Dissecting a company's heart

Ross Grant - former Southlander and head of Australasia's leading corporate valuer - is laughing down the phone from his Sydney office.

The suggestion that members of New Zealand's financial community have said positive things about Grant Samuel - the company he founded in 1988 - has amused him.

"That's unusual," he says. "You could argue that if we're not being criticised, we're not doing our job."

Grant can rest assured that his company still has plenty of critics on this side of the Tasman. This month, the New Zealand office came under fire for its valuation and subsequent revaluation of forestry company Carter Holt Harvey, which is in the process of being taken over by Graeme Hart.

The judgments of independent valuers play a crucial part in deciding who wins control of this nation's biggest companies. When a bid is launched, the company that is the target of the takeover is required by law to commission a valuation from an independent party. That valuation is presented as a fair value range, with a low-end share price and an upper price.

In most cases, the target company's independent directors urge shareholders to reject the offer if it does not fall within that range and that advice is usually followed.

Grant can't talk about current cases but he has learned to take criticism with a grain of salt.

He recalls an Aussie mining industry takeover from earlier this year.

"When the bid for Western Mining came from Xstrata we put out a value which was 50 per cent over the market price and there were howls of outrage," he says.

When another company bought it - paying well above the original valuation - it prompted howls of outrage about Grant Samuel being too conservative.

He said an independent valuation was just "a view" and it should not be treated as gospel.

"A really good report should allow a reader to say: I see their logic, I understand how they've reached their conclusion but I disagree with it because there is enough information for me to form a different view."

Grant Graham, a partner at Ferrier Hodgson, said the extent to which shareholders relied on reports depended on the status and sophistication of the individual investor.

"At one end of the scale, the institutional investors will often rely very little on independent appraisals," he says. "They are well placed to evaluate the worth and merits of a bid themselves. But at the other end of the scale, the mums and dads do rely on the reports. They lack the resources to reach conclusions in the time allotted."

Many of the people spoken to by the Herald did have kind words for the valuers and the job they do - but it was generally out of sympathy.

Their's is a job "fraught with danger", says one broker who - like many in the financial community - didn't want to be named.

Long-time company director Sir Dryden Spring - who has had to deal with more than his fair share of takeover plays - puts it another way.

"They're on a hiding to nothing," he says. "You always have a whole group of people with a vested interest in criticising your valuation. And they go at it fairly vigorously."

By Grant Samuel's reckoning, it does independent valuations for about 80 per cent of all takeover deals in Australasia. It may be closer to 90 per cent by market capitalisation, Grant says.

Ferrier Hodgson, number two player behind Grant Samuel, says that it has about a 25 per cent share of the New Zealand market. The remainder of the work is divvied up among the big accounting firms.

It is often more difficult for the specialist accounting firms to get the valuing jobs because they are conflicted by the auditing work they do.

Valuation work accounts for less than 25 per cent of Grant Samuel's revenue in Australia and perhaps about 30 per cent in New Zealand. Most of its income comes from advising directly on mergers and acquisitions (working with the company doing a takeover), property development, debt advisory work and other traditional areas of corporate financial advice.

Grant Samuel is not big enough to compete with the international bankers - such as Goldman Sachs and Credit Suisse First Boston - for the biggest takeover deals. That leaves them free to handle the valuation work on those deals.

Questions are sometimes raised about whether Grant Samuel is too dominant for the small local market.

Shareholders Association chairman Bruce Sheppard says he is pleased that Grant Samuel has a declining monopoly - "Ferrier Hodgson is providing reasonable competition".

But Sheppard is not so concerned about independence, "which is really a mindset which anybody should be able to maintain".

What bothers him is the reliance valuers put on a company's management for key information.

It is an issue that goes to the heart of the Carter Holt Harvey controversy, where management has largely copped the blame for failing to provide adequate information to the valuers.

After Grant Samuel valued CHH at between $2.55 and $2.95 a share (compared with Graeme Hart's offer of $2.50), management downgraded the profit outlook. The revised forecasts were passed on to Grant Samuel with a request that the information be considered and the valuation revised if necessary. It resulted in a new valuation of between $2.43 and $2.90, putting Hart's offer within the fair value range.

"Most independent reports are a regurgitation of what they've been spoon-fed by management," Sheppard says. "It's rare that they go very far in search of external data to help them make their case. They need to go beyond due diligence and discussion with management and check externally."

Michael Lorimer, founding partner of Grant Samuel's New Zealand office, says that accusation is a little unfair.

"We do drill down into the business," he says. "We don't just take the forecasts and say thank you very much. We talk to management; we talk to the heads of the divisions. It's backed up with budgets for the various sectors of the business, strategic plans. You don't just get sent some numbers on the email."

But to a certain degree, valuers will always be reliant on the quality of information management provides, Lorimer concedes. There is a degree of trust involved, particularly around figures like the ongoing costs of running a business.

"They know what it costs to run a plant. They'll give us their electricity prices and we'll go along with them," Lorimer says. "But when it comes to the market price, we'll look at what other commentators in the market are saying and may form a slightly different view. Generally a more conservative view."

It is not unusual for management to disagree with the valuations.

"But only on the big-picture assumptions. As to costs, we've got to take their view. We can't go in and say: Oh you can cut 20 per cent [of staff] out of that factory. We wouldn't have a clue."

Grant says sometimes things can get quite heated behind the scenes. "But that is healthy."

Once the valuation goes public, it is rare for the independent directors to make a contradictory recommendation about the value of the offer.

But Grant wouldn't mind if they did.

"I would encourage them to," he says. "I'm always critical of directors that abdicate their responsibilities to independent experts."

In the end a Grant Samuel valuation is "just a judgment", he says.

"Although hopefully it's a good judgment."



Judgment call


Takeover battles where independent valuers have made a difference:
* October 2005: Graeme Hart buys a majority stake in Carter Holt Harvey (in a private deal) at $2.50 a share. He extends the offer to all shareholders at that price. Grant Samuel values the shares at $2.55 to $2.95 a share. Management downgrades its profit outlook, and Grant Samuel revises the value to between $2.43 and $2.90 a share. Hart now has a 77 per cent stake and the offer was due to close last night.


* May 2004: Craig Norgate's Rural Portfolio Investments (RPI) launches hostile bid for majority control of Wrightson. It offers $1.50. Grant Samuel says the company is worth between $1.61 and $1.86. RPI's bid succeeds but only after the offer is raised to $1.65


* July 2003: Australia's Toll offers 95c a share for Tranz Rail. Grant Samuel values the shares at between $1.34 and $1.62. Toll raises its bid to $1.10 and succeeds in getting majority control.