O'Sullivan: Lion weighs its Montana options

By FRAN O'SULLIVAN

The next 30 days will be some of the most testing for the high-powered Australasian and Japanese directors sitting on Lion Nathan's strategy committee.

On Friday, Lion Nathan was in the box seat in the hostile takeover battle for control of the Montana Group, sitting on a 62 per cent stake.

Now it faces a July 27 deadline to reduce its Montana stake to 43 per cent. The Stock Exchange's standing committee has ruled it must sell 40 million Montana shares within that period as penalty for defaulting on the arcane listing rules.

Lion Nathan's strategy committee - led by Gavin Walker - has a tough fight on its hands if the Australasian brewer is to retain its pole position in the Montana battle.

Rival bidder Allied Domecq has moved swiftly by making an offer to take its own Montana holding from 27 per cent to more than 50 per cent.

Allied would be an obvious buyer for Lion's shares, but the Australasian brewer will not want to find itself locked into the minority position the British drinks company currently enjoys.

Lion's strategy committee has several options. One is legal action to challenge the standing committee's decision.

Chief executive Gordon Cairns said he was extremely disappointed with the committee's ruling that the Australasian brewer should forfeit 19 per cent of its 62 per cent Montana holding. The committee had imposed a severe penalty (instead of an appropriate remedy) for what was, at worst, a technical breach of the Stock Exchange rules.

"We believe that the decision that we should dispose of 40 million shares worth around $200 million is manifestly unjust, given that we acted in good faith throughout and the initial finding of the standing committee covered only 21 million shares," said Cairns.

Cairns was holding his cards tight to his chest this weekend, but his use of the word "unjust" to describe the committee's ruling is an indicator that Lion Nathan will not comply with the instruction to forfeit 19 per cent of Montana without first exhausting all the avenues, legal and commercial.

A team of Russell McVeagh lawyers has been digesting the decision to see if there are grounds for a High Court judicial review. The team, assisted by Lion Nathan director Geoff Ricketts, will probe whether grounds exist to challenge whether the committee's process was fair.

The committee - former Court of Appeal judge Sir Duncan McMullin, former High Court judge Sir Ian Barker and Bill Wilson, QC - had been criticised for ignoring previous committee rulings on the critical issue of what constitutes a transfer of shares.

Also at issue are the committee's decision to ignore supportive evidence given by market participants like stockbroker Don Turkington, and to make a range of adverse deductions in its first ruling which were not first put to Lion Nathan or its stockbroker Credit Suisse First Boston during closed hearings.

Two weeks ago Cairns said his over-arching objective was to get a speedy decision and press on with building the Montana Group.

Lion Nathan had wanted the decision on the defaulter securities issue taken out of the hands of Montana's independent directors, but Cairns did not believe the matter should go back to the standing committee.

Lion Nathan's position had been that the Stock Exchange's market surveillance panel was the appropriate body. The panel was the exchange's self-regulating body for dealing with market issues. It had the jurisdiction and should not delegate it to a standing committee dominated by former judges.

While the game would clearly change on July 1 when the takeovers code went into effect, at the time the Montana row blew up, the market was still operating under a different paradigm.

If Lion Nathan seeks a judicial review, it will also seek interim orders to prevent Montana's independent directors from disposing of its 19 per cent stake until the High Court action is heard.

The High Court will need to be convinced that a genuine cause of action exists before it agrees to arrest the 30-day disposal period.

Lion Nathan's second option is to sell its stake to an independent party or parties as directed by the standing committee. The company is not prohibited from buying the shares back later. But the committee may want to see proof that the acquiring shareholders are not simply "warehousing" the shares for Lion Nathan to pick up again.

Under the takeovers code, Lion Nathan will have to make a pro rata offer to all Montana shareholders if it comes back into the market. It seems likely that Lion Nathan would have to make a full takeover bid to ensure control.

Arbitragers hold just over 10 per cent of Montana and are in a commanding position to extract a considerable price from Lion or Allied Domecq as they seek to gain outright control.

Lion Nathan's third option is to open discussions with Allied Domecq. Both Cairns and Allied Domecq adviser Malcolm Turnbull confirm the option of running a joint venture has been raised in the past. But formal discussions have yet to take place.

The Montana board is still dominated by chairman Peter Masfen and independent directors Barry Neville-White, Hylton Le Grice, Brian Mogridge and Peter Coote.

These players have sold their Montana holdings to Allied Domecq, but still control the board.

Despite its 62 per cent holding, Lion Nathan has only one representative on the Montana board - chief executive Gordon Cairns. Allied Domecq with 27 per cent of Montana has yet to be awarded board representation.

Although Lion Nathan can now vote only 43 per cent of Montana stock - instead of its 62 per cent holding - Montana's independent directors can realistically no longer stand in the way of Lion acquiring further board seats.

Also concentrating minds will be Lion Nathan's allegation that Allied Domecq had an arrangement to acquire Masfen's Montana holdings.

This allegation is yet to be heard by the exchange's standing committee, but Allied will argue it is nonsense as Lion was offered the opportunity to bid for the Masfen stake in an auction conducted by JBWere.

No date has been set for this hearing.

But if Lion's allegations are proven, Allied Domecq could find itself in a similar position, being forced to disgorge some of its Montana shares.

Five months into the Montana takeover battle there is only one clear winner.

It is not Lion Nathan or Allied Domecq, but Masfen - richer to the extent of $200 million through selling his Montana holding.

As Cairns ruefully puts it: "Masfen's congratulating me on the great job I've done for him.

"At the moment he's the only winner. The rest of us are sitting here spending a lot of time and effort with no reward yet."