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Re: [sharechat] Sailing into the sunset with Norgate?

From: "Fiona Phibbs" <>
Date: Sat, 22 May 2004 17:14:02 +1200

Hi Snoopy

In regards to the DDM

The reason I have used it is - as a minority shareholder my only return on
the stock is dividends (and capital gain - but don't tell the taxman ;-)  )
so this is the relevant CF model for me for this stock. Also have considered
WRI a fairly mature company so have used constant growth DDM -   D1/ r-g

To calculate my expected return on equity in the denominator have used
CAPM - inputs for CAPM are:
WRI beta 0.84, NZ market risk premium 7.5% - can get these from analysts
websites got mine from PWC. Used RFR of 5yr Treasury bond of 5.87% - as I'm
a long term holder, but you could use an earlier maturity if you were a
short term holder or could also adjust the rate upward if you thought
interest rates were on the rise.

To calculate growth rate in divs in the denominator could use historical div
growth rate for WRI over the last ten years or so but I have used the
implied growth rate rate from the sustainable growth model (g=RR*ROE) where
RR is div retention rate.  This I believe gives WRI's true growth potential
for the future rather than just using past rates.  Of course this gives a
low growth rate but as WRI is not retaining much cash this would be a fair

Calculate D1 in the numerator and 'Plug and play' gives a value of around

Of course I believe valuation is just a guess any way, really depends
greatly on your input assumptions especially in the denominator Could just
as easily use other assumptions that were equally as valid and get a totally
different value.

I guess you could say with this valuation I should be selling?  But the
decision for me is not as easy as that.  The big question is where do I get
a comparable yield?  I've seen too many people in the NZ market selling out
their stock in takeovers for a small premium then missing out on all the
future gains from what was a good sound company (not saying WRI is in this
case but you get my point), and with nowhere half as good to put their
money.  IMO sometimes investing is more than just instant gratification -
some of the best returns take time.

  cheers Dean

----- Original Message -----
From: <>
To: <>
Sent: Saturday, 22 May 2004 12:38
Subject: Re: [sharechat] Sailing into the sunset with Norgate?

> 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
> 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?
> --
> 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."
> --------------------------------------------------------------------------
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