KEY POINTS:
The takeover battle for Alcan in Montreal should be closely studied by all New Zealand directors of listed companies.
While most are happy to accept bids that are at a 20 to 30 per cent premium to the current sharemarket price, Alcan has demonstrated that a strong and determined board can extract a substantial acquisition premium for shareholders.
The share price of Rio Tinto, Alcan's successful bidder, has eased back because investors believe that it may be paying too much for the Canadian aluminium producer.
When is the last time the share price of a New Zealand company bidder has come under pressure because investors believed that it was paying too much?
The Alcan story began on Monday, May 7 when the company announced it had received an unsolicited offer from Alcoa, a major producer of alumina and fabricated aluminium. The bid, which was for US$58.60 cash and 0.4108 Alcoa shares for each Alcan share, valued Alcan at US$73.55 a share.
This represented a 20 per cent premium on Alcan's previous day close and was 32 per cent above the company's average closing share price over the previous 30 trading days.
The bidder's share price rose from US$35.66 to US$39.50 the day after the announcement. This indicated that investors believed that the offer price would add value to Alcoa.
Alcan's directors immediately announced that they were committed to creating shareholder value and they had a clear strategy to achieve this. They advised shareholders to defer any decision until the offer could be fully reviewed.
On May 22, by which time Alcan's share price had climbed to US$81.03, the target company's board released an impressive 45-page document with the words Rejection and Reject in large bold type on the front cover. Each page of the report contained the words Reject the Alcoa Offer in bold type at the bottom.
The directors wrote: "The board is highly confident in the future of Alcan and the continued success of its strategies which are strongly supported by Alcan's deep pool of outstanding talent with proven execution capabilities.
"Its financial position, asset base, energy position, leading technologies, organic growth projects, sustainability practices and the depth and quality of its management all contribute to Alcan's unparalleled strength and ability to carry out its ambitious business plans in support of its highly focused strategy based on principles of value-based management."
Why don't New Zealand directors make these strong comments in response to takeover offers?
Alcan was particularly critical of the premium for control, which was 32 per cent above the company's average closing share price in the 30 trading days before the offer.
The company quoted data that showed the average premium for unsolicited global acquisitions in the period from January 2000 to May 2007 was 33 per cent and 51 per cent in Canada.
As the average premium for unsolicited offers in the metals and mining sector was 54 per cent, the directors believed that the 32 per cent premium offered by Alcoa was hopelessly inadequate.
The board also revealed that it had mandated the strategic committee, together with the group's management and financial and legal advisers, to look at further ways to create shareholder wealth. This included talking to third parties.
In other words, the Alcan board had instructed its strategic committee and advisers to look for other potential bidders.
Strategic committee members received an additional US$2000 for every meeting attended, US$1000 for each meeting they took part in by telephone and a retainer of US$30,000 was paid to the chairman of this committee.
Alcan shareholders got great value for their money as the directors announced on July 12 that they were unanimously recommending a takeover offer from Rio Tinto at US$101 a share.
This values Alcan at US$38.1 billion and represents an amazing 82 per cent premium over Alcan's average closing share price in the 30 days before the Alcoa offer.
The Alcan board drove a hard deal as the new aluminium group will be called Rio Tinto Alcan and will be based in Montreal.
Dick Evans, Alcan's current chief executive, has been appointed to the same position in the new group. He will realise over US$50 million ($65 million) from his shareholding and numerous share schemes as a result of the Rio Tinto offer.
Rio's share price hit an all-time intraday high of A$105.19 on July 12 but quickly dropped back below A$100 after the Alcan bid was announced. This clearly indicates that the Alcan directors have done an excellent job for shareholders as investors are concerned that Rio has agreed to pay too much.
The 82 per cent share price premium indicates that Alcan has extracted full value from Rio Tinto.
The optimism of the Alcan board, and its determination to reject a bid that did not represent a substantial price premium, is in stark contrast to most New Zealand companies, particularly Tourism Holdings.
The offer for the tourism company chaired by Keith Smith represented a premium of just 27 per cent over the average share price during the 30 days before the offer.
The Tourism Holdings board not only accepted the offer but also agreed to pay MFS Living and Leisure a $3.5 million break fee if another proposal resulted in the offer failing to become unconditional or if a director of the target company did not recommend the offer or changed his recommendation. The Rio Tinto/Alcan deal also has break fees, but only after an 82 per cent premium has been negotiated.
Why were Tourism Holdings' directors willing to accept a premium of only 27 per cent and agree to a break fee that discouraged them from seeking alternative bidders?
It is easy to understand why a number of major institutions accepted the low-priced offer. The problem they faced was that the board's response to the MFS bid was totally acquiescent and demonstrated that the directors have no clear growth strategy, have demonstrated little public confidence in their executive team and are not excited by the challenge of growing the company.
Institutional investors in North America have strongly supported the optimism and determination of the Alcan board, but how can we expect performance-oriented investors to have confidence in the long-term future of Tourism Holdings when they are stuck with a board that demonstrates little enthusiasm and vision and has limited tourism experience?
The Tourism Holdings offer closes today and it will be touch and go whether MFS reaches 90 per cent and is able to move to compulsory acquisition.
If MFS reaches 90 per cent today, then Tourism Holdings will be delisted and the current directors will be replaced by an Australian-dominated board. If MFS doesn't reach 90 per cent, the offer will lapse and Tourism Holdings' share price is expected to fall.
Any share price decline will be partly due to the lack of confidence in the board and its inability to demonstrate and communicate a clear growth strategy. The extent of the share price fall will depend on whether the Tourism Holdings board has a Plan B and whether it will release the details of this plan to the market before trading begins on Monday morning.
Based on recent performance, this is unlikely, and one of the first priorities for Tourism Holdings shareholders, if the bid fails, is to identify a number of new directors to revitalise the board.
Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
