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Stingy Ngai Tahu triggers takeover trap


Friday 12th December 2003

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Shoeshine hasn't had a good year calling takeovers. He thought Graeme Hart's Goodman bid was doomed to failure and picked Toll Holding's tilt at Tranz Rail as a surefire success.

So it would be foolish to risk the hat-trick by predicting the outcome of Ngai Tahu's cleanup bid at Shotover Jet.

This is particularly so because some of the little-known intricacies of our takeovers regime are likely to come into play. What's more, passions in some quarters are more inflamed than is usual for these things.

Ngai Tahu has gained the reputation in recent years as a beast of some note in the corporate jungle, being well-run and analytical and executing its moves with clinical precision.

It turned up on the jetboat operator's share register in 1999, securing a 50% stake through a market stand and on-market buying. It got to 80% in 2001 by buying the 30% stake of former managing director Jim Boult.

Plainly it wasn't going to sit there forever so a cleanup bid last year surprised no one.

What did raise eyebrows was the stinginess of the offer ­ 60c initially, then 70c when it became clear that wasn't getting any traction.

A Grant Samuel appraisal report valued the shares at 82c to 94c and the offer closed having got Ngai Tahu only to 88.3%, from about 82%.

Most observers probably expected Ngai Tahu's next move, after an obligatory 12-month stand-down, would be to get over the 90% compulsory acquisition threshold by using the code's 5%-a-year creep allowance.

Why it chose instead to mount a general code offer is open to conjecture. Possibly it simply wanted to be seen to do the "right" thing.

More likely it tried to creep but found holdout shareholders such as Christchurch's Peter Rae and Tauranga's Lloyd Christie were outbidding them for the trickle of shares that come on to the market.

In any case it is now relying on the firepower of a code offer to pull in 50% of the outstanding shares and avoid a messy arbitration process.

It looks like it'll get one anyway.

Under the code, if a controlling shareholder gets past 90% with a code offer, then the price it pays to the remaining shareholders is the same as it paid to the shareholders whose acceptances got it through the threshold.

But that's only if it gets acceptances for more than half of the shares it didn't own before it made the offer.

If it gets fewer, holdout shareholders with more than 10% of the outstanding shares can, within 14 days of receiving the compulsory acquisition notice, object to the price.

The matter then falls into the hands of a Takeovers Panel-approved "independent person" for "expert determination." The dominant shareholder, not the target company, pays the expert's costs.

This might seem odd because shareholders will already have had an independent and expert appraisal of their shares' value ­ in Shotover's case, a fresh one from Grant Samuel.

Some Shotover holdouts suspect appraisers appointed by the target company's independent directors could come up with a lower value than the panel-approved expert.

That's because they could apply a "minority discount" to the value of the outstanding shares to reflect that the dominant shareholder effectively controls the company.

In fact, the appraisers don't. They calculate the fair value of all the company's shares as though they were all available to the highest bidder.

The code specifies valuers appointed under the code process must calculate value the same way.

Quite why the code's drafters saw fit to tell an independent expert how to do his job is one of life's little mysteries.

Of course independent appraisers can and do find offers "reasonable but not fair."

That means the offer is close to the price at which the shares were trading on-market just before the offer (and so is reasonable) but falls short of a fair value calculated by multiple-of-earnings or discounted cash flow methods.

As Shotover's stroppier shareholders claim to have their feet on 2.2 million shares of the five million-odd outstanding, arbitration seems highly likely.

It will be interesting to see how Grant Samuel's price differs from that of a panel-approved expert, which is likely to be one of its competitors.

It will also be interesting to see if either gets near the $1.20 some of the disgruntled minorities think the shares are worth.

They point to a material improvement in Shotover's prospects since the Ngai Tahu offer a year ago.

The signs, they say, point to a bumper tourism season. Auckland International Airport reported a record week at the end of November, with international passenger numbers 17% higher than the same week a year ago.

It didn't say so but presumably most of them were coming, not going.

Shotover last year spent nearly $3 million buying up the bits of two walking tour businesses it didn't already own and invested a further $2.2 million in existing businesses.

The June-year result before tax was up 25% to $4.5 million and the balance sheet, with net debt to net-debt-plus-equity of 16%, is strong.

The company is upgrading its jetboat fleet to twin-engined craft (three of the old ones are advertised for sale on its website ­ speed freaks, note). Subject to the vagaries that affect the industry, it expects to deliver a higher profit this year.

If the independent valuers take the same view as the holdouts, Ngai Tahu's stinginess could end up costing it more than it hoped to save.

An offer of $1 would have cost it only an additional $500,000 and would have been far more likely to get it home without a tedious arbitration process.

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