Gaynor: Clear lessons in Richmond struggle

By BRIAN GAYNOR

The bitter battle for control of Richmond ended on Tuesday when PPCS acquired a controlling interest in the Hawkes Bay meat producer.

This concluded a four-year conflict that exemplified some of the worst aspects of the New Zealand corporate environment. These include breaches of company law; inadequate penalties; only one shareholder receiving the full premium for control; the best suitor losing out; and Richmond's share price plunging after PPCS acquired its 52.5 per cent shareholding.

The only compensation is that most of PPCS' actions will no longer be allowed when the takeovers code comes into force on July 1.

Richmond was established by W.R. Richmond, a Scotsman who came to New Zealand in 1887 and began trading under his own name in 1909.

Its growth was steady, if unspectacular, until Dawn Meats, Pacific Freezing and Hawkes Bay Farmers Meat Company were acquired in 1986.

Richmond's success attracted suitors. An attempt by PPCS to buy the Meat Board's 33.4 per cent holding in 1997 was blocked after High Court action by the company. This shareholding eventually ended up in the hands of HKM Nominees, a Maori investment company.

Two years later, HKM's shareholding was reduced to 25.5 per cent following the issue of shares in the takeover of Waitotara Meat and a share placement that included 2.5 million shares issued to Peter Spencer at $1.20 a share.

In February 1999, PPCS took a second bite at Richmond when it bought 33.3 per cent of HKM Nominees and acquired an option over another 33.3 per cent of the Maori investment group.

PPCS upped the ante seven months later when it said it was interested in acquiring 51 per cent of Richmond. The Dunedin-based company raised the pressure again in January 2000 when it exercised its option to buy 66.7 per cent of HKM and then began buying Richmond shares on the Stock Exchange's unlisted market between $1.32 and $1.80 a share.

A farmers group called Richhold was formed to fight off the southern invaders. It acquired 9.6 per cent of Richmond and issued a legal challenge to PPCS' share buying activity.

After obtaining legal advice, an independent committee of directors determined that PPCS had failed to give a restricted transfer notice, as required by clause 11.1 of the Richmond constitution, when it acquired a shareholding and an option in HKM Nominees in February 1999.

On June 29, 2000, the independent directors determined that PPCS was a defaulter in respect of all its 35.8 per cent shareholding and had to sell these shares to an independent party or parties within one month. If they were not sold within this period then Richmond would exercise this right in accordance with its constitution.

Talley Fisheries and Active Equities, the investment company of former Brierley Investment executives Paul Collins, Bruce Hancox and Patsy Reddy, were the two contenders. Just before the one-month period expired PPCS sold its 14.7 million Richmond shares to Active Equities at $2 a share, realising a capital profit in excess of $4 million.

PPCS provided Active Equities with vendor finance of $12.5 million in the form of redeemable preference shares. Active Equities stated that this allowed it "to obtain non-recourse bank debt for the balance of the investment, limiting Active Equities' financial exposure."

The battle for control of Richmond reignited in mid-May when PPCS bought a 16.7 per cent shareholding at $3. This included a 10 per cent holding from Richmond director Peter Spencer, who made a profit in excess of $7 million.

On May 23, PPCS issued a restricted transfer notice saying it wished to buy up to 60 per cent of Richmond at between $2.70 and $3.24 a share.

Richmond questioned the integrity of PPCS and tried to restrict its share buying by classifying it as an insider. PPCS successfully appealed to the Stock Exchange, and questioned Richmond's corporate governance standards.

On May 30, the British-owned, Invercargill-based North Meats entered the fray with a restricted transfer notice indicating it wished to buy 60 per cent of Richmond at between $2.70 and $3.24 a share.

This was quickly followed by PPCS raising its price range from $3.10 to $3.65. North Meats did the same and two days later increased its price range to $3.10 to $3.70 a share.

The North Meats offer appeared to have far more potential benefits for Richmond, but the efforts were in vain because on Tuesday PPCS notified the Stock Exchange it had effective control of 52.5 per cent of Richmond. In a complicated deal, PPCS has bought a 49 per cent interest in Active Meat, the Active Equities company that owns 35.8 per cent of Richmond, for an effective price of $3.65 per Richmond share. It has also acquired an option over the remaining 51 per cent of Active Meat that can be exercised in 2003.

Active Equities will eventually walk away from Richmond with a capital profit in excess of $23 million.

The Richmond takeover battle is a classic example of the ineffective rules and elitist characteristics of the New Zealand sharemarket. It also illustrates that when Lion Nathan is forced to sell Montana shares it can easily buy them back within a short time.

PPCS was first rebuffed by a High Court decision in 1997. In 2000, it had its 35.6 per cent shareholding confiscated for a breach of Richmond's constitution yet just 10 months later it owned these shares again and had effective control of the Hawkes Bay company.

How could this happen? What is the point of forcing a defaulter to sell shares if these can be repurchased from the same party in less than a year?

Was there any agreement between PPCS and Active Equities regarding the 35.8 per cent shareholding? Was Talley Fisheries offered vendor finance and what were the terms of the $12.5 million redeemable preference shares issued by Active Equities to PPCS?

How can control of a company be obtained without widespread shareholder involvement and against the wishes of directors?

The two most important Richmond shareholders were Active Equities with 35.6 per cent and Mr Spencer on 10 per cent. Mr Spencer received more than half his shares in a placement at $1.20 a share, yet he sold to PPCS when the board was strongly opposed to the South Island company.

In most cases it doesn't really matter to the sellers of large shareholdings whether the new owner is good for the company or not. One could argue that it is not particularly important from Mr Spencer's perspective because he still owns 20 per cent of Affco, Richmond's main competitor in the North Island.

The Richmond transaction is a major boost to Active Equities. The Wellington-based company has 4000 shares, issued at $10,000 each, and more than 60 shareholders. Its shares are quoted on the unlisted securities market and have traded in a range of $12,000 to $12,500 over recent months.

The Richmond shareholding is its largest asset, representing 41 per cent of total assets as at December 31.

The profit on the sale of the Hawkes Bay company represents an estimated $5,800 a share, yet Active Equities' share price has increased only $500 to $13,000 since the sale announcement.

Perhaps investors have unwarranted concerns over Commerce Commission approval or are unconvinced Active Equities is entitled to all the profits from the Richmond sale.

* Disclosure of interest: nil

* bgaynor@xtra.co.nz