Gaynor: Lion Nathan pays highly for poor advice

By BRIAN GAYNOR

MONTANA

Lion Nathan and its highly paid advisers are making a terrible hash of the Montana takeover battle.

Lion should be home and hosed by now because it already owned 28 per cent of the wine group when Allied Domecq entered the fray. It also gained a huge advantage when the British-based group declined to raise its initial offer.

Since then, Lion has made several blunders which have allowed Allied Domecq back into the game:

* It bought shares on market in breach of Stock Exchange rules and was ordered to sell 19 per cent by the standing committee. This will reduce its Montana holding to 43.8 per cent.

* Lion then made a partial takeover offer for 11 per cent of Montana at $5.50 a share and said it would bid for the rest at $3.70 a share if the partial offer achieved more than 50 per cent. The standing committee decided Lion could not make a takeover offer for Montana before it sold the 19 per cent stake.

* The Takeovers Panel determined that Lion's bid constituted an offer at different prices, which does not comply with rule 20 of the Takeovers Code.

The main objective of the code is to create an auction process where the highest bidder wins. Allied Domecq has a full bid on the table at $4.80 a share, but before the panel intervened Lion was trying to compete with a clever two-tier bid that offered an average of only $4.38 a share.

Lion Nathan's tactics have been flawed both in terms of the old and new takeover rules. The best way for it to beat Allied Domecq is to make a full takeover bid for Montana at more than $4.80 a share.

PDL

A fascinating situation is developing at PDL as Schneider holds 98.1 per cent and is moving to compulsory acquisition.

Under the new Takeovers Code, Schneider could go to 100 per cent however it wishes, but under the old Stock Exchange rules, which still apply to PDL, the compulsory acquisition price is decided by an independently qualified party.

Grant Samuel must determine whether the acquisition price will be related to the market price or to more fundamental issues. If it is related to the market price then Schneider's last three purchases are particularly relevant. These are:

* The French company bought 59.6 per cent from the Stewart family at $12 a share.

* 7.9 per cent bought from Gold Peak at $11.15 a share.

* The last 2.1 per cent acquired from Gold Peak at $11.50 a share through a tender offer.

If a more fundamental approach is adopted then the price will be strongly influenced by the disappointing result for the March 2001 year and prospects.

There is a strong argument that the remaining shareholders should receive $11.50, because that is what Schneider was prepared to pay to go from 96 to 98.1 per cent.

PDL shares closed yesterday at $10.20 and shareholders have an anxious wait until the acquisition price is announced next Wednesday.

SHAREMARKET OWNERSHIP

A recent study by the Reserve Bank on household wealth reached several interesting conclusions. These included:

* Individual holdings of domestic equities, both direct and through managed funds, increased from $11 billion in December 1985 to $18 billion in December last year.

* Holdings of overseas equities rose from $2 billion to $18 billion in the same period.

* Total individual equity holdings increased by $24 billion to $36 billion between 1985 and 2000, yet individual debt climbed by $63 billion to $77 billion in the same period.

* Housing represents 81 per cent of net household wealth compared with 68 per cent 15 years ago.

One of the Reserve Bank's more sobering conclusions was that it had previously overestimated the amount of direct overseas equity investment by $8 billion. The bank concluded that there had been no additional investment in Australia; any increase in equity holdings was in line with the changes in the $NZ and $A and the rise in the Australian Stock Exchange.

The bank also believes that individual New Zealanders may have sold Australian shares to invest in residential property, particularly in Queensland.

This latest analysis is further confirmation that we love to borrow and invest in property and have a strong aversion to non-property investment at home and overseas.

EVERGREEN FORESTS

Evergreen Forests convertible noteholders, particularly those with a long-term investment horizon, should think twice before accepting the company's buyback offer.

The notes were issued at $1 each in March 1999 with the following conversion options available to noteholders:

* Each convertible note is redeemable for $2 cash on March 19, 2009. The $1 premium represents interest that is paid only when the notes are redeemed; or

* Noteholders can choose to use the accrued value of the notes (issue price plus accrued interest minus withholding tax) to buy ordinary shares at 55c each at any time.

The company is now offering to buy back 15 per cent of the notes on a pro rata basis at $1.1716 per note. The 17.16c premium over the original issue price represents accrued interest, and noteholders can choose to have withholding tax deducted from this amount at 19.5, 33 or 39 per cent.

Evergreen Forests is a low-profile, conservatively run forestry company that has been caught in the downdraught of international timber markets.

Only noteholders with a short-term horizon or those who believe it is worthwhile to accept the company's offer and try to buy back notes at a lower price should consider accepting the offer.