Lessons from Lion Nathan in Takeover 101

FRAN O'SULLIVAN looks behind the financial headlines at the corporate manoeuvres that gave Lion Nathan control of Montana.

Rule number one: if you want to launch a sudden-death ambush on Lion Nathan, make sure CEO Gordon Cairns is further afield than deepest China and that chairman Douglas Myers is with him.

Rule number two: dig in, don't sleep until the deal is done, and - most importantly - never, ever, mount a bidding war for control of a company in Lion Nathan's sights with your final offer.

That's corporate Raiding 101, old chaps.

Outsmarted, outbid and comprehensively beaten - for now - Britain's Allied Domecq was this week bleating about the unfairness of New Zealand's takeover regime.

It complained about the lack of a rigorously enforced takeover code which would have stopped Lion Nathan from whipping control of New Zealand's premier wine company from under its nose without first having to trump Allied's $4.40-a-share bid for 100 per cent of Montana.

It also complained about the knave-like behaviour of the Stock Exchange's market surveillance panel, which bent the rules in Lion Nathan's favour by allowing it to get into the play one day after Allied's offer was tabled.

The exchange should have enforced the usual two-day stand-down for a company insider which had signalled that it wanted to move to 51 per cent, it said.

Down at Auckland's Viaduct Harbour, sweltering in a mid-February heatwave, Cairns was calmly preparing to smooth any fallout between himself and Montana's independent directors, who had immediately backed Allied Domecq's 100 per cent bid without giving their major shareholder the courtesy of time to mount a counter-offer.

The independent directors wanted all of Montana shareholders to benefit from a takeover bid, rather than just the usual institutional suspects on Lion broker Credit Suisse First Boston's A-list rolodex and influential overseas equity players such as the Capital Group, with its 7 per cent holding and enough muscle and moxy to blacken New Zealand's name as an investment destination if they were not cut in on the action.

But it was now business as usual.

And it was Lion Nathan which controlled Montana, not Allied Domecq.

Montana's gracious executive chairman, Peter Masfen, was locked in with a 19.9 per cent stake and Cairns wouldn't need to use too many Scottish wiles to restore harmony between the two of them.

Both Masfen and Cairns are astute players. They have worked together on the Montana board for almost a year and even Cairns' insinuation that Lion's shareholding influence was the main factor behind the doubling of the wine producer's shareprice since it took a 28 per cent stake last year is a stretch with which both men can live.

Flashback to Wuxi, China. It's late pm, Wednesday, February 7, at the three-star hotel where Cairns and his financial officer, Paul Lockey, are anxiously trying to get a Chinese hotel manager to find them a speaker phone so they can liaise with Lion Nathan's strategy committee and shaft the Allied camp's ambush tactics.

"You've got a phone," says the manager "speak on it."

Not the answer the Lion boys wanted to hear. They would also have to overcome the five-hour time difference as they worked with Doug Myers, long-time Lion dealmaker Mike Smith, fellow director Geoff Ricketts, and the company's legal advisers, Russell McVeagh, on the fight-back strategy.

That Lion Nathan would fight cold-bloodedly for control of Montana should never have been in doubt. Doug Myers' take-no-prisoners approach is legend.

Allied and Lion play in the same corporate sandpit. But the affability of Philip Bowman, the British company's CEO, and the distribution partnerships between the two companies go only so deep.

Particularly when Allied had waited until Cairns was in China, to make its bid, giving Montana's independent directors and Masfen a 6 pm deadline that day to get behind it or have the offer withdrawn.

But within 24 hours, the brewing company had been granted its controversial waiver. CSFB quickly lined up enough institutions to make Lion's $4.65-a-share counter offer for 51 per cent of Montana a fait accompli by the time the New Zealand market opened that Friday.

"For two nights we didn't sleep," recalls Cairns. "Time was of the essence. Our obligations to our Lion shareholders were to protect their interests and the Montana stake."

Cairns reiterates that the surveillance panel had to grant the waiver to allow Lion back into the play and restore competitive neutrality.

But what really stymied the Allied move was price, and under-estimating the lengths to which Lion would go to protect its own position.

Allied's decision to isolate $4.40 as its top and only price was clearly a useful stampede device to push Montana's independent directors and Masfen to okay its conditional bid.

"Philip Bowman was in New Zealand and had a mandate," Cairns explains. "I was stuck in China."

"But when we talked to the institutions, it was their decision. If you've got $4.65 compared to $4.40, then you're going for $4.65."

Lion's bid price of $4.65 is clearly well above the $3.20-$3.80 range it stipulated in December, when it issued a notice stating it wanted to get to 51 per cent. But Cairns rationalises that Lion's average price for its Montana stake is still only $3.39 a share. Its earlier 28 per cent holding had been acquired at $2.38 a share.

Constraints imposed by Japan's Kirin Breweries, Lion's own controlling shareholder, forbade the Australasian brewer from moving beyond the current 51 per cent control threshold - if indeed it needed to.

"Allied have been portrayed as victims but they're the second-largest such company in the world. We're small by world standards. We get portrayed as ogres. But it's very much David and Goliath and we're definitely David," Cairns snorts.

"They shouldn't complain about losing. I've played rugby - you don't tell the referee afterwards that you're not happy about the rules here."

Allied had, in fact, telegraphed Montana's independent directors around Christmas that a 100 per cent bid was likely, Montana director Barry Neville-White confirms. Masfen was also approached before the ambush. Various arrangements, where Allied and Lion might work together, had also been telegraphed.

Masfen denies market scuttlebutt claiming he had arranged for JB Were to solicit a suitable buyer for Montana. Masfen Holdings is obviously too small to swallow Montana on its own, but he wants to stay a long-term shareholder.

Masfen had told Cairns repeatedly that he would not back a control play by Lion unless it made a 100 per cent offer. But he is sanguine about working with Cairns and at pains to stress that he has lived in many corporate situations with a dominant shareholder.

The task for both men is to ensure Montana remains on its growth path, a position which will be reaffirmed when the company's results are released on Monday.

"We didn't plan for it to happen last week," said Cairns.

"Now all the napalm's over, we've got to make it work."

Monday: The acid test.