Brian Gaynor: Greenmail set-ups rolling down tracks

The NZX is vulnerable to a major outbreak of greenmail.

This is a strong possibility given the present state of takeover bids for Capital Properties, Carter Holt Harvey, Metlifecare and, to a lesser extent, Mike Pero Mortgages.

In strict terms, greenmail is the purchase of shares in a company threatening to make a takeover offer and forcing the company or its owners to buy back the shares at a higher price.

The term greenmail can also be used when a shareholder or shareholders accumulate a block of shares to stop a bidder from reaching 90 per cent and moving to compulsory acquisition. The objective of this strategy is to force the bidder to make a new offer at a higher price to remaining shareholders.

This type of greenmail has been used on Tranz Rail, now called Toll NZ. When Australian-based Toll Holdings raised its offer for Tranz Rail from 95c to $1.10 a share on September 5, 2003, the target company's independent directors recommended acceptance. At that stage, the bidder had only 19.99 per cent of Tranz Rail.

It ended up with 83.46 per cent, frustratingly short of the 90 per cent target.

There were unconfirmed rumours after the offer closed that Toll was having talks with a number of the remaining shareholders to determine the price they would be willing to accept under a new offer. This would allow the major shareholder to reach 90 per cent.

Toll Holdings probably regrets not pushing these talks to a successful conclusion because it could have reached 90 per cent with an offer of around $1.25 to $1.30. Toll NZ's share price is now $3.30.

Things have deteriorated as far as Toll Holdings is concerned because Third Avenue, a New York-based investment firm, has purchased 10.01 per cent of Toll NZ at an average cost of $1.63 a share. Toll Holdings cannot acquire 90 per cent of Toll NZ unless Third Avenue agrees to sell.

The Australian transport giant has been checkmated because it didn't strike a deal with Tranz Rail's non-accepting shareholders two years ago.

When Mainfreight raised its takeover offer for Owens Group from $1.03 to $1.10 a share in September 2003, the independent directors recommended acceptance.

Toll Holdings jumped into the fray and purchased 11.88 per cent of Owens at $1.15 a share. Mainfreight had 79.6 per cent of Owens when the offer closed.

After the bid terminated, Mainfreight entered negotiations with Toll, which agreed to sell its stake at $1.17 a share. Mainfreight then made an offer at this price, the Toll shareholding took the bidder above 90 per cent and it moved to compulsory acquisition.

The most obvious case of a holdout at present is Fisher Funds' refusal to sell its 11.6 per cent stake in Metlifecare.

Fisher wrote to Metlifecare stating that it did not intend to accept the $3.90 a share offer. The bidder's best option is to let the offer close as planned on December 17 and either negotiate a deal with Fisher Funds or allow Metlifecare to remain a listed company with Fisher as a significant minority shareholder.

Under the Takeovers Code, the offerer would have to pay any higher price paid to Fisher under the current bid to all accepting shareholders. However, the offerer could allow the $3.90 a share bid to expire and negotiate a higher price with Fisher. The bidder would then make a new offer at this negotiated price, Fisher would accept and the compulsory acquisition provisions would apply. All remaining shareholders would receive the higher price.

In light of the developments at Tranz Rail/Toll NZ, the new controlling Metlifecare shareholder may be willing to offer a reasonable premium to Fisher under a new offer in order to move to compulsory acquisition.

The situation regarding Capital Properties is more difficult to predict although it appears as if AMP Property Portfolio won't reach the 90 per cent target.

As at December 2, shareholders with less than 90,000 shares owned just over 11 per cent of Capital Properties and ING controlled an estimated 4.7 per cent (ING told the NZX on November 16 that it had a 4.86 per cent holding but it has sold a small number of shares since then).

No other shareholder appears to own more than 1 per cent of the Wellington-based property group.

The outcome for non-accepting Capital Properties shareholders will be heavily dependent on ING. If ING doesn't accept the present offer, it will be in a strong position to negotiate a higher price with AMP, and AMP would then have to offer the same price to all remaining shareholders under a new offer.

If ING accepts, AMP is expected to go over the important 85 per cent mark and could use the creep provisions of the Takeovers Code once the bid lapses.

Under the creep provisions, a holder of between 50 per cent and 90 per cent of the voting rights of a Code company can purchase a further 5 per cent in any 12-month period (AMP couldn't begin to utilise the creep provisions until 12 months after the present bid expires).

Once a controlling shareholder goes over the 90 per cent mark under the creep provisions, it has to move to compulsory acquisition. In effect, an independent adviser determines the compulsory acquisition price after the controlling shareholder reaches 90 per cent under a creep.

As the mid-point of Capital Properties' valuation is $1.605, dissenting shareholders could expect to receive more than $1.48 a share under this creep scenario.

The Carter Holt Harvey situation is fascinating because Graeme Hart has reached 84.8 per cent and has extended the offer until December 23.

Hart will want to avoid public scrutiny of his CHH carve-up. If he doesn't reach 90 per cent, he will be keen to do a deal with several major shareholders, make a new offer and reach 90 per cent.

It will be relatively easy for Hart to do a deal because most of the small shareholders have sold out and big institutions dominate its share registry. In the two weeks to December 2, the Accident Compensation Corporation raised its shareholding from 1.58 per cent to 1.64 per cent and the holdings of a number of nominees also increased.

Hart and his advisers will be aware that CHH is likely to attract overseas hedge funds that are more willing to take risks than New Zealand institutions. As Hart won't want to end up in the same situation as Toll Holdings in relation to Tranz Rail/Toll NZ, he may be willing to offer dissenting shareholders $2.665 (the mid-point valuation) or more under a new offer.

That would raise his overall purchase price from $3.272 billion to about $3.304 billion.

Under this scenario, Hart would be able to take full control of CHH for an additional $32 million, delist the company and undertake his restructuring with minimal public scrutiny.

A totally new offer for CHH at a higher price would be a satisfactory outcome for an emerging form of corporate greenmail.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and a CHH shareholder.