Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Dean,
 
> 
> I'm not so sure about this offer there appear to be several points
> that are worth considering some which are brought up in the offer
> appraisal report;
> 
> -- swapping your shares for junk bonds (and lets face it that's what
> they are) increases risk and decreases any upside potential        
> you would otherwise be able to participate in if the shares increase
> in value. -- 
>

Agreed.   Despite the GS appraisal report saying there is less 
downside risk in the RPI bonds than WRI shares, I think GS are wrong.  
Did GS forget that he $40m of preference shares that Norgate and Co. 
hold in RPI is actually a debt, not equity?

>
>If the takeover is successful Norgate must milk the
>company to pay the interest on the junk bonds which could be
>potentially to the detriment of the long term health of WRI.  For
>example (sorry Snoopy) the company could reduce the dividend 
>payout to take up an attractive acquisition or expansion, if 
>Norgate takes over this may not be possible without an equity 
>injection. 
>

It is interesting to speculate on what form rural restructuring could take 
in this country.  In the South Island the only two big chains are PGG 
and WRI, so it is hard to see those two being allowed to get together.

If RD1 and Wrightson get together they will have 126 outlets.    That 
will translate into a national rural supplies market share of around 
36%:  more than twice the size of their nearest competitor.  That would 
be a truly formidable combination, so WRI + RD1 may be the final step 
in any rural reorganization as far as WRI is concerned.  It would be a 
big bite indeed if WRI were to buy RD1 off Fronterra, and probably a 
capital raising would be necessary.

It is hard to see a highly leveraged Norgate being in a position to 
support such a capital raising, so I would say that if Norgate gets 
control then any RD1/WRI restructuring might be affected.

>
>-- all I have
> heard from Norgate are negatives, no positive plans so far, if he is
> such a whiz kid in farming why did he get the DCM  from Fonterra?
>

Legacy dairy group politics.  I don't think the fact that he wasn't 
reappointed is any reflection on Craig's abilities.

>
> --I'm not that convinced about the valuation 
>in the report I've valued the company at around
>$1.21 using DDM, which may be more appropriate from a 
>minority shareholders  viewpoint, 
>(can supply my input assumptions if anyone wants) 
>

Please do!

I've been looking at the WRI 'target company statement' myself.   On 
page 22 GS notes:

"To convert sharemarket data to a meaningful information on the 
valuation of companies as a whole it is market practice to add a 
premium for controlto allow for the premium that is normally paid to 
obtain control through a takeover offer.   This premium in terms of of 
equity values (share prices) is typically in the range of 20 to 35 percent 
(but is lower based on ungeared values)."

If I read that correctly, what GS is saying is that if a company has low 
debt then the premium for control should be less.    I am slightly 
puzzled by this so would be interested if anyone out there could shed 
light as to why taking over an ungeared company should be 'cheaper'.

However, if we accept that WRI is largely ungeared and we take the 
lower figure (20%),  that means we can take the GS valuation ($1.61-
$1.86) and get a normal market trading share price range of $1.34-
$1.55.  On that basis the Norgate $1.50 offer looks fairer, although he 
is clearly *not* paying a premium for control.  In fact:

1/ given that WRI shares are currently trading at $1.40, and 
2/ given that only around half of your shares will be bought if the 
Norgate offer goes through

that means Mr Market says that the share price will be heading south 
again to $1.30 after Norgate has put his bucket and mop away.  
Because the 'battle for control' would then be over, it is quite likely the 
share price of the remaining shares could stay at $1.30 or so.

In summary selling half your shares for a good market price, and 
locking the rest of your shares in to a price band below fair value 
doesn't seem an attractive proposition to me.   Norgate will have to 
raise his offer.   To what price?  

I expect Norgate to pay the the equivalent of a 20% premium on all of 
my shares.  If we accept Mr Market's valuation of $1.24, immediately 
before the bid was announced, that means an offer of $1.49 would be 
needed to secure all of my shares or $1.74 for half of them.     I'm not 
using any inflated expectations of WRI management in that figure so I 
think my price is fair, and within the independently valued price range.   
So how about it Craig?

SNOOPY





--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"You can tell me I'm wrong twice, 
but that still only makes me wrong once."


----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/chat/forum/