Gaynor: Brutal reality got better of Lion

By BRIAN GAYNOR

Has Lion lost its roar? Why did the Australasian brewer throw in the towel and sell its 43 per cent Montana stake to arch rival Allied Domecq?

Under Doug Myers Lion Nathan never took a backward step. But in the midst of the battle for control of Montana, Mr Myers resigned from the board and Geoff Ricketts replaced him as chairman. Maybe Lion will be a more docile organisation under Mr Ricketts' stewardship.

But the reality is that Lion had little choice but to throw in the towel because of continuing legal losses and Montana's disappointing result for the year to June.

Lion has shown no interest in buying 100 per cent of the wine group but the hard-line stance of the Stock Exchange's standing committee, particularly its July 16 decision over the 19 per cent Lion was forced to sell to independent parties, had removed its partial offer option.

A full bid for Montana at $5 a share would have cost Lion a total of $950 million, a hefty sum for a company with shareholder funds of $A1749 million ($2130 million). (Included in assets are intangibles, mainly brand values, of $A2368 million.)

The other issue Lion had to consider was Montana's disappointing result for the 2001 year. On August 6, the wine group announced earnings before interest and tax (ebit) of $53.5 million compared with the forecast of $67.7 million contained in the PricewaterhouseCoopers report dated April 24.

The poor result indicated that Allied Domecq's $4.80-a-share offer is extremely generous and the Sydney-based brewer made the right decision by accepting the offer.

Lion Nathan made a terrible mess of its attempt to diversify into the wine industry but still walks away with a pre-tax profit of $127 million.

The outcome illustrates that most participants benefit from a takeover battle contested under a clearly defined, properly enforced set of rules and in the end there is a clear winner.

IT Capital

IT Capital's annual meeting, which will be in Auckland at 1 pm on Friday, should be a lively affair.

The company has two promising investments but it has a huge cost structure, with offices and employees in Auckland, Australia, Singapore, Philadelphia and the west coast of the United States.

Among the questions shareholders should be asking are:

* Why was chief executive Jeff Dittus paid a bonus equal to 2.6 times his $250,000 salary when the company reported a loss of $5 million?

* Why was managing director Keith Phillips paid a bonus equal to 2.2 times his $150,000 salary?

* Why were these huge bonuses paid when the shareholders' resolution that approved the bonus scheme stated that payments were at the discretion of directors?

* Why does the company have four overseas offices when note 28 to the accounts stated that all operations were carried out within NZ? How much do these offices cost to run and what do they do?

* Now that Mr Phillips has resigned, who will run the New Zealand office and how many times did Mr Dittus visit New Zealand last year?

One of the motions shareholders will be asked to approve is the issue of 100 million shares at the discretion of directors.

This is in addition to the 172 million currently on issue.

It would be far better for IT Capital to slash costs and conserve existing cash resources instead of issuing a flood of new shares that dilute the interests of existing shareholders.

Software of Excellence

Software of Excellence has been one of the best-performing stocks over the past week, with its share price rising from $1.75 to $2.15. The strong performance has been mainly due to an extremely frank and informative annual meeting in Auckland last Wednesday.

The company, which has developed a state-of-the-art software programme for dentists, was listed on the Stock Exchange on December 15 after the issue of 5 million new shares to the public at $1 each. At the time, the remaining 16 million shares were owned by 120 original investors.

One of the unique features of the Albany-based company is that most of its sales are in Britain. In the year to March, $7.3 million - 77.2 per cent - of total sales were to Britain, where it services 1400 dental practices. Directors told the meeting that the consolidation of dental practices in Britain would benefit the company because large operations required sophisticated computer-based systems providing clinical analysis and patient records.

In recent months Software of Excellence has won several contracts with large organisations, including a major healthcare group in Minnesota, National University Hospital of Singapore and the University of California's Los Angeles campus.

The dental software developer's pre-tax loss for the year to March was 10.7 per cent lower than the prospectus forecast and directors indicated at last week's meeting that it is on line to achieve its net profit forecast of $2.4 million for the current year.

The company is on target to become a big player on the world scene. If it can achieve this goal and meet its prospectus forecasts, shareholders will be well rewarded.

Share splits

One of the issues raised at the Software of Excellence meeting was whether the company should split its shares.

This is a perennial question at shareholder meetings.

Share splits or share consolidations are often seen as a way to improve sharemarket returns because share prices above $3 and below $1 are not attractive to investors.

This is clearly ridiculous as the share prices of some of the best performing stocks, including Baycorp, Fisher & Paykel, Horizon Energy and Sky City, are above $10.

It is true that Baycorp had a one-for-three share consolidation in 1994 and a two-for-one share split in 1999, but its excellent share price performance has been due to its strong profit growth. (Baycorp had a four-for-one share split in October 1987 but its share price went into a tail spin soon after because of problems in Australia.)

A share split might be justified if a stock is tightly held and illiquid but institutional investors, who have a major influence on share prices, are not put off when a share price climbs up to the $10 mark.

Quite the contrary - the New Zealand sharemarket would have a much better performance and image if a higher percentage of its companies had share prices in excess of $10.

* Disclosure of interest: Brian Gaynor is a Lion Nathan and Software of Excellence shareholder.

* bgaynor@xtra.co.nz