Gibbs chucks rocks at Rubicon

By Shoeshine

Friday 11th October 2002

All's fair in love, war and takeovers. But GPG's attack on Rubicon directors' and executives share options schemes is really a little rich.

GPG's Tony Gibbs last week "outed" a "phantom options" arrangement and complained his takeover offer had triggered a mechanism by which the exercise price of options issued to non-executive directors as their remuneration had fallen from 63.7c to 50.5c.

At the 21.5c difference between the current share price and the lower exercise price the options are worth $1.25 million between six directors, or an average $208,000 apiece.

What wasn't mentioned is that, as the directors have agreed to take all their fees in options, none has yet received a penny for overseeing the company for the last 18 months. Nor will they until GPG's takeover bid is resolved, as its offer is conditional on no options being exercised.

Rubicon directors' and executive options are issued at the company's share price at the beginning of each year. The exercise price escalates annually at the rate of the company's cost of equity less the dividend yield.

So unless the share price rises each year, the options will be worth less. If the price falls below the cost-of-equity-adjusted exercise price they're worthless so the directors don't get paid at all.

By contrast the exercise price of GPG's executive options scheme doesn't escalate. There are two performance targets that must be met before they can be exercised.

Over the five years from issue to exercise the group's net assets must have increased by a rate at least equal to the increase in the net assets per share of the top 25 companies in London's FTSE100 index.

And the percentage rise in net assets must at least equal 110% of the British inflation rate over the period.

Gibbs, as executive director in charge of GPG New Zealand, was last year issued one million of these options at an exercise price of 40.5p. They are now $350,000 in the black.

He now has options over 6.4 million GPG shares at exercise prices between 31p ($1.03) and 50p ($1.66). At a GPG share price of $1.60 the highest price relates to the only tranche that's out-of-the-money, but that's only 380,000 options.

Gibbs last year received a salary and fees of £294,348 and a £546,821 bonus, or about $2.8 million. Add in the gains on his 2001 batch of options and he's well clear of $3 million.

Telecom chief executive Theresa Gattung last year got $1.8 million for managing a company with assets of $8.2 billion. Fonterra's Craig Norgate got $2.1 million for managing an $11.8 billion behemoth.

As Gibbs likes to say, it's not what you're paid, it's whether you're worth it.

GPG doesn't break out Australia and New Zealand from geographic segmental reporting, lumping them in as Australasia.

The Australasian business last year comprised 46.3% of the group's total assets but its $34.3 million pre-tax profit accounted for only 18.4% of the total.

It makes you wonder if GPG shareholders need a new accounting measure: EBTGP, or earnings before Tony gets paid.

Interesting though Gibbs' remuneration is, all this detracts from the substantive issues underlying GPG's Rubicon attack: whether Rubicon shareholders should accept GPG's 75c a share takeover offer and what plan if any GPG has for New Zealand forestry.

GPG's offer closes on October 24. It's probably fatal that independent valuer Grant Samuel has rejected it as too niggardly.

Gibbs' tetchy reaction was to link Grant Samuel's 98c to $1.28 valuation to the Rubicon options exercise price, as if that had anything to do with it.

In fact, it's impossible by any analysis to see how Rubicon shares could be worth as little as 75c.

Rubicon's principal asset is 491 million Fletcher Challenge Forests shares worth, at the current FFS share price of 22c, $108 million.

Divided by Rubicon's fully diluted capital of 284 million shares, that's 38c a Rubicon share.

Rubicon's cash is worth 24c a share.

Grant Samuel values Rubicon's biotech assets Trees and Technology, ArborGen, Argentina's Forestadora, etc, at a minimum 22c, net of 4c corporate overheads.

This values Rubicon at 9c above GPG's offer. At the mid-point of Grant Samuel's range for biotech the offer is 20c short and at the high point 31c short.

In other words, the offer values Rubicon's biotech assets at nothing.

The offer document sent to Rubicon shareholders noted that "material changes in respect of the business activities of Rubicon are not likely to be made" if GPG won control. Only a day or two later Gibbs was quoted in a newspaper article describing the biotech assets as "a bucket with a hole in it" and saying a sale was "a distinct possibility."

It would be helpful for any Rubicon shareholder actually considering selling at GPG's price if GPG would come out and explain clearly why it wants control.

Gibbs has been doing the dance of the seven veils, dropping hints about The Plan here and there.

His boss, Sir Ron Brierley, has been more precise, or rather, more imprecise, saying The Plan was "necessarily somewhat unformulated" because GPG didn't have "the official status ... to be able to move forward to implement it" that is, it doesn't have control of Rubicon.

And there's the paradox of GPG's offer.

If Rubicon holders believe GPG has a plan that will add value for all concerned including them, then they won't sell. And if they don't, then The Plan goes nowhere.

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