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Kermadec deal is best independent directors could extract, chairman says

Tuesday 13th March 2012

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Kermadec Property Fund’s $7 million deal to internalise its management contract is the best that the independent directors could extract, chairman Peter Wilson says.

Kermadec shareholders are to vote on the proposal tomorrow and the New Zealand Shareholders Association is among opponents, saying it will use its proxies to vote against a deal that is too favourable to Augusta Funds Management.

If the vote is passed, Auckland-based Kermadec will pay $5 million, funded by borrowings, to buy out the contract held by Augusta and pick up its funds management business. The manager will get additional earn-outs of up to $2 million if certain forecasts are met.

“In the end what is required of the independent directors is to extract the best deal they can,” Wilson told BusinessDesk. “We have put forward a proposal which we think is worthy - it represents a much better opportunity for shareholders than the status quo.”

Shares of the boutique property investor, which owns five commercial properties in Auckland, have almost halved from their April 2007 peak of $1.15 and most recently traded at 65 cents. The stock has slipped 1.5 percent this year.

Under the transaction, Augusta will retain 17.8 percent of Kermadec and its directors, Mark and Chris Francis, will become the company’s full-time employees.

“In our view the independent directors have not been able to drive a hard enough bargain on behalf of all other shareholders,” said John Hawkins, Shareholders Association chairman, in a statement published on its website. “There may be a deal done here, but as it stands, the cost to Kermadec shareholders remains a problem.”

Hawkins says the Augusta buyout amounts to a price-earnings ratio of 10 times – “very high for a small private company which would typically sell at a P/E of 3-4 times.”

PwC’s independent appraisal report of the proposed transaction said it was “fair to Kermadec’s shareholders.”

Although the base price of $5 million “appears ‘full’ in comparison to other transactions” it is offset by the company’s opportunity to take additional profits from the Augusta Funds Management Business in the takeover, the report said.

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