Gaynor on Wednesday: Grocorp takeover offer leaves sour taste

By BRIAN GAYNOR

Grocorp Pacific

The takeover offer for Grocorp Pacific, which is in the form of a compulsory acquisition notice, is a strong candidate for the cheekiest bid of the year.

It ranks with the failed attempt by Sea Holdings to acquire 100 per cent of Trans Tasman Properties.

Grocorp Pacific was listed in December 1984 after an issue of shares at 50 cents each to the public. Over the years it has been involved in a large number of unsuccessful export activities that have included apricots, asparagus, cherries, nashi, squash, onions, kiwifruit, apples, frozen vegetables and ice cream.

The company has struggled to produce positive results and has paid only one dividend, 1.5 cents a share in 1994.

It has also had a wide range of shareholders, including Sanyo General Capital of Japan with a 50 per cent holding.

In 1998 and 1999, Camrant Holdings acquired an 82.7 per cent interest from Sanyo and Sentry Investments. Camrant is a difficult company to pin down but it is part of a wider group that includes Humphry Rolleston, Alan Hubbard and Edward Sullivan as directors.

This group also bought the substantial apple interests of Eastern Equities in Hawkes Bay.

In recent years Grocorp has shed all its activities except apples. Directors have continually berated the export monopoly of Enza (formerly the New Zealand Apple and Pear Marketing Board) and have told shareholders that the company's position would dramatically improve if Government control was removed.

On May 10, two days after the Government announced the deregulation of the apple industry, Grocorp told the stock exchange that a compulsory acquisition notice was being issued to minority shareholders.

The action was facilitated because Camrant (82.73 per cent), Hawkes Bay Apples (3.96 per cent) and JG & CE Sinclair (3.91 per cent) were now associated parties and they had a combined shareholding of 90.6 per cent.

There was no mention of their association in the recent annual report or substantial security shareholders notices.

According to stock exchange rules, if a person, or a group of associated persons, acquires beneficial ownership of 90 per cent or more he or she shall issue an acquisition notice within 20 days.

How did these three shareholders suddenly become associated parties and announce the compulsory acquisition of Grocorp Pacific just two days after the Government deregulated the apple export industry?

Five days later, on May 15, Camrant and associates said they would offer 16c a share. This was below the market price of 18c a share but well in excess of Deloitte Touche Tohmatsu's assessed value of between 2c and 5c a share.

The Deloitte report, which was prepared by its Christchurch corporate finance department, is an unsatisfactory document as far as Grocorp shareholders are concerned.

First it states: "Although it [Grocorp] has budgeted a significant profit in the current financial year [to October 31] there is insufficient evidence to provide confidence in the projections." Accordingly, Deloitte rejects this forecast and the traditional discounted cash flows (DCF) and capitalisation of earnings valuations and goes for a notional liquidation method.

This favours the bidders because a notional liquidation method will nearly always give a much lower valuation when a company is expecting a strong rebound in earnings - Grocorp is forecasting a pre-tax profit between $0.3 million and $1.2 million for the present year.

More importantly, no attempt has been made to assess the impact of industry deregulation from October 1, yet shareholders have been constantly told that Enza's export apple monopoly has been the main reason for the company's recent poor performance.

Deloitte brushes aside the 18c share price with the following comment: "[We are] of the opinion that the prices at which Grocorp shares are trading on the New Zealand Stock Exchange reflect public expectation of a bid for full control. We consider that any premium for full control has already been fully anticipated by the market."

On what basis does Deloitte make this assumption? Is Deloitte aware that industry deregulation also influences the company's share price?

Stock exchange listing rules obviously did not anticipate compulsory acquisition without a prior bid because there is no provision to send the appraisal report to shareholders.

A two-page summary of the Deloitte report was sent to shareholders with the acquisition notice on May 23. It had no substantive information, particularly on profit forecasts and valuation methods.

The brevity of the letter is important because, under the compulsory acquisition provisions, shareholders have 10 business days to object to the price and the objection will normally be based on the appraisal report.

When a shareholder(s) objects, an independent person is then appointed to determine the compulsory acquisition price for the dissenting shareholder(s). If the final price is greater than the consideration specified in the acquisition notice (in this instance 16c) then the cost of the independent expert is borne by the bidder.

If the final price is the same or less then the objector(s) pays the costs and receive the lower price. This is a big disincentive for shareholders to object.

Grocorp shareholders, who have until tomorrow to object to this audacious offer, will probably accept the inevitable.

But most of them will be left with a bitter taste in their mouths and will be asking the following question: why didn't the independent directors insist that Deloitte take into account this year's profit forecast and assess the impact of industry deregulation from October 1?

* bgaynor@xtra.co.nz