Brian Gaynor: Opportunity knocks, but so do pitfalls

The large number of takeovers, mergers and backdoor listings at present is positive for the sharemarket. But the rules and regulations regarding these corporate activities are complex and can create pitfalls, as well as opportunities, for investors.

Two of the more important provisions are compulsory acquisition and minority buy-out rights. The former applies to all takeover offers and the latter to the proposed INL/SkyTV merger and backdoor listings.

Compulsory acquisition allows the bidder to acquire all the outstanding shares once it reaches 90 per cent. The compulsory acquisition rules apply whether the bidder started with nothing, 19.9 per cent or 89 per cent.

But under the New Zealand Takeovers Code, shareholders can object to the compulsory acquisition price when the bidder has not acquired 50 per cent of the securities it was aiming for under the offer.

There have been two such objections under the code:

* In 2003, Ngai Tahu, which owned 88.3 per cent of Shotover Jet, made a bid for the Queenstown-based company at $1.03 a share. Ngai Tahu reached 91.5 per cent and moved to compulsory acquisition, but it hadn't achieved the 94.2 per cent required to avoid the objection clause. A number of non-accepting shareholders objected and received $1.18 a share after an independent assessment.

* In 2004, Sky City Entertainment Group, which owned 50.2 per cent of Sky City Leisure's ordinary shares and 76.8 per cent of its mandatory convertible notes, made an offer for the cinema operator at 82c a share and $1.60 a note. When Sky City had 90 per cent of the voting securities, it moved to compulsory acquisition, but it hadn't received acceptances for 50 per cent of the outstanding notes. A number of noteholders objected and received $1.98 a note after an independent analysis.

Masthead's offer for Vertex was successfully completed at $2.09 and the company was delisted on June 3. Even though the bid price was below the independent assessment, there was no opportunity for investors to object to the compulsory acquisition price because Masthead started with 19.9 per cent and received acceptances for more than 50 per cent of the shares it was seeking.

The offer of Auckland Regional Holdings (ARH) for Ports of Auckland is at an interesting stage.

As ARH started with 80 per cent, it can move to compulsory acquisition once it reaches 90 per cent without the threat of a price challenge.

However, acceptances are extremely slow and the offeror is still short of the 90 per cent threshold. This places Ports of Auckland shareholders in a strong position because experience indicates that when bidders go above 80 per cent, they are determined to reach 100 per cent. Thus, if ARH falls short of its target, it will probably raise the $8 a share offer or let it lapse and come back with another, future bid.

If ARH makes a new offer, the 50 per cent threshold will be above the 90 per cent compulsory acquisition mark. This increases the opportunity for shareholders to object to the compulsory acquisition price.

Owens Group minority shareholders have no room to manoeuvre under the latest Mainfreight bid. In mid-2003, Mainfreight made an offer for Owens at $1.03 a share, later raised to $1.10. The independent valuation report valued Owens between $1.09 and $1.27 a share and Mainfreight ended up with 79.6 per cent.

Mainfreight's latest offer is at $1.17 a share. Toll Group has already accepted in respect of its 11.9 per cent and the bidder has 91.5 per cent and can move to compulsory acquisition. An independent appraisal report released yesterday valued Owens between 92c and $1.07, but it is meaningless because Owens' shareholders would have had to accept $1.17 regardless of its conclusions.

This highlights a flaw in the Takeovers Code. Owens had to undertake a costly independent analysis that couldn't have any bearing on the outcome of the bid.

The takeover offer for Urbus Properties by ING Property Trust Holdings is complicated because the target company has ordinary shares, conversion shares, convertible notes and five classes of mandatory convertible notes (MCN).

If ING reaches the 90 per cent compulsory acquisition threshold, holders of the convertible notes and any class of MCN can object to the offer price if ING has acceptances in respect of less than 50 per cent of the amount required for each security.

An ING spokesperson said it had received acceptances for more than 50 per cent of each security and there would be no opportunity for investors to object to the compulsory acquisition price.

The minority buy-out provisions of the Companies Act 1993 are another facility available to dissenting shareholders.

Under sections 110-115 of the act, shareholders have the ability to require a company to buy back shares that vote against a special resolution that is passed.

Infratil used this successfully when it voted against NGC's purchase of a 75.8 per cent stake in TransAlta New Zealand in 2000.

As per the act, Infratil exercised its right to require NGC to buy back its shares. NGC offered $1.30 a share, Infratil objected and an independent arbitrator determined that NGC should pay $1.68 a share.

Since then, companies have been looking for legal loopholes to avoid the minority buy-out provisions. This includes the SkyTV/INL merger, which will be the subject of special resolutions at shareholder meetings in Auckland on Monday.

At the end of 2003, INL made a takeover offer for SkyTV on the basis of $3.35 cash and three INL shares for every 10 SkyTV shares. This valued SkyTV at $4.63 a share.

Deloitte Touche Tohmatsu valued the pay-to-view television group between $5.03 and $5.61, the independent directors recommended rejection and INL obtained only 78.3 per cent.

When a takeover is unsuccessful, the next step is often a merger proposal, because this requires a 75 per cent majority under a special resolution, whereas 90 per cent is needed before compulsory acquisition can be implemented.

The SkyTV/INL merger has been organised under a scheme of arrangement that excludes any minority buy-out rights. It is unfortunate that our major companies are putting together merger structures that specifically exclude an important provision of the Companies Act 1993.

The level of disclosure in the SkyTV/INL merger documents is also extremely poor. There are no earnings forecasts or dividend projections for the merged company (there is more information on projected distributions in the ING Trust/Urbus Properties documents).

Unfortunately, there is a clear impression that the SkyTV/INL merger has been structured to suit a major shareholder rather than minorities.

Rupert Murdoch's News Corp, which owns 43.7 per cent of INL, will receive $283 million from the INL cash distribution and its shareholding in the merged company will be diluted to 34.2 per cent.

But in a side deal, approved by INL shareholders on Thursday, News Corp has bought Telecom's stake in INL for $272 million, which will raise its stake in the merged company back to 43.7 per cent.

News Corp is the big winner. It will receive $283 million, pay out $272 million, and raises its stake in the merged company from 34.2 per cent to 43.7 per cent without having to make a takeover offer.

Not a bad deal for one of the world's major media giants.

Disclosure of interest: Brian Gaynor is a Ports of Auckland and Sky Network Television shareholder and an executive director of Milford Asset Management.