Brian Gaynor: Shareholders too quick to accept offers

The clear message from recent takeover offers is that shareholders are far too quick to accept opportunistic bids. The recent offers also demonstrate that the share price of a target company will often rise, rather than fall, after a bidder fails to reach 90 per cent and an offer lapses.

There was little doubt that Graeme Hart would want to mop up Carter Holt Harvey's minority shareholders as quickly as possible after Toll Holdings failed to act decisively in its bid for Tranz Rail.

Hart's $2.50-a-share offer closed on January 27 and seven days later he announced a new bid at $2.70 a share. (If he reaches 90 per cent within seven business days all remaining shareholders will receive $2.75.)

Under the Takeover Code, there is no requirement for Hart to pay the $2.70 or $2.75 to shareholders who accepted his earlier $2.50-a-share offer.

The 5c-a-share incentive to accept within seven business days has immediately run into trouble with the Takeovers Panel. The panel is holding a meeting on Monday to determine whether this complies with the code.

The concern is that the 5c incentive effectively shortens the $2.75-a-share offer period from the 30 days required under the code to just seven business days (the 30-day requirement is an important aspect of the code and is one of the main reasons why bidders are not allowed to use stands in the market to gain control of target companies).

There is also a concern that the seven days will have expired before shareholders have received the new independent appraisal report.

Under Rule 57 of the code, shareholders can object to the compulsory acquisition price if Hart reaches 90 per cent but fails to acquire 50 per cent of the outstanding shares. As he starts with 85.7 per cent, he has to reach 92.85 per cent before minorities lose this important right, which was successfully used by Shotover Jet shareholders.

In late 2002, Ngai Tahu made an offer for the Queenstown jetboat company at 70c a share and raised its holding from 82.2 per cent to 88.3 per cent. A year later, it made another bid at $1.03 a share and Grant Samuel valued the company at between 97c and $1.10 a share.

Ngai Tahu reached 90 per cent but failed to acquire 50 per cent of the outstanding shares. Some holdout shareholders objected to the $1.03 compulsory acquisition price and the panel appointed an independent valuer to determine it under Rule 57.

The new independent appraiser concluded that $1.18 was a fair price and all shareholders who had not accepted the Ngai Tahu offer received this 15c-a-share premium.

This objection facility is not without risk, as the independent appraiser could determine that the final compulsory acquisition is lower than the offer price.

Hart's attempt to gain full control of CHH is not over yet and the outcome of Monday's panel meeting and the independent appraisal report will have an important bearing on the outcome.

We could see a few more twists and turns as several astute investors - including the ACC with 0.9 per cent and Peter Masfen and James Kirkpatrick with 0.2 per cent each - remain on CHH's share registry.

AMP's offer for Capital Properties is entering a fascinating stage.

The original $1.42 a share offer was raised to $1.48 and all accepting shareholders receive this higher price because it was increased under an existing offer.

Despite a flood of media comment by AMP's Stephen Costley - one of which drew a public ticking off from the NZX - the offeror's last shareholders' notice indicated it was stuck on 88.2 per cent.

The offer must close on February 26 and it would be surprising if AMP reached 90 per cent, because remaining minority shareholders are now in the driver's seat with no incentive to accept.

As it is highly unlikely that AMP will want to stop at 89 per cent, it has two important options:

* It can make a new offer for Capital Properties at a higher price.

* Wait for 12 months and use the creep provisions of the code to reach 90 per cent (a controlling shareholder can buy an extra 5 per cent in any 12-month period without making a formal offer).

If AMP makes another takeover offer and reaches 90 per cent, then hold-out shareholders can object to the compulsory acquisition price if the bidder doesn't acquire 50 per cent of the outstanding shares. As the mid-point of last year's independent valuation was $1.60, it is reasonable to assume that a new valuation would be in excess of the present offer price.

If AMP reaches 90 per cent under the creep provisions then an independent appraiser also determines the compulsory acquisition price.

Why would Capital Properties' shareholders want to accept AMP's $1.48-a-share offer when there are numerous ways they could receive a higher price, including through a sharemarket share?

Carmel Fisher stymied Macquarie's attempt to gain full control of Metlifecare when she didn't accept in respect of the 11.6 per cent shareholding held by Fisher Funds.

The Metlifecare bid has lapsed and the company's share price is $3.90, the same as the offer price. The New Zealand Superannuation Fund has recently said it has a 5.1 per cent holding and this will make it extremely difficult for Macquarie to acquire full control of Metlifecare without making a new offer at the upper end of the $3.63-$4.15 independent valuation.

Delegat's attempt to gain majority control of Oyster Bay Marlborough Vineyards has had a huge number of twists and turns.

In short, Peter Yealands made an initial offer for Oyster Bay at $3.10 a share, partially because he believed that the company's land holdings were undervalued. Yealands' offer started a bidding war with Delegat's, which finally bid $4 a share.

Ferrier Hodgson's independent report did not value the land at market, Yealands objected, the panel intervened, Delegat's offer was declared null and void and the latter launched a new offer to obtain 50.1 per cent at $6 a share, Delegat's offer closed this week with 88.3 per cent acceptances and shares will have to be returned on a pro rata basis as the offeror is only after 50.1 per cent.

Yealands' determination shows that a more positive outcome can be obtained from rejecting low offers and challenging independent reports.

This has also proved to be the case in the recent bids for Baycorp Advantage, BIL International and Mike Pero Mortgages.

Allco made an offer for Baycorp Advantage at A$3.52 a share and the target company's share price is now A$3.63 after a 50Ac capital repayment.

A bid for BIL International at S$1.25 a share ($1.06) was only partially successful and the share price is now S$1.52. The latest offer for Mike Pero Mortgages is $1.05 a share compared with 82c for last year's bid.

The willingness of most shareholders to accept low offers, as demonstrated in the Capital Properties and CHH bids, indicates a lack of understanding and appreciation of the code.

In the pre-code era, the bidder held all the cards and shareholders had little option but to accept low offers. The balance of power has now switched from the offeror to the offeree, but most investors, and their advisers, are taking a long, long time to recognise this.

* Disclosure of interest; Brian Gaynor is a CHH shareholder and an investment strategist and analyst at Milford Asset Management.