Richard Inder: Panel's Powerco pasting makes a victim of Vector

COMMENT


U-TURN

The Takeovers Panel has handled Vector's $1.3 billion planned takeover of gas pipelines group NGC badly.

Its actions fall short of its duty to promote and apply clear, robust and fair regulation - the foundation of a healthy market.

As a first step to making its bid, Vector had agreed to buy a 66 per cent cornerstone stake in NGC from Australian Gas Light (AGL) by acquiring an AGL subsidiary that owned the shares.

However, as this structure was in breach of rules that companies making a takeover must buy shares in the target directly, AGL and Vector asked the panel for an exemption.

They were naturally confident that they would get the green light. After all, the panel had granted a similar exemption when Edison Mission Energy sold its 51 per cent stake in electricity generator Contact to Australia's Origin Energy.

Just to make the point crystal clear, Origin Energy acquired the Edison subsidiary that owned the Contact shares instead of buying the shares directly.

To Vector and AGL's surprise and disappointment, the panel issued its rejection in a curt press release: "The panel considered the reasons for requesting the exemption, which principally concerned taxation issues and the scale of the transaction costs, which may be incurred, did not provide a proper basis for the panel to exercise its exemption powers."

This, as far as the panel was concerned, was the end of the matter.

The panel gave little more justification for its decision, not even to Vector or AGL.

"Any statements concerning the future course of Vector's announced takeover offer for NGC will come from Vector and AGL," the panel said.

A call to the panel for clarification on the features of the Vector plan that distinguished it from Origin's plan were met with vague references to financing structures.

(Apparently, the Origin deal preserved a finance structure and the Vector deal did not.)

I am not going to try to make sense of this comment for this is not the point. The release and the opaque pronouncements by the panel have not provided sufficient information for the market to come to a reasonable conclusion about how it reached its decision.

The principles the panel uses to make its decisions are not clear. (This despite the panel exhorting applicants to identify any existing exemption notices which may set a precedent.)

As a result, companies will struggle to frame similar requests in the future.

More worryingly, this lack of transparency also undermines confidence in the panel.

AGL and Vector, convinced their plan did not differ in any significant way from the plan advanced by Origin and Edison, and the rest of the market are already filling the information vacuum with their own theories.

The one that has greatest currency is that the panel has become more cautious in the wake of its pasting over a ruling it made on Prime Infrastructure's $680 million bid for New Plymouth's Powerco. That ruling gave overseas Powerco shareholders an unforeseen advantage over local ones and led to a flight of Powerco shares offshore.

Judging the validity of this theory is just as difficult as judging the validity of the panel's ruling. Nevertheless, its mere existence should give the panel pause for thought.

NEUREN LOSS

The listing of biotechnology group Neuren Pharmaceuticals in Australia instead of New Zealand is a blow to our stock exchange.

Neuren, which is developing drugs aimed at reducing brain damage, says one of the reasons it has chosen Australia is because that market has a better appreciation for the high-risk nature of biotech investment.

This is a view that has been reinforced by the success of its New Zealand rival, Living Cell Technologies, the former Diatranz, which since listing on the ASX, has doubled in value.

New Zealand's biotech sector is punching below its weight. The NZX has four companies with a market value of $43 million.

Compare this with Australia, where the biotech sector is worth $16 billion.

Neuren, raising around $16.5 million, would have only provided a small boost to the NZX.

But it would have lifted coverage and investor understanding of biotech.

This is an essential step if New Zealand is to reverse its deficit in the sector, which has the potential to be a significant wealth generator.

* Richard Inder is editor of the Business Herald.