Brian Gaynor: Buying or just passing by

Peter Fitzsimmons, the chairman of Metlifecare, was in an uncommunicative mood at Thursday's annual meeting.

He was reluctant to give specific details of the due diligence process in relation to the proposed sale of Cliff Cook's 25 per cent shareholding. He also refused to give a meaningful update of trading conditions since the December 31 balance date.

The two issues are important because Metlifecare will probably be subject to a takeover offer and its trading performance for the 2005 and 2006 years will strongly influence the independent valuation and the directors' recommendation.

The potential takeover story began on December 10 when Cook, the company's founder, said he was selling his 25 per cent stake.

Under the Takeovers Code, the sale of a 25 per cent holding to one purchaser triggers these options:

* The purchaser has to make a full bid for the company or

* The purchaser and seller can ask non-interested shareholders to approve the transaction without the requirement of a full offer.

This resolution would have little chance of success because Fisher Funds owns 13.6 per cent of Metlifecare and would be expected to vote against any proposal to exempt the purchaser from making a full bid.

Metlifecare's share price rose from $3.11 to $3.40 after Cook's announcement. It had already risen from $2.50 a month earlier following media speculation of a bid.

But the proposed sale of Cook's stake is complicated by a pre-Takeovers Code 1999 agreement with Todd Capital, which owns 35 per cent of Metlifecare and has two board representatives.

This arrangement has two important ingredients:

* Both parties agreed to maintain their shareholdings until September 24, 2004.

* Cook and Todd granted each other pre-emptive rights over their Metlifecare holdings. Under this agreement, they have to offer their shares to the other party if they want to sell.

On February 11, Metlifecare said it would allow qualified potential purchasers of Cook's stake to undertake due diligence.

Why would parties want to undertake expensive and time-consuming due diligence when Todd had pre-emptive rights over the shares?

When questioned at the annual meeting, Fitzsimmons was vague about the due diligence process. He wouldn't say how many parties had undertaken this process or the information they had received. He was prepared to say only that potential purchasers had not been given updated performance figures.

After the meeting, a person associated with the sale revealed that 14 parties had been given due diligence material but the process was still at an early stage because potential purchasers were waiting to see what Todd would do.

On April 18, Cook offered his 21.7 million shares to Todd Capital at $3.72 a share. The offer expires at 5pm on May 20.

The sales process will come to a virtual standstill until Todd makes a decision. If Todd decides to purchase Cook's shares, it will have to make a takeover for all the remaining shares at $3.72.

If Todd declines, the due diligence process will become more meaningful and Cook will be hoping to attract a higher offer from another party.

At $3.72 a share, the retirement village operator is valued at $325 million. This places it on an historic ebita (earnings before interest, tax and amortisation) multiple of 16.7.

The company is budgeting for net earnings of $21.5 million for the current year, compared with $17.5 million for the December 2004 year. This implies Ebita of about $25.5 million and a prospective ebita multiple of 12.7.

It is difficult to value 100 per cent of a retirement village operator because there hasn't been a takeover of a listed New Zealand company in this sector.

Grant Samuel valued Vertex, the plastics company subject to a takeover offer from Masthead, on a historic ebita multiple of between 8.4 and 9.2 and on a prospective ebita multiple between 8.3 and 9.

But there is little dispute that a well-performing retirement village operator should be on a higher multiple than a plastics company, particularly as the repurchase agreements relating to apartments and villas removes the obligations for companies in this sector to pay tax (they pay non-imputed dividends as a result).

At yesterday's closing price, Ryman Healthcare, the country's other listed retirement village operator, was trading on a historic Ebita multiple of 17.3 and a prospective Ebita multiple of 14.2.

This suggests that at $3.72 Metlifecare is relatively cheap as it has lower Ebita multiples than Ryman Healthcare and the latter's multiples do not contain any premium for control (normally 20 per cent to 30 per cent above the pre-offer sharemarket price).

Cook may be prepared to accept a low price because he has established a joint-venture retirement village company in Britain with a private equity firm and needs the cash. This new operation, which is headed by former Metlifecare chief executive Gavin Aleksich, has ambitious plans and will require a reasonably large capital contribution from Cook.

Todd now has three options:

* It can purchase Cook's stake at $3.72, which would require it to make a full takeover offer at the same price.

* Todd can try to negotiate a low price with Cook.

* It can stand still and then decide whether to accept a takeover from another party if Cook's sale process is successful.

Whatever way you look at it, Todd is in the driver's seat.

Under the Takeovers Code, any purchaser of a 25 per cent stake must make an offer to all shareholders and reach 50 per cent. If the bidder does not achieve the 50 per cent target, it must go back to 19.99 per cent.

This is not a concern to Todd because, if it purchases Cook's 25 per cent holding, it will go to 60 per cent and meet the requirements of the code even if no other shareholder accepts its offer.

But another purchaser of Cook's holding has to purchase a further 25 per cent from other shareholders in order to reach the 50 per cent target. If it doesn't reach this target then it can keep only 19.99 per cent, leaving it as a minority shareholder with Todd in the dominant position.

Another option for Todd is to negotiate a lower price with Cook. If this strategy is successful, and few other shareholders accept its low-priced takeover offer, then the Wellington-based group would hold 60 per cent and could creep to 90 per cent in the years ahead.

Finally, Todd can reject Cook's offer and any bid from another party unless it is particularly attractive. This would make it extremely difficult for another party to reach 50 per cent.

The pre-emptive agreement between Cook and Todd would not be allowed under the Takeovers Code. Unfortunately, it gives too much influence to Todd and could mean that Metlifecare shareholders will not receive full and fair value.

The best option for minority shareholders is for Todd to reject the $3.72 a share offer and for Cook to convince another party to pay much more.

But will an outside party be prepared to pay in excess of $3.72 a share when a major shareholder, with considerable financial resources and an inside understanding of Metlifecare, is not a buyer at that price?

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