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Opinion: Warehouse `bidders' make a mockery of continuous disclosure

By Simon Louisson of NZPA

Friday 8th June 2007

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NZX has made much of rebuilding public confidence in the stock exchange through its continuous disclosure regime, but shenanigans this week over bidding for The Warehouse have made a mockery of its efforts.

The idea of continuous disclosure is investors be informed as soon as possible by public announcement of any material information that may affect a stock's price.

Properly followed, it reduces insider trading and results in an informed market peopled by investors who believe they are treated fairly.

The flip side is what happened here in the 1980s -- those with inside knowledge got a jump on the mum and dad investors, who were invariably burnt.

The result was a generation turned off share investing -- 20 years later, the market has not recovered either in value or, more importantly, as a vehicle for raising capital.

For the good of investors, the market and the economy, it is crucial issues such as continuous disclosure are taken seriously.

Although the water is far from clear, what appears to have happened with The Warehouse is that investors were left in the dark.

One day before the decision by competition watchdog the Commerce Commission to decline permission for supermarket groups Foodstuffs and Woolworths to separately bid for The Warehouse, two newspapers carried stories about detailed offers made by each group.

In response to the newspapers' disclosures, shares in The Warehouse rose 6.3% yesterday, against a very weak market.

Further emphasising the power of information to move a company's share price, today's Commission decision saw Warehouse shares fall 8.4%. Warehouse chairman Keith Smith is adamant no offers were made.

In that case it was an uncanny coincidence that both the Australian Financial Review and The New Zealand Herald had specific details about the supposed bids.

Independently, both newspapers stated Woolworths had offered $7.15 a share and Foodstuffs verbally offered $7.75.

Smith said he is mystified about the source of the "speculation".

No great mystery there -- it was probably being leaked by sources that have a vested interest in boosting any bid price.

Interviewed by NZPA yesterday, Smith denied about a dozen times any offer had been put on the table.

"We have never received an offer. I have had to say that a hundred times. I don't know where the speculation is coming from."

But he did say: "We have had various discussions with various parties, a number of parties, not just Woolworths.

"Various ranges have been discussed at various times.

"I'm totally confident I have been complying with everything."

The point with Smith is that the offer was not "on the table". It is a judgement call and a matter of legal intepretation as to whether an offer was made.

Smith is also chairman of Tourism Holdings (THL), currently the subject of a takeover offer by MFS Living and Leisure.

Independent analyst Brian Gaynor says he finds it appalling directors fail to disclose such material information.

He points to another case, also involving Smith, in his THL role.

Before the current offer, THL received an offer of $140m for its leisure activities -- nearly half the company's business -- which Smith did not disclose to the market, Gaynor says.

"(THL) allowed the parties to do due diligence, it appears, and then got an offer from them and never disclosed it to the market.

"If these offers are being made, even if they are conditional offers, they should be disclosed to the market."

The non-disclosure by The Warehouse and THL contrasts with how textile company Pod and Software of Excellence behaved recently.

Each disclosed they had been approached before a bid had been received.

Pod last month received two proposals, one of which was for a substantial part of the business as happened with THL.

It would constitute material information if completed, Pod said.

It a dded it was not in a position to inform the market of the prices under either proposal or the financial implications, as the prices under both proposals were currently not determined, and may not be.

Pod's share price rose 15 percent on the announcement.

"Smith sticks to the letter of the law -- he seems to interpret that an offer is only an offer when it is a firm offer," Gaynor said.

"He obviously takes the view that you should not be announcing anything until it is absolutely unconditional, or close to it.

"Other chairman don't take that view.

"Certainly with Software of Excellence and Pod they were not firm offers initially, but they have kept the market up to date to say that there is an offer in the market."

Macquarie Securities' head of investment Arthur Lim believes the issue can be a matter of judgement.

"If a bid is subject to all kinds of conditions, it could be just as misleading to the market to have the information out there."

Bruce Sheppard, of the Shareholders Association, said, like many others with good sources of information, he was aware of the existence of "something that might resemble a Woolworths bid for some time".

"But I haven't chosen to alert anyone to it because I don't see that it is value accretive to shareholders to know about it."

He said even if the board had something in its possession resembling a bid, "in the absence of it being a formal bid, or the notification of an intention to make a formal bid, they're under no obligation to announce it unless it's considered price sensitive."

Sheppard argues any Warehouse bid would only be successful if Stephen Tindall accepted. But, given Tindall owns 51% of the company, even the most dimwitted investor would realise that.

He considered there was greater harm done in publicising the information than in not.

Although the stock exchange has taken great trouble to institute continuous disclosure, it seems to make little effort to police it.

In the "bad old days" there was a market surveillance committee which investigated such issues. The exchange was far more accessible and public in disclosing its investigations.

Today, it is difficult to know from NZX who, or which body, is responsible, let alone what they are investigating.

Even if it did take an interest in the matter, which would seem highly improbable, with its current fortress mentality, it is unlikely it would deign to tell the public.

The bottom line is fewer people will trust an investment in shares and everybody will be the poorer for it.

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