Recent controversial decisions regarding Tower and Tranz Rail indicate that the Market Surveillance Panel and the Government have fairly limited commitments to the philosophy of our securities regulations, particularly the Takeovers Code.
They both made decisions that will reduce the competition for corporate control, whereas one of the main objectives of the regulations and code is to create an open and competitive environment in this area.
A 1983 Securities Commission report called Company Takeovers, A Review of the Law and Practice noted that some of its members believed "there is not sufficient competition for control [in New Zealand]".
The commission argued that one of "the main objectives of a takeover law should be to ensure that there will be sufficient competition for control so that the potential premium over normal sharemarket prices will be paid and received for control of the target company".
This report and a later one by the commission were catalysts for the introduction of the long-delayed Takeovers Code.
On Saturday July 5 the Market Surveillance Panel received an application for a waiver in respect of the underwriting agreement between Tower and Guinness Peat Group (GPG). This was the underwriting agreement for the 4-for-3 pro rata renounceable rights issue at 90c a share that gazumped the proposal put forward by a consortium including AMP, Alliance and Hanover.
Under listing rules, the GPG agreement required shareholder approval because the investment company had a 9.9 per cent stake in Tower and had two board seats.
The panel granted a waiver on the basis that GPG had agreed to take up no more than 15.6 million shares, to bring its stake to 13.75 per cent, and the independent directors were totally responsible for choosing the GPG proposal over the AMP/Alliance/Hanover one.
This was a major u-turn, because on July 2 the panel said it would not grant a waiver on an earlier GPG underwriting agreement because the investment group could double "its shareholding to the Takeover Code threshold of 20 per cent [and] this would materially increase GPG's effective control of Tower". On July 4 the panel confirmed that decision after GPG requested a review.
When granting a waiver to the revised proposal, the panel claimed that an increase in shareholding from 9.9 per cent to 13.75 per cent would probably not result in a material increase in GPG's effective control of Tower.
The panel also claimed that GPG obtained no benefit from the underwriting agreement and had no influence over the decision. If so, why was Tony Gibbs of GPG so determined to be the underwriter and when did he stop taking an active attitude towards his investee companies?
The simple answer is that the underwriting agreement has given GPG an advantage in the competition to control Tower. The Market Surveillance Panel should have given a big weighting to this. The acquisition of cheap shares through an underwriting agreement is a huge boost to Gibbs, and the 13.75 per cent stake gives GPG a big influence because the insurance group has 117,000 widely dispersed shareholders.
GPG will receive an underwriting fee of 2.5 per cent and is expected to pass on 1.8 per cent of this to sub-underwriters. On the assumption that GPG will underwrite 50 per cent of the issue and the other 50 per cent will be sub-underwritten, Sir Ron Brierley's company will receive an underwriting fee of $3.4 million.
Any shares GPG picks up in the underwriting agreement in excess of 13.75 per cent will have to be sold within six months. This is also a big advantage to the investment group because it will be able to pick up these additional shares for only 90c and sell them at a profit based on Tower's $1.22 ex-issue share price.
Although the independent directors, which excludes Gibbs and Gary Weiss of GPG, were responsible for the underwriting decision, they would have been aware of the upcoming vote on their overpaid fees.
A recent decision by the Market Surveillance Panel concluded that Tower directors were paid in excess of the amount approved by shareholders. The panel decided that retrospective approval would be required for in excess of $200,000 overpaid last year, and GPG's vote will have an important influence on the outcome of this resolution.
GPG will also have an important influence on the retirement fees paid to independent directors, which could be as much as $300,000 per individual.
The other major u-turn involved Tranz Rail and the proposed deal between the Crown and Toll Holdings. This will severely restrict the competition for control of the country's railways operator because the Government has struck an exclusive deal with Toll that discourages other potential bidders.
The Crown/Toll agreement is extraordinary for several reasons, including:
Toll has been granted exclusivity, as the Crown cannot negotiate with any other party while the Australian company's takeover offer for Tranz Rail is live.
Toll will have exclusive use of the track network for freight services, although the Crown will have "step-in" rights if volumes on a line slip below 70 per cent of present usage.
Tranz Rail's operations will be effectively unregulated, whereas under an earlier agreement with the Government - to be reactivated if Toll's bid is unsuccessful, controls will be placed on the profitability of the group's railway operations.
The Government has dealt a big blow to Tranz Rail shareholders by facilitating a revised bid that has a 90 per cent plus compulsory acquisition shareholding condition instead of a 50 per cent requirement. This is particularly disappointing for shareholders who participated in the original public offering at $6.19 a share, because they now have no hope of getting their money back if Toll's offer is successful. The same applies to institutional investors who purchased the Wisconsin Central Transport and Fay Richwhite shareholdings at $3.70 and $3.60 a share respectively.
It is difficult to understand why the Clark Administration has struck a deal that would limit the competition for control of Tranz Rail, particularly when it was responsible for the introduction of the Takeovers Code.
The Tranz Rail offer has similarities with the Bank of New Zealand takeover in 1992, particularly the haste to facilitate a takeover by an Australian company. The Bank of New Zealand has proved to be a bonanza for National Australia Bank, which recovered its $1.48 billion purchase price in less than five full financial years (in terms of BNZ's net profit after tax).
At 95c Tranz Rail will cost Toll $200 million, and it is more than likely that the Australian company will also recover its purchase price, in terms of net profit after tax, in less than five complete financial years.
The Crown/Toll deal has forced institutional investors to take a firm stance against the 95c a share offer because it is far too low in light of the Government's proposal to acquire ownership of the track infrastructure. But no matter what price Toll finally has to pay to reach its 90 per cent target, it will still be too low for many shareholders, as Tranz Rail once had a $9 share price and market value in excess of $1.1 billion. The Crown is facilitating its sale at nearly 90 per cent below its peak because of the total ineptitude of the group's previous controlling shareholders and senior management.
* Disclosure of interest: Brian Gaynor is a Tranz Rail shareholder.
* Email Brian Gaynor
<i>Brian Gaynor:</i> Straying from the Takeovers Code
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