Richard Inder: Signs point to success in Hart's pursuit of CHH

Graeme Hart is going for broke with his $3.3 billion bid for forestry giant Carter Holt Harvey. On Thursday, the billionaire disclosed he had almost 70 per cent as he extended his bid for another three weeks.

Until then, many investors expected Hart to let his bid lapse, sitting tight on the 51 per cent stake he acquired last month from International Paper for $1.7 billion and a few others who wanted the cash.

At this level of holding, he would have enough sway to push through his planned reorganisation - read cost-cuts and most likely a break-up.

Gains would be shared with other shareholders, but so would the risks.

But the extension shows he is willing to take on much more of the risk and sees substantially more value in the company. His doom-saying letter to shareholders yesterday underscores this point.

Full control has several advantages.

He can use CHH's cashflows to pay the interest on money borrowed to pay for his bid. He lined up nine banks to lend him $3.4 billion for the bid, but interest on the loan, for the moment at least, must be serviced from his own pocket.

With just 70 per cent of the votes, he could force CHH to borrow to pay a special dividend to help relive his personal debt burden. But such a move would see a leakage of cash to minority investors.

(CHH has plenty of capacity to borrow more. Its net debt stands at about $350 million, yet the company has the ability to service as much as $1 billion).

Meanwhile, with 100 per cent he could push through major transactions, such as a break-up, without reference to minority shareholders. Deals could be effected quickly and he would save on the not-insubstantial costs of consultation. Finally, he would take the company out of the public eye, satisfying his penchant for privacy.

But the $3.3 billion question is whether he will succeed. Several factors are in his favour.

The risks of a hard landing are growing, especially after Reserve Bank Governor Alan Bollard's hawkish speech in Rotorua yesterday to the Credit and Finance Institute. In such an environment, the already weak outlook for equity markets begins to look worse.

This will encourage a flight from stocks exposed to the ebbs and flows of the economy to defensive plays such as utilities. Of the two, CHH is firmly in the former camp.

Meanwhile, CHH's third-quarter earnings, due on October 26, are not expected to be pretty. As part of the independent analysis of Hart's bid, accounting and advisory firm Grant Samuel forecast December full-year operating earnings would fall from $295 million to $250 million. Now doubts are growing it will even achieve this figure.

CHH is suffering under the strong dollar, now trading near post-float highs against the US dollar, and the downturn in the Australian housing market - one of the company's most important outlets for its products. Worker strikes at several mills are eating into earnings.

Hart's reorganisation could be costly. In the short term, this could depress earnings. As a result, a plunge in the share price before any gains that come from a reorganisation is more than possible.

Meanwhile, pressure is mounting for the index trackers to accept Hart's offer.

Once the free float of a company on the sharemarket falls below $1.2 billion, its weighting in the key benchmark indices is reduced. Hart's bid has already cut the free float of the business to just under $1 billion and, as a result, funds that track indices will have to sell shares to reflect this new weighting. In turn, this will encourage more selling.

Retail investors who last February held about 7 per cent of CHH's shares can now sell at a price seen infrequently over the past five years. For a company that has been a perennial disappointment, the incentive to sell may be strong.

Finally, some investors will refuse to back Hart, regarding his faith in his investment in CHH misplaced.

It seems certain more investors will sell into this offer. But it is by no means clear that Hart will get to 90 per cent, the point at which he could force minority investors to sell. Hart will, at the very least, guarantee an exciting ride.

As the Business Herald disclosed last week, the complicated asset swap with Fonterra last month could see Hart pocket as much as $344 million for three months' work. This is proof of his eye for value and alone it may be sufficient justification for investors to hold on to CHH shares for as long as possible.

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Chicken talk

Food giant HJ Heinz is taking its time to sell its Tegel Foods chicken business. The decision to sell was made last December, yet the business is still in limbo. In such an environment, it is no wonder Australia's Ingham has been tipped as a bidder.

The talk is ill-informed. Such a merger would see Ingham controlling 80 per cent of the fresh and frozen chicken market. The Commerce Commission would not accept such dominance.

A more intriguing scenario is the shortly-to-be-floated Goodman Fielder buying the company. The business will already have a significant presence in supermarket chiller cabinets including the Kiwi and Huttons meat business, which would complement the Tegel business nicely.