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Opinion: Selling out to the Aussies

By Simon Louisson of NZPA

Friday 2nd June 2006

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"Digger" Don Brash, as opponents have dubbed the National Party leader, worries Kiwis will fly in flocks across the Tasman due to tax rates. But possibly he should as concerned at the number of kiwi companies flying the coup.

Australians seem to be snaffling up New Zealand companies left and right. This week's effort was Gold Coast company's S8's $235 million bid for travel agency firm Gullivers Travels.

It followed hard on the heals of Transpacific swallowing Waste Management for $870m, AMP buying Capital Properties for $356m, Fairfax buying TradeMe for $700m and Australian private equity funds buying 51% of retailer Kathmandu for more than $200m.

Also on the agenda was Contact Energy's "merger" with Australian parent Origin Energy, which valued the 49% of Contact not owned by Origin at around $2 billion.

A common theme for the listed companies among these transactions was the local sharemarket seriously undervalued them.

Gullivers, whose shares listed on the local market 18 months ago, had been struggling to stay above its $1.60 issue price, when S8's $2.35 per share cash offer flashed on screens.

Waste Management shares were on $6.99 when the "amalgamation" news, valuing Waste at $8.64 per share, hit.

Similarly with Contact, news of the "merger" was a rocket booster for the share price, then at $6.52 compared with $7.77 today.

Obviously, companies wanting control should pay a premium, but questions should be asked why a good part of that premium is not built into the share price before a takeover is announced.

There are plenty of other potential takeover targets around - good, well run, companies whose shares are undervalued.

A plethora of potential candidates spring to mind including Fletcher Building, Mainfreight, Michael Hill International, Ryman Healthcare, Sky City, Cavalier, Fisher & Paykel Healthcare, Rakon, Fisher & Paykel Appliances, Freightways, Hallenstein Glassons, Pumpkin Patch, Tenon, Scott Technologies, 42 Below, Mooring Systems, Methven, Provenco and Wellington Drive Technology.

Even beleaguered market heavyweight Telecom was touted this week as a possible major play for billionaire Graeme Hart, whose 54% Australian-owned Burns Philp is sitting on a $3.5 billion war chest.

Instinct suggested the 20%, $2.4 billion, fall in Telecom's value since the Government announced it would regulate more firmly, is overdone. Hart, or perhaps a deep-pocketed Australian predator could easily swoop.

The good news was that New Zealand investors have not rolled over, with quite the abandon of the past.

Contact shareholders at this stage look set to reject the "takeover in drag", which has been delayed two months until August, to allow the promoters to regroup.

And the rise in Gullivers' price to $2.38, suggested S8 may be pressured to offer a higher price, as usually occurred with Australian takeovers.

The report of Gullivers independent valuer will make interesting reading.

Institutional investors were riled about the Waste Management Transpacific deal, even though it valued the company well above the top of the independent assessor's range, because poison pills and done deals effectively gave shareholders no choice but to accept.

Analyst Brian Gaynor pointed out that Australia's superior savings record was likely to make takeovers from that quarter commonplace.

AMP boss Andrew Mohl recently predicted Australian private pension assets would grow by $2.2 trillion ($2200 billion!) - or 15 times New Zealand's GDP - in the next decade, to reach a mind-boggling $3 trillion.

Gaynor noted that as the local market capitalisation was less than $60 billion, Australian investors could buy this market 40 times with the new funds on tap by 2015.

"New Zealand is rapidly becoming an economic colony of Australia, mainly because our neighbour has a huge pool of funds to buy our companies and we have limited funds to defend them," said Gaynor.

The bad news was that the 10% fall of the New Zealand dollar against the aussie dollar, made our assets even cheaper to Australians.

Australians will soon exhaust the list of decent companies to acquire at home. They will very quickly turn their attention here and will likely offer what is perceived as top dollar. And if investors here hold their nerve, they may be able to demand a full price as Sam Morgan did for Trade Me.

Sharebroker James Smalley, of Hamilton, Hindin, Greene, said that Capital Properties' result announced this week showed its net asset backing was $1.66 per share - well ahead of the $1.48 AMP paid.

"Perhaps Capital Properties does highlight that shareholders are correct to want top dollar for their shares," he said.

He believed Gullivers' founder and 27% owner Andrew Bagnall may have sold himself short when he floated the company.

"If he'd hung on for a year he could have done it in a trade sale at $2.35 (per share)," Smalley said.

There must be similar concerns that Rakon's advisers seriously undervalued the GPS systems manufacturer, which listed two weeks ago.

Despite adverse publicity recently about making components for the US military, its shares have rocketed to $2.80 from the $1.60 issue price. That means the original owners were short-changed to the tune of $50 million.

Smalley noted that five or six years ago, as soon as a takeover came along out of the blue, "people were jumping over themselves to accept it".

"In hindsight, imagine if something like a Fletcher Energy was still listed, with the current energy and gas prices."

Fletcher Energy and Fletcher Paper fetched $5b apiece in trade sales in 2001 and Fletcher Challenge management were chastised for reportedly declining an offer of around $3-a-share for Fletcher Building, valuing the company at under $1b - against its $4.5b capitalisation today.

"It seems to be that the big corporates who buy these companies really have a better understanding as to the long-term gains of these companies that they are buying, whereas shareholders accept the short-term cash," said Smalley.

Let's hope small investors will lift their investment horizons and at least get the best price when they sell out.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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