KEY POINTS:
The Mounties ambushed Auckland International Airport directors rather cutely on Friday by giving formal notice they intended to mount a partial takeover for a 40 per cent stake in New Zealand's key international gateway at $3.6555 a share.
The Canadian Pension Plan Investment Board's move comes just two working days before Auckland Airport chair John Maasland musters his directors for what promises to be one of the most interesting AGMs of the year.
The airport board has already sent the Mounties packing once, by dismissing their Mark One plan to amalgamate with the airport to form a new tax-efficient entity. A majority of directors believed this proposal should not be put to shareholders as it would ultimately damage the company.
But the Canadian fund has now launched a Mark Two strategy: it has to get to first base by acquiring a 40 per cent stake through a partial takeover, then build base camp by getting three of their nominees appointed to the airport board, then strike out for the summit by using the fund's weight on the board to get the amalgamation proposal in front of shareholders.
The move puts Maasland on the back foot making it virtually inevitable he and three other directors, Joan Withers, Tony Frankham and Keith Turner, will face questioning on the merits of the Canadians' overall advances at the AGM next Tuesday. And this at a time when they will not have enough information to present a clear steer.
The board has instructed its investment advisers to see if any other players want to contest the takeover. This could be read as hostile, as the board has good reasons not to be enamoured by some of the Canadians' past surprise tactics.
But the feeling is mutual. The Mounties are still sore their Mark One proposal wasn't put to shareholders in the first place.
On Friday, the Canadians wheeled up CCP infrastructure vice-president Graeme Bevans to spruik the proposed two-tier deal.
Bevans resorted to some interesting metrics to bolster the fund's position. The offer price at $3.6555 a share represented a value of 22.2 times the company's 2007 EBITDA. Unfortunately, the new strategic direction Bevans charted for Auckland Airport (post a Canadian buy-in) conflicted with his protestations that the fund would not be able to control the airport company from a 40 per cent position.
Bevans said the fund's three new directors would take the board strength to 10. But the fund would really only have 20 per cent of the board votes, as one of the trio would act as an independent. Its shareholding vote power to select or remove directors would be kept to 30 per cent.
In my view the fund's claim that it will not have effective control is risible. The Takeovers Panel says too much emphasis has been given to the fairness of takeover offers, which often boils down to the value placed on the target company rather than taking a balanced view of the pros and cons of offers.
While the price offered by a bidder compared with the adviser's assessment of the value of a target company will always be an important merit of an offer, it should not necessarily be the determining factor, said the panel.
The panel was strong on partial takeovers. It noted most regulated takeover markets do not allow partial offers.
But under the New Zealand code, bidders can make an offer that would result in the offer holding between 20 and 50 per cent of the voting rights in the target company.
Auckland Airport shareholders should pay great attention to the forthcoming report on the Canadians' proposed offer to be carried out by independent adviser Grant Samuel. As the Takeovers Panel notes, an independent adviser's description of a partial offer as "fair", on the basis of price is problematic because either relatively few shareholders will get the benefit of any premium paid by the bidder or, if there are a large number of accepting shareholders, the premium will be well spread.
All continuing shareholders will experience the consequences of being minority shareholders in the ongoing company.
This is the fundamental issue. Shareholders need to think carefully about the two decisions they have to make for a partial bid to proceed.
It may be in their best interests to vote against the partial takeover because the fund would achieve effective control of the target company while, at the same time, also accepting the offer. If the offer is approved and succeeds, the shareholder will at least sell some of his or her shares.
On the other hand, if a shareholder is comfortable with remaining a minority shareholder in a company controlled by the fund because of the benefits the shareholder considers the fund will bring to the target company, then it may decide to approve the partial takeover but not accept the offer.
The position is further complicated by the fact the Canadians want to push through the amalgamation once they get on to the board. Bevans made it clear the fund sees this as a single transaction done in two steps.
For an amalgamation to go ahead the airport's board needs to give its approval. The proposal must then get 75 per cent approval from non-aligned shareholders.
By first acquiring 40 per cent of the shares through a partial takeover, the fund reduces the total number of shareholders it needs to convince of the merits of the amalgamation proposal. Two council shareholders (Manukau and Auckland City), which stand to achieve greater cash returns on their investment after the amalgamation, have a combined 23.5 per cent of airport shares. That combined stake carries a much greater overall voting weight once the Mounties' 40 per cent is subtracted.
It would not be too difficult to pick off enough other shareholders to get 75 per cent approval for the amalgamation, if the fund manages to get the board to agree to put the deal to shareholders.
Where the fund's strategy could come unstuck is if Lloyd Morrison succeeds in getting voted on to the airport board on Tuesday.
Morrison opposes the fund's decision to shoot for 40 per cent, saying this delivers effective control. He also maintains a 24.9 per cent stake would be more appropriate as it would preserve liquidity in the stock. If he gets on the board he could decide to pan the move.
Two weeks ago I wrote the existing directors opposed Morrison's appointment as an airport director on three grounds: his directorship of Wellington Airport, which they believe is a competitor; Infratil's push for a second Auckland Airport at Whenupai, which they believe would be in direct competition with Auckland Airport; and their belief that a possible acquirer of Auckland Airport should not be sitting at the board table.
Maasland made it clear that while the board believes Morrison has some conflicts, they are not opposed to his nomination. Morrison says the perception is unfair.
