O'Sullivan: Acid on Lion to end wine whines

The Montana board's next meeting, on March 9, promises to be a highly political event.

Just 10 days ago most of the directors were preparing to welcome a new controlling shareholder, British liquor group Allied Domecq.

The directors - most close associates of Montana chairman Peter Masfen - had fully expected Allied to win control of New Zealand's premier wine company when it launched a 100 per cent offer at $4.40 a share on February 7.

But Allied's takeover strategy backfired. Lion Nathan now controls Montana. And some of those directors will inevitably lose their positions as the Australasian brewer stacks the board with its appointees.

Lion Nathan now faces an acid test. It must ensure Montana's growth momentum continues apace so that its share price quickly supersedes the $4.40 threshold, which Allied Domecq tabled in its February 7 takeover offer.

Unless that occurs, Montana's minority shareholders will continue to snipe that they were unfairly deprived of the swift capital gain they would have achieved by selling their shares to Allied Domecq.

Many institutional holders got out at $4.65 a share when Lion Nathan launched a retaliatory overnight raid to take its existing 28.2 per cent stake to a 51 per cent controlling level. But because the Lion offer was not pro-rated, smaller shareholders did not have the option of selling.

The basic equity argument has been fully canvassed in the Business Herald. But that is just one aspect of a takeover play. Lion Nathan, the NZ Stock Exchange and the exchange's market surveillance panel have all taken criticism.

But there's more to this than the simple line that minorities have been screwed. The Montana share price has appreciated to $3.85 since the takeover play. Lion Nathan had to pay $4.65 to get its control stake. The minorities have lost no value and are in line for a free ride if the share price continues to appreciate.

The pragmatists will argue that New Zealand's takeover laws should mirror other international regimes. They will when the Government finally introduces a formal takeovers code on July 1.

But at issue are wider elements of corporate strategy and behaviour.

First, the position of significant shareholders - in this case Masfen - when a company's growth reaches the stage where it becomes a tasty morsel and the significant shareholders do not have sufficient capital to maintain control.

Ironically, it was Masfen's vision that propelled Montana forward and alerted other players to the company's growth potential.

The Australian brewer Foster's saw the potential in harnessing Montana's distribution arrangements to benefit its own products on this side of the Tasman. And Lion Nathan quickly moved to protect its back door, snapping up 20 per cent of Montana last May.

Lion was sensitive to Masfen's position. Chairman Douglas Myers had known him for years and Myers had himself been in a vulnerable position at Lion Nathan with a minority stake and a wide-open share register.

Both Masfen and Lion Nathan CEO Gordon Cairns confirm that a proposal was put to the Montana chairman to form a shareholders' agreement. This would have ensured their combined forces would be sufficient to withstand any takeover bid by a third player.

Such agreements usually contain pre-emptive rights clauses and a range of other protections to ensure stakes are sold to "friendlies" if either player wishes to get out.

Masfen's decision not to get into bed with Lion Nathan inevitably meant the brewer would have to increase its stake to have sufficient critical mass to fight off an expected takeover bid by a third party.

Masfen says he would not do any deal which did not also ensure other shareholders got a slice of the action through a 100 per cent offer. But this just weakened his overall position.

We must believe Masfen when he says he does not want to sell his Montana stake. But his status as executive chairman of the group is now likely to be reduced to that of chairman and his ability to have a significant impact on the company's future is less than if he had formed an agreement in the first place.

Second, there is the role of independent directors when a company is under takeover offer - friendly or hostile.

The Montana board was in a difficult position once Lion Nathan, then Masfen Holdings, issued notices late last year stating they wished to increase their holdings to 51 per cent.

As Barry Neville-White, chairman of the independent directors' group, reiterates, directors were not able to discuss issues with either their chairman or Cairns, who is Lion's representative on the Montana board.

But the board's response when Allied Domecq and its advisers, Goldman Sachs, came sniffing is intriguing. "They first put their head up before Christmas, but it was really only 10 or 12 days ago that we got talking," says Neville-White.

Allied was notified that there were two issues it would have to satisfy to get a positive recommendation from the independent directors. Any bid would have to be at fair value and it would have to be a 100 per cent offer, or a 51 per cent offer on a pro-rata basis to all shareholders.

Neville-White was contacted while at cricket on Waitangi Day. He knew an offer was coming, but he was not told at what price.

When the conditional bid emerged it had a clause requiring the independent directors to approve it forthwith. But the Montana board did not immediately seek to inform major shareholder Lion Nathan, which had a 28 per cent stake.

While the independent directors later said they would recommend a Lion offer that was above the $4.40 level bid by Allied if it was pro-rated to all shareholders, the game by then was all but over.

Hindsight is always easy to exercise, but in this affair Lion could be forgiven for a certain amount of grumpiness.

Third, there is the role of Montana adviser JB Were.

JB Were had acted for Montana in the past - notably in its successful acquisition of Corbans last year. It has also acted as an adviser for Masfen, but when Allied finally moved on Montana, Goldman Sachs instructed it.

The advisory firm is highly rated also by Lion Nathan. But in this affair, where Lion Nathan was not brought into the picture until after the Allied bid was launched, JB Were's potential for a conflict of interest inevitably emerges.

Ironically, when Lion was ambushed, Cairns did then call Allied CEO Philip Bowman and offer a partnership deal for control of Montana. Says Cairns: "We could either work together or in opposition. There are plenty of global opportunities we could have partnered on."

Bowman gave Cairns the brush-off. The outcome is history.

Finally, there is Montana's future. Its plum position in the NZ market will be amply demonstrated when it reports its result.

Lion's challenge will be to demonstrate to institutions that it has a strategy so that the stock price can be rerated. Wine is a growth arena and with no single player holding more than 2 per cent of the world market, the opportunities are immense for a leisure play.

Montana is a superbly managed company. Lion Nathan has proven experience in marketing and distribution and capital-raising. If the board can quickly resolve its differences, "Brand New Zealand" should prosper in the world wine market. And Montana's minorities may yet laugh longest.