Gaynor: Code changes brokers' tune

By BRIAN GAYNOR

A huge transformation has taken place in the stockbroking industry since the Takeovers Code was introduced on July 1.

Before the code a large number of controlling stakes in New Zealand companies were acquired through the sharemarket, an extremely lucrative process for brokers.

These on-market targets included Brierley Investments, Carter Holt Harvey, Lion Nathan, Montana, Wilson & Horton and several energy companies.

Controlling stakes in many of these companies were acquired in a matter of minutes, with brokers encouraging shareholders to sell and receiving huge brokerage fees as a consequence.

Under the new regulations all offers for controlling stakes bypass brokers and are made directly to shareholders. This has produced a remarkable transformation in the broking community.

Analysts are now publishing reports with bullish sentiments and "don't sell" recommendations. Contact Energy and Frucor are good examples of this. Brokers are concerned that the stock exchange is losing too many companies and our sharemarket is dying.

But where was the broking industry over the past 15 years? Why didn't it vigorously defend New Zealand companies when they were under attack from foreign predators? Were brokers' "sell" recommendations driven purely by their own short-term self-interest?

The sharemarket would not have lost some of our larger companies if the broking community had defended them more aggressively and had been less obsessed with lucrative brokerage fees from on-market bids.

Pacific Retail

The sharemarket attracts a surprising number of clairvoyants. Take Pacific Retail, for example.

On September 24, Eric Watson's Cullen Investments made a takeover offer at $1.76 a share. Over the next few weeks Pacific Retail's share price traded a few cents above the offer price on relatively light turnover.

On October 18, the stock closed at $1.80 and the following day started at the same price.

Then suddenly at 9.04 am it picked up to $1.85 and rose steadily throughout the day to close at $2. A total of 184,043 shares were traded, compared with a daily average of just 18,200 over the previous eight days.

After the market closed Pacific Retail said Arthur Andersen had determined that the company's shares were worth between $2.13 and $2.95 each. The shares then traded around $2.

Individuals with finely honed clairvoyant capabilities have always done well on the sharemarket. Regulatory authorities in other countries usually interpret clairvoyance as insider trading.

Nuplex

The Nuplex board of directors were subjected to a barrage of questions at Friday's annual meeting over the company's disastrous investment in Medihold in Australia.

On January 5, Nuplex bought all the shares in Medihold for $27.2 million. The price included $21.2 million of goodwill.

Medihold's performance has fallen well short of expectation and $11.9 million of that goodwill was written off in the year to last June. This was the main reason why Nuplex's net earnings fell 92 per cent for the period.

Chairman Fred Holland admitted the company had made a mistake. Medihold was a complex group of companies and Nuplex, during due diligence by its own employees, had failed to pick up several issues relating to cost structure.

Mr Holland said directors had learned a hard lesson and the company was reviewing its approach to due diligence.

Representatives of the NZ Shareholders' Association played an active role in the meeting but there was no sign of any major institutional shareholder and proxies representing only 3.7 million shares, or 6 per cent of the capital, had been lodged with the company.

Why don't institutional investors play a more active role in monitoring our listed companies? Mr Holland said that in the past he asked institutions to lodge proxies but they were only willing if the agenda contained a controversial item.

But surely this misses the point: a proxy can be lodged in support as well as in opposition to a motion.

Representatives of the association successfully called for a poll on all items but this was later withdrawn and motions were passed by a show of hands. It is quite conceivable that all directors standing for re-election, including Mr Holland, could have been defeated in a poll vote because of the low number of proxy votes.

Is this the outcome institutional shareholders would have wanted?

Trans Tasman Properties

Trans Tasman Properties shareholders need thick skins. The firm's performance has been dreadful and it is now requiring small shareholders to sell their holdings - and charging them for the privilege.

Shareholders with fewer than 2000 shares must sell by December 3 or buy sufficient shares to raise their holding (the stock exchange's minimum holding is 2000 shares when the price is 25c or less).

If they do nothing then the company will sell their shares and remit the proceeds "after the payment of reasonable expenses, including any application brokerage charges".

This compulsory share buyback has several notable features:

* After adjusting for capital issues, 2000 Trans Tasman shares were worth $32,600 15 years ago, compared with $380 today.

* Holders of 2000 shares have contributed $2520 in equity through rights issues since 1989.

* In 1996, Trans Tasman also had a compulsory buyback for small shareholders but many topped up at 75c a share to bring their holding to 500 (the exchange's minimum holding is 500 shares when the market price is 50c to $1).

* Most companies do not charge brokerage or other fees when they have buybacks for shareholders holding fewer than the minimum parcel, for example, Rubicon's recently offer to shareholders with fewer than 500 shares.

But Trans Tasman's minority shareholders are used to third-class treatment. While the market value of the company has declined, directors have restructured, expensively but unsuccessfully, and have done nothing to replace the entrenched senior management team.

Trans Tasman Properties has six board members: executive directors Don Fletcher (chairman), Chris Canning and Rodney Hodge; independent directors John Ferner and Carl Peterson; and controlling shareholder Lu Wing Chi.

* bgaynor@xtra.co.nz