Brian Gaynor: Bid and bid again in godzone

The ability of a bidder to make a new offer immediately after an earlier one has important implications for New Zealand shareholders.

The response to last week's column on takeover offers indicates a large number of investors do not understand the rules that govern these bids. The most common complaint is that New Zealand shareholders are unfairly treated under the Takeovers Code, particularly when compared with Australia.

Investors want to know why Graeme Hart could offer up to $2.75 for each Carter Holt Harvey share after paying $2.50 to most shareholders. Many believe that in Australia Hart would have had to pay $2.75 to those who accepted his earlier offer.

The situation is more complicated than that. Although British takeover rules have a 12-month stand-down period before a second offer can be made, there are no specific rules in Australia with the exception that the bidder may not offer less than it paid for shares in the previous four months.

Nevertheless, there have not been any quick second offers across the Tasman because of the belief that the Takeovers Panel would disallow them under the "unacceptable circumstances" provisions of the code.

Legal experts believe that if a bidder has stated an offer is closing on a particular day and the offer price will not be increased, then the panel would not allow it to make a new offer at a higher price immediately afterwards.

Bidders in Australia are concerned the panel might require them to pay the higher price to acceptors under a previous offer if they make a new bid immediately after an early one closes. The threat of this has meant that there hasn't been a new higher-priced bid in Australia immediately after an earlier one has closed. It is wrong to claim that Australian investors are treated better in a takeover situation, although there are concerns about the integrity of the process in this country when offerers say they will not be raising their bid but, a few days later, launch a new offer at a higher price.

It is clear that Hart or anyone else would be extremely reluctant to make a second offer at a higher price if they were required to pay this to acceptors under an earlier bid.

Hart owns 85.7 per cent of CHH and the extra 25c will cost him $47 million more than the earlier $2.50 a share offer. If he had to pay the additional 25c to all shareholders, then the new offer would cost him an extra $327 million.

The ability of a bidder to make a new offer immediately after an earlier one has important implications for New Zealand shareholders. The main objective of any purchaser is to pay as little as it can for an acquisition. If a bidder can make a number of simultaneous offers then the objective of the first one is to get to 50 per cent. A higher offer can then be made to flush out more sellers and, if 90 per cent has not been reached, then another offer can be made at a higher price.

This is what happened when Ngai Tahu took over Shotover Jet.

Hart indicated at the early stages of his $2.50 a share offer, which closed on January 27, that he would be happy with just over 50 per cent of CHH. He was probably surprised to reach 85.7 per cent, and a new offer, which was announced on February 3, was a logical step. But, as expected, the panel has rejected the latest bid because the $2.75 would be available for only seven days whereas the code requires an offer be open for 30 days (acceptors would receive $2.70 a share if Hart took more than seven days to reach the 90 per cent compulsory acquisition mark).

The non-compliant offer showed that Hart's lawyers either don't understand the code or they wanted to see what they could put past the panel. The offer also demonstrated that Hart felt he needed to come up with a special incentive to get remaining shareholders over the line.

This is a signal that he is not overconfident of reaching 90 per cent through a straightforward $2.75 a share bid and may have to raise his offer once again to reach this important target. Meanwhile, Stephen Costley and AMP are desperately trying to get a few more Capital Properties shareholders to accept the $1.48 a share offer in their quest to reach 90 per cent and move to compulsory acquisition. AMP must be hoping that there are a few remaining shareholders who still don't understand that they are in a strong position under the code.

The latest development is a letter sent from Nick Williams, an investment adviser at First NZ Capital, to remaining Capital Properties' shareholders. Whereas most letters in this takeover have been addressed either "Dear Investor" or "Dear Capital Properties Shareholder", Williams has addressed shareholders by their first name even if he has never met or talked to them.

The official line at First NZ Capital is that Williams has sent his letter to keep Capital Properties' shareholders informed. The problem with that argument is that his letter doesn't contain any substantive additional information to AMP's letter, dated January 31, and the independent directors' letter, dated February 1.

Capital Properties traded above $1.48 for the first time on a consistent basis after these two letters were written. The firm's share price opened and closed at $1.54 on February 9, the day Williams wrote his letter, yet he made no mention of this. The clear tone of his letter was that shareholders should accept the $1.48 offer. Williams also wrote that AMP "have said they will not lift the offer price" even though the offerers' letter nine days earlier made no mention of this, and Hart announced a new offer for CHH at $2.75 on February 3 when he had earlier stated in big bold print that his "$2.50 offer price will not be increased".

The investment banking division of First NZ Capital is advising AMP on the offer. Williams is an investment adviser and has written to Capital Properties' shareholders even though First NZ Capital is not supposed to provide investment advice to Capital Properties' shareholders on whether to accept AMP's bid.

Have the Chinese walls blown over at First NZ Capital?

The takeover offer for Lyttelton Port should also be extremely interesting. Christchurch City, which already owns 69 per cent of the target company, will offer $2.10 a share to remaining shareholders. The problem as far as Christchurch City is concerned is that a large percentage of shareholders are from Canterbury, as 50 per cent of the shares in the 1996 IPO were reserved for preferential allocation to residents of the region.

Canterbury investors did not accept the first offer for Mike Pero Mortgages, and Cantabrians were behind the strong opposition to the Shotover Jet bid that resulted in minorities receiving a much higher price under the compulsory acquisition provisions of the code.

It would be a surprise if hard-headed Canterbury investors accepted a 20 per cent premium over market for their Lyttelton Port shares when last year's offer for Ports of Auckland was 24 per cent above the market price.

It will be extremely surprising if Christchurch City gains full control of Lyttelton Port at $2.10 a share even if the independent appraisal report endorses this offer price.Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.