Hawkins' offer will leave shareholders without the protection of NZX rules
Shareholders of Cynotech Holdings who are about to accept Allan Hawkins' takeover offer for the company should reconsider their decision.
Hawkins has made a derisory offer which is likely to see Cynotech investors end up in the same hopeless situation as Richina Pacific shareholders.
They will receive illiquid securities and will be at the mercy of Hawkins without any stock exchange regulatory protection.
Hawkins and Richina Pacific's Richard Yan have poor records as far as shareholder wealth creation is concerned and investors should be very careful when considering any proposal or offer from them.
Hawkins was a confident and aggressive businessman in the 1980s when he took Equiticorp and its 40,000 shareholders on a hectic ride.
He received a jail term after Equiticorp collapsed but in June 2004 he returned to the sharemarket scene when he was appointed chairman and chief executive of Rocom Wireless.
This appointment occurred after two of Hawkins' companies, Cynotech Securities and Newmarket Securities, were assigned a Rocom borrowing facility and underwrote a rights issue by the company.
Rocom, which operated in the technology area, was in dire straits with $7.7 million of accumulated losses and negative shareholder funds of $1 million.
It was a major surprise to see Hawkins back on the sharemarket scene, particularly through Rocom, because he had limited technology experience and a listed entity involvement would subject him to public scrutiny.
However investors were excited by Hawkins' reappearance and Cynotech's share price shot up from 8 cents to 40 cents in the first few months after his appointment. This was shortly before the shares went ex a 1-for-1 rights issue at 5c a share.
At the end of 2004 Hawkins decided that Rocom should expand into the finance sector, sell its technology business and change its name to Cynotech Holdings.
One of his first initiatives was to establish Budget Loans. This week the Commerce Commission advised that it intends to proceed with an action against Budget Loans for alleged breaches against the Fair Trading Act.
Hawkins has struggled to get any momentum at Cynotech and the company has been involved in a number of controversial issues including:
* In 2005 a company associated with Hawkins purchased Betta Foods for $3.68 million and sold it to Cynotech for $3.89 million a few months later.
* The 2006 annual meeting was particularly heated because of a proposal to change the exercise price of the company's warrants from 25c an ordinary share (exercisable in May 2006 or May 2008) to 10c in June 2006, 20c a year later or 30c in June 2008.
The motion was strongly opposed by Richard Guy, a former Cynotech director and the largest shareholder before Hawkins took control, because he had sold his warrants and the proposal would dilute his shareholding.
* In mid-2009 Cynotech released a prospectus for the issue of up to $10 million of Capital Securities. There were a number of controversial aspects to this issue including; Hawkins' jail term was not disclosed, the securities had no redemption date, the 9.25 per cent interest rate was too low relative to the risk and the new securities were to be listed on the NZDX, where liquidity is low.
The issue attracted only $1.8 million and these securities are now trading at half their issue price.
On August 5 last year Cynotech announced its interim profit for the June 2009 half year, which included a dividend of 0.5c a share.
Seven weeks later Hawkins told the Stock Exchange that Cynotech had decided not to pay the interim dividend and the decision "centred on the need to protect the interests of our investors and shareholders".
On November 16, Cynotech announced it had been notified that Hawkins intended to make a full takeover for the company but the terms of the offer were not revealed. After this announcement Cynotech's share price shot up from 11c to 15c.
On December 18, the full details of the bid, probably one of the most insulting and unsatisfactory offer ever received by New Zealand shareholders, were revealed as following;
* Shareholders are being offered one preference share in a company called Cynotech Securities Group Ltd (CSGL), valued at 13.5c each, for each Cynotech share.
* The preference shares will pay a dividend of 8 per cent per annum if the money is available.
* The preference shares have no redemption date, will not be listed and holders will have no voting rights.
* Hawkins is the only director of the bidding company.
Investor response to the offer has been negative with the company's share price trading yesterday at only 7.5c compared with the theoretical offer price of 13.5c per share.
The CSGL preference shares are dreadful instruments, particularly as the Cynotech Capital Securities issued last year - which have a 9.25 per cent interest rate - are trading at half of their issue price.
Ironically, Cynotech's low share price may encourage unsophisticated investors to accept the offer because its 13.5c theoretical value looks more attractive than the 7.5c share price.
This leads us to Richina Pacific and its woeful treatment of shareholders. Cynotech shareholders should take notice of developments at Richina Pacific when considering Hawkins' offer.
Richina Pacific was delisted from the NZX shortly after shareholders made the bizarre decision to vote in favour of delisting at a special meeting on December 15, 2008.
As part of this motion shareholders were told that the company would offer to buy back their shares at 45.47c each.
The information flow from the company has been deplorable since delisting, there is no market for the shares even though it was on the Unlisted facility for six months (no shares were traded), it hasn't paid a dividend and only a select few shareholders have been offered the buyback facility.
Chief executive Richard Yan continues to travel the world even though few, if any, of his promises have been fulfilled and Richina Pacific shareholders now realise that they are powerless without the protection of NZX rules and regulations.
Shareholders who accept Hawkins' offer could face a similar situation.
They may receive almost no information on CSGL, they will have no voting rights, there will be no market for the preference shares, the dividend may not be paid and they may never realise the 13.5c theoretical value.
Based on the Richina Pacific experience CSGL may have no obligation to treat all preference shareholders equally.
Richina Pacific has made its buyback offer available to some, but not all, shareholders and CSGL could do the same as far as the redemption of its preference shares are concerned.
It is possible for Hawkins, who will be the only CSGL director, to give priority to the redemption of preference shares held by him and his associates.
This would have no impact on his control of the overall Cynotech group because the preference shares have no voting rights.
There is no suggestion that Hawkins will give priority to his own holdings but shareholders should be extremely careful about voting in favour of a stock exchange delisting or accepting a takeover bid where securities in an unlisted entity are being offered.
Investors in listed companies have less than satisfactory regulatory protection but it is far, far superior to the protection offered to shareholders in unlisted entities, particularly when they hold securities that have no voting rights.
* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.
