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Getting a growling

By Fiona Rotherham

Sunday 1st June 2003

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Judging by the performance of some government-appointed watchdogs, you'd be forgiven for thinking they had been de-barked. But not the Takeovers Panel, which has both barked and bitten since the Takeovers Code was introduced two years ago. And the panel's proactive stance seems to be paying off - market consensus is that the code is working well and investors are fighting off underpriced bids.

But one fly in the ointment has been the poor performance of some independent advisers, whose job is to assess the merits of takeover offers. Panel chairman John King won't name names, although many independent advisers were happy to snipe at one another off the record when approached by Unlimited for comment. The panel approves advisers and monitors their performance, and King says two advisers won't be approved again. The rest are being threatened, politely. "They shouldn't assume because they have been approved as an independent adviser in the past that they will necessarily be approved again."

So what's the problem? Independent advisory reports are required for full and partial takeover offers, and also where shareholders increase their controlling stakes through acquisitions from other shareholders or share buybacks. The panel's biggest concern is that some reports haven't informed shareholders of their protections and rights under the code, nor of the options available to or denied the bidder.

Independent advisers are accustomed to doing appraisal reports under the Stock Exchange listing rules. These have a narrow focus on whether an offer is fair in terms of the company's underlying value. However, the code introduced a much broader test, requiring advisers to consider the overall merits of an offer. The code stopped short of defining the meaning of "merits", and the panel hasn't been willing to do so. "We're not trying to influence the assessment," says King. "What we're really trying to do is get these people to take their blinkers off."

Valuation is usually the key issue to consider in a full takeover offer, but in a partial offer the factors are often more complex. These include the prospect of a competing bid, or whether retaining the status quo is the best option. "Shareholders should not be passing control to other individuals unless they can add value to the company," King says. And just because the adviser can't see any downside to an offer doesn't mean it stacks up as the best deal.

The bigger picture can be incredibly complex at times - take the long, drawn-out battle for control of meat processing company, Richmond, for example. Independent adviser Ferrier Hodgson recommended earlier this year that a $3.05 per share offer from Dunedin-based co-op, PPCS, was fair because it fell within its valuation range - albeit at the bottom end. The report addressed the complexities caused by High Court rulings relating to PPCS's previous share acquisitions and pending appeals. But it failed to consider the deep cultural rift between the two companies that lies at the heart of the story and is the main reason why PPCS's bid looks likely to fail - despite the co-op increasing the offer to $3.11 and extending the deadline for acceptances eight times.

Grant Samuel is a key player in the independent advisory market. It says the takeover battle between Lion Nathan and Allied Domecq for control of winemaker Montana just after the code was introduced is a good example of where an independent adviser had to consider wider issues. The independent adviser's report recommended that, although the offer was fair, Montana shareholders should defer any decision to sell until it become clearer whether the offer would go unconditional or whether there was likely to be an alternative offer. Grant Samuel director Michael Lorimer says the recommendation was warranted in this case because it was such an aggressively contested takeover. But he believes the code is deliberately worded to limit independent advisers' role to discussion of the facts. He says it's up to the independent directors of the target company to make a recommendation to shareholders based on the adviser's report and their own knowledge of the transaction.

Mid-way through last year the panel decided to get more involved in this process by vetting independent advisers' draft reports before they went public. Last month it met with advisers to discuss its recently issued guidance note on their role under the code. The most important ingredient in any independent adviser's report is the target company's profit forecasts, and the panel's guidance note asks whether advisers should carry out their own "reasonableness test" of the financial information provided by the company, or prepare their own forecasts. But advisers say the latter suggestion is naive, given the tight timeframe for completing reports.

Independent directors also come in for the hard word from the panel. It says some don't seem to appreciate the extent of their responsibilities under the code. This upset the Institute of Directors, which, in turn, accuses the panel of being too bureaucratic. Institute chief executive David Newman says the panel should butt out and let the independent directors get on with their job. "Why should the panel get in between the independent advisers and the independent directors? It is the independent directors' role to call for a report and clarify the issues."

Newman's biggest beef is the panel's demand that advisers be totally independent of the client company - a far more zealous approach than the Stock Exchange's Market Surveillance Panel. He was involved in a takeover bid where the panel wouldn't allow the top four accounting firms to act as independent advisers because they had already been approached to compete for a management consultancy contract by one of the company's minority shareholders. "The panel is slowing the process down and adding costs," Newman says. The cost of reports already ranges from $10,000 to more than $100,000. Newman's criticism is backed by Deloitte, one of the firms to miss out on some work. "It makes it very difficult for the big four firms because the panel takes such a stringent view on independence - too much so," says New Zealand head of corporate finance, Peter Simmons.

So far the panel has approved some 59 companies, firms or individuals as independent advisers. The inexperience of some has resulted in the shoddy work now being criticised by the panel. King makes no apologies for regularly turning down firms because of conflicts of interest, and for encouraging newcomers to join the pool. "It isn't healthy for the system to just end up with three or four experts. They have to be independent and to be perceived by the market as independent."

Despite the panel's push for a high standard from advisers, the Shareholders Association questions just how independent independent reports are. The target company pays the independent adviser, and shareholder activist Bruce Sheppard says it is unlikely advisers will want to say anything that bites the hand that feeds them. But he couldn't provide examples of where company influence was obvious, and independent advisers strongly refute the accusation. They say they deal directly with independent directors to avoid any bidder or management pressure. PricewaterhouseCoopers corporate finance partner David Bridgman says you have to ignore outside criticism. "I issued a report a few years ago when Foodland made a bid for Progressive saying the offer was not fair. I doubt that Foodland is going to choose our services again."

On the bright side, King says even where an independent adviser has not produced a Rolls Royce report, there is time for market commentators and the media to fill the gaps before shareholders need to vote. Anecdotally, it would seem shareholders are usually advised to accept takeover bids. But Bridgman reckons even when shareholders are advised an offer is unfair, around 50% accept anyway. You have to assume they knew what they were doing.

How shareholders have voted

REPORTS 2002 Grant Samuel's Assessment of Offer Independent Directors' Recommendation Outcome of Shareholders' Vote
Turners & Growers/ENZA Positive Positive Accepted
Shotover Jet Negative Split Rejected
Rubicon/GPG Negative Reject Rejected
United Networks/Vector Positive Positive Accepted
eVentures Positive Positive Accepted
Newmarket Property Trust Positive Positive Accepted
Air NZ / Govt Positive Positive Accepted
IT Capital Positive Positive Partially accepted
Pacific Retail/Logan Negative Negative Accepted
Bendon/Pacific Retail Neutral Positive Accepted


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