Gaynor: Lessons from the Montana battle

Montana

The Montana takeover battle has more twists and turns than a rollercoaster ride.

Allied Domecq's strategy has been particularly shaky, and the British company will have only itself to blame if it eventually loses out to Lion Nathan.

On Wednesday February 7, Allied announced that it was making a full takeover offer for Montana at $4.40 a share with the substantive purchases beginning, on market, on February 9 through broker JB Were.

On February 8 Lion Nathan, which already held 28 per cent of Montana, announced it wished to acquire a 51 per cent shareholding and would pay a minimum of $4.65 a share.

Under Stock Exchange rules Lion Nathan could not begin buying until Monday, February 12.

Lion was then granted a waiver that allowed it to start buying shares on February 9.

But its broker, Credit Suisse First Boston (CSFB), approached a number of Montana shareholders on February 8.

A Stock Exchange inquiry is looking into these pre-deadline approaches.

At 5.26 pm on February 8, Allied Domecq issued a press release that allowed Lion Nathan to gain the upper hand. The UK group said its $4.40 a share offer was fair and it was not prepared to pay a higher price.

The bizarre announcement encouraged institutional shareholders to accept the Lion offer, thus allowing the Australasian brewer to acquire its 51 per cent Montana shareholding.

If Allied had announced it was reviewing its offer price - with the prospect of increasing it - then the institutions would have held back their selling orders, particularly as Allied's offer was for 100 per cent and was supported by Montana's independent directors.

The press release indicated that Allied Domecq was caught on the hop by Lion's higher offer.

It quoted chief executive Philip Bowman as saying: "Lion Nathan's bid directly contradicts previously reported statements to the effect that Lion Nathan would not increase its offer from the $3.20 to $3.80 price range."

Under the UK Takeovers Code, a company must comply with statements that say it will not increase the offer price, but New Zealand has no such rule.

Since then, Allied Domecq and Montana's independent directors have been trying to reverse the events of February 8 and 9. On February 24, Montana asked the Stock Exchange to investigate whether Lion had bought shares before the February 9 deadline, and on April 20 Allied Domecq notified the exchange that it intended buying up to 50.01 per cent of Montana at between $4.16 and $4.64 a share.

Several things flowed from this:

* A new appraisal report by PricewaterhouseCoopers concluded that the fair value for Montana was between $4.24 and $4.72 a share

* Last Friday, Allied Domecq, this time using broker UBS Warburg, announced that it was seeking 10 per cent of Montana at $4.55 a share. It acquired 5.9 per cent before other brokers, including CSFB, bid the stock up to $4.60 at the close of trading;

* Lion Nathan immediately announced that the Allied bid was unwelcome and that it would be reviewing its options. The Australasian group subsequently said it would buy a minimum of 5 per cent in a range of $4.65 to $5.05, starting today.

* Yesterday morning, Allied Domecq said it had bought 7.2 million shares from Peter Masfen, the Montana chairman, at $4.80 each and now held 10 per cent of New Zealand's largest wine group.

Why was Allied unwilling to pay more than $4.40 a share in February, when it still had the opportunity to gain control of Montana, but willing to pay $4.80 when Lion had 52 per cent of the wine group?

A number of conclusions can be drawn from the four-month-old battle for Montana.

Allied Domecq was ill-prepared to fight a competitive takeover battle under New Zealand's flawed takeover rules.

Its decision to replace JB Were with UBS Warburg suggests the UK group was unhappy with its earlier advice.

Second, although the Stock Exchange inquiry could rule against Lion, the brewer is still in the best position to gain full control of Montana because it is prepared to pay the highest price.

Lion and CSFB have proved once again - notwithstanding the result of the Stock Exchange inquiry - that they know how to take best advantage of New Zealand's light-handed regulations.

Finally, the Stock Exchange's takeover rules are a shambles. It should not take the exchange nearly four months to rule on an important issue in the middle of a hostile takeover battle.

But relief is on the horizon. The new Takeovers Code will come into force on July 1 after the final passage of the takeovers legislation by 110 votes to 9 last week.

It is now clear that the best advice for Allied Domecq would have been to wait until after the Takeovers Code became law before making its bid for Montana.

Even if Lion Nathan had tried to increase its holding to 51 per cent before July 1, the UK group would have been ina strong position to spoil this move - as long as it was prepared to match Lion's price.