Gaynor: Investors learn to say 'no'

By BRIAN GAYNOR

Investors have learned to use the new Takeovers Code to fend off unwanted and underpriced takeovers.

The four major bids initiated under the code have run into strong opposition, yet under the old regime they would probably have been completed by now.

Edison Mission originally offered $3.85 a share for Contact Energy and nominated November 30 as the closing date.

The offer price was subsequently raised to $4.14 and a final dividend of 11c a share has been paid.

No dividend was proposed under the first bid.

Since substantial security-holder (SSH) notices have to be lodged with the Stock Exchange for changes in shareholdings of 1 per cent or more, and Edison has not lodged a notice since July, the bidder is stuck on 51.2 per cent.

The closing date has been extended to February 3 but it appears unlikely that Edison will reach its 90 per cent target, in which case all acceptances must be returned to shareholders.

The closing date for Danone's $2.35 a share offer for Frucor has been extended several times and is now January 4.

Danone's last SSH notice, on November 8, showed it had an agreement to buy 37.6 per cent from Bain Pacific. The recent drop in Frucor's share price indicates that the bidder may be gaining the upper hand.

Normandy NFM's offer for Otter Gold Mines, which is 1.9 Normandy shares for every 100 Otter shares, closes on January 29.

GPG has agreed to sell 9.35 per cent of its shareholding and Normandy has received a further 1.9 per cent from other shareholders.

These acceptances were received before the release of the independent appraisal report and directors' recommendation.

Eric Watson's bid for Pacific Retail, which closed on November 10, was unsuccessful.

The independent directors recommended that shareholders reject the $1.76 a share offer and Mr Watson raised his shareholding from 63 per cent to just 71.4 per cent.

The target company statement revealed that Mark Hotchin and Stefan Preston, both Pacific Retail directors and close business associates of Mr Watson, would accept the bid.

As these two owned 9.1 per cent of the company between them, and Mr Watson received acceptances of only 8.4 per cent, it appears that no one else accepted the offer.

This is clear evidence that the code gives shareholders the opportunity to resist unwanted and underpriced bids.

Pacific Retail

Pacific Retail's excellent interim result - a net profit before abnormal items of $5 million, compared with $2.4 million for the six months to September last year - has brought a wry smile to shareholders who rejected Mr Watson's takeover offer.

But behind the headline figure is a more interesting story: the group's retail operations are being overshadowed by its finance activities.

This is consistent with predictions in Andersen's recent independent adviser's report.

For the six months ended September, pre-tax profit from retailing declined from $4.3 million in the previous year to $4.2 million, and earnings from finance activities rose from $1.8 million to $3.4 million.

The increasing importance of Pacific Retail's finance operations makes it hard to forecast earnings.

The second half of the year, which contains Christmas, is the most important for Pacific Retail as it constitutes about two-thirds of annual earnings.

To meet management forecasts included in the Andersen report, the company must achieve net earnings of $10.2 million for the period, compared with $9.3 million in the six months to last March.

Management forecasts of $15.2 million for the year represent earnings per share of 29.3c.

At yesterday's closing price of $2.07, this places the company on a prospective price/earnings multiple of only 7.1.

Pacific Retail's relatively low p/e is due to two factors: the company's unwillingness to pay a dividend and concerns over Mr Watson's attitude towards minority shareholders.

Pure New Zealand

The secrecy surrounding Pure New Zealand is a perfect example of what used to happen under the old regulatory regime but is no longer tolerated under the Takeovers Code.

On April 5, Bomax of South Australia said it would acquire 50.1 per cent of Pure: 34.3 per cent from Jamina Holdings and 15.8 per cent on-market at 15c a share. Jamina, which is controlled by Adriana Tong, held 44.1 per cent of Pure.

On June 25, Bomax told the Stock Exchange it would buy Jamina's remaining 9.8 per cent.

Bomax finally bought Jamina's stake at 15c a share on July 31 but managed to sidestep the Takeovers Code because the deal was agreed to in June. The commitment to buy shares on-market was not fulfilled.

Four of Pure's five directors have since resigned and been replaced by one British-based and three Australian directors.

Pure's recent annual report revealed it had negative shareholder funds of $391,000 and had borrowed $1.4 million from former directors and $300,000 from Bomax.

A twist to the situation is that interests related to Bomax have gained 19.9 per cent of Apple Fields and also effectively control that firm.

A shroud of secrecy has descended over Pure New Zealand and Apple Fields and all calls to their head offices, which seem to be under the same roof in Christchurch, are met by answerphones.

Pure shareholders will be asked to approve an increase in directors' fees from $35,000 to $180,000 at January's annual meeting, along with the purchase of 55 per cent of Colorado-based Reynolds Environmental Engineering Co. Details of this transaction have not been released through the Stock Exchange and the notice of meeting contains little specific information on Reynolds.

Under the old regulatory regime, control of a company could be transferred from one party to another with no need to make an offer to all shareholders.

Under the code, Bomax would have to make an offer to all Pure shareholders or get their approval to buy the 44.1 per cent holding without making a general offer.

In both situations a substantial amount of information would be released to shareholders.

It doesn't take a rocket scientist to work out the preferred regime.

* bgaynor@xtra.co.nz