Montana fiasco confirms NZSE failings

The takeover battle for Montana Wines confirms again that the New Zealand Stock Exchange is a hopelessly inefficient, undemocratic and elitist organisation.

It also highlights that its takeover rules discriminate against individual shareholders and its market surveillance panel is naive.

The new takeovers code, which comes into effect on July 1, will bring more order to the market but the exchange still has its head in the sand.

Managing director Bill Foster continues to insist that there is no need for a change because the existing rules are more effective than the proposed code.

It is hard to believe that anyone can be so out of touch with investor sentiment both here and overseas.

The battle for Montana began on November 24 when Lion Nathan notified the exchange that it wished to increase its shareholding from 28 per cent to 51 per cent and was prepared to pay between $3.20 and $3.80 a share.

This notice, which was given under listing rule 4.5, indicated that purchases could be on-market or by private treaty. Lion could not buy any shares for 15 business days because its chief executive, Gordon Cairns, was a Montana director and, as a consequence, Lion was an insider.

Ten days later, Montana chairman Peter Masfen notified the exchange that he wished to raise his shareholding from 20 per cent to 51 per cent and would also offer between $3.20 and $3.80 a share.

On December 12, three days before Lion could start acquiring shares, Montana's independent directors announced that PricewaterhouseCoopers' assessed value of the company was between $4.16 and $4.64 a share. Shareholders were advised to reject the Lion and Masfen offers.

The battle began in earnest at 4.39 pm on Wednesday, February 7, when Allied Domecq announced that it was making a full takeover offer for Montana at $4.40 a share. Under the listing rules, Allied could:

Make an offer by private treaty or through the market and give three days' notice. (Allied was not an insider so its notice requirement was shorter than Lion's.)

Make an offer through the market only and give just one day's notice.

As Allied took the latter option, it could start acquiring its first 19.9 per cent on February 8 (there are no restrictions on the purchase of this shareholding), and the remaining shares on February 9 (it had to wait until this date because its notice was given after the market closed on February 7).

Allied's bid was cleverly structured to comply with, and take advantage of, the listing rules. The London-based group knew that Lion would have to give two days' notice of a price increase to its November 24 offer. Thus, Allied could build up a controlling stake on Friday whereas Lion would have to wait until Monday before it could buy more.

Allied's advantage was more apparent than real.

Before the market opened on Thursday, Lion announced it had raised its November 24 offer to a price range of $4.65 to $4.80 a share and would begin acquiring Montana shares on Monday.

Allied entered the market to buy its initial 19.9 per cent at $4.40 but got nowhere. More than 5.7 million shares were traded on Thursday at prices ranging from $4.65 to $4.75.

The Stock Exchange's problems began at 12.55 pm when John Oldfield, of Russell McVeagh, e-mailed the market surveillance panel requesting a waiver that would allow Lion to buy Montana shares on Friday instead of Monday.

The request said that the waiver was in respect of the November notice that allowed Lion to buy on-market or by private treaty.

At 3 pm a telephone conference call was held among Philippe Leloir, the panel's secretary, and three panel members - Paul Bevin, Sir Ian McKay and Denis Wood.

At 3.20 pm Mr Leloir phoned Mr Oldfield to tell him that Lion would be granted a waiver. Within minutes, the dealing rooms at Credit Suisse First Boston, Lion Nathan's broker, were a hotbed of activity. Every phone was humming as dealers tried to persuade Montana shareholders to sell their shares to Lion.

CSFB's sales pitch was that this was a first-come, first-served offer for 23 per cent of Montana. It would be executed at one minute past midnight but firm commitments would be required before 6 pm, although orders could be withdrawn before midnight.

By the time Mr Leloir had sent written confirmation of the waiver to Mr Oldfield, and this was released to the Stock Exchange at 4.40 pm, CSFB had already contacted many of Montana's big shareholders.

CSFB is the master of the pre-market dawn raid - or the midnight raid in this situation - and this was no exception. Before the market opened on Friday morning, Lion Nathan had effective control of New Zealand's largest wine company. Allied Domecq and Montana's small shareholders were dead and buried.

Why did three panel members, who have extensive experience in fund management, corporate advisory work and law, make such a naive and illogical decision?

They argue that nothing in the waiver request "suggested to the panel that any waiver would be used to pursue off-market transactions before the market opened on February 9."

Yet Mr Oldfield's e-mail clearly stated that Lion Nathan was allowed to buy shares either on-market or by private treaty.

They should also have known that CSFB, and most other brokers, has never waited for the market to open before soliciting orders.

The panel also believed that Lion was disadvantaged by the rules and it wanted "to put the two bidders on an equal footing." It must have paid no attention to market trading on Thursday morning because when Allied tried to buy its first 19.9 per cent it got nowhere because of the higher offer announced by Lion. If anything, Lion was already in the driver's seat.

In private, panel members argue that their botch-up didn't matter because Allied was unwilling to increase its offer and Lion would have gained control anyway.

There is some truth to this argument. Montana's independent directors suggested that Allied could raise its offer but Philip Bowman, the British group's chief executive, who was in Auckland during the contest, indicated shortly after the waiver announcement that $4.40 was his top price.

But even if the waiver request was rejected and Lion acquired 51 per cent, the outcome would have been severely criticised.

First-come, first-served offers to selected shareholders do enormous damage to a market's reputation and are illegal in most Western countries.

Even in the United States, the bastion of the free market, Lion Nathan would have had to make a pro rata offer to all shareholders if it wished to go from 28 per cent to 51 per cent.

A pro rata offer for 23 per cent of Montana at $4.65 would be no match for a 100 per cent offer at $4.40. Lion would probably have to pay $5-plus under a pro rata regime if it wished to obtain 51 per cent.

First-come, first-served offers also coerce shareholders into making hasty decisions that may not be in the best interests of the target company.

When CSFB hit the phones investors had only minutes to make a very important decision.

Under a pro rata regime - which will come into force in New Zealand on July 1 - investors have plenty of time to consider competing offers.

The likely conclusion from a considered analysis is that Allied Domecq, with its huge international distribution network, would be a far better partner for Montana than Lion Nathan.

The remaining Montana shareholders have also been disenfranchised and they can do nothing if Lion Nathan makes a hash of running their company.

This week, Bill Foster continued to support the first-come, first-served offer.

He refuses to acknowledge that these bids severely damage the market's reputation, can lead to hasty and irrational decisions and disenfranchise a company's remaining shareholders.

It beggars belief that the exchange and its market surveillance panel can be so out of touch with commercial reality.