly known as Frontier Petroleum, will have sent a shiver down the spines of many shareholders.

The Melbourne-based debt collection company, which has a large number of New Zealand shareholders, reported a loss of $A10.7 million for the six months to June 30.

Taking the second half of the December 2000 year and the first half of the present year, the company had total revenue of $62.9 million compared with a pre-acquisition forecast of $59.5 million. But costs have been substantially higher than predicted and the company recorded negative earnings before interest and tax (ebit) of $14.3 million for the 12 months to June 30 compared with a forecast surplus of $11.2 million.

Included in the $14.3 million negative ebit are abnormal writeoffs of $6.4 million associated with staff redundancies and office closures and a $2.5 million investment writedown.

Deputy chairman and chief executive Jim Boult, who was one of the brains behind Baycorp's strong recovery in the early 1990s, said margins were well below expectations in May and June but "RMG expects to report profitability for the period to December 31, 2001, but a clear picture of the ongoing performance will be apparent from the June 30, 2002, result."

RMG will benefit from the recent $A8.8 million share placement, but its latest results indicate that the company has still some way to go before it achieves its pre-acquisition forecasts.

* bgaynor@xtra.co.nz