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The Shoeshine Column: Infratil Australia takeover bid stumbles

Friday 28th April 2000

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Allegations of share price manipulation, opportunism and mismanagement have clouded the hostile move

Utilities are among the dullest of investments, with their stable but slow-growing markets for energy, goods-handling or transport services. That makes the passions surrounding Australian Infrastructure Fund's (AIF) hostile takeover bid for Infratil Australia (IFA) all the more surprising.

The past few weeks have seen allegations of share price manipulation, opportunism and mismanagement.

AIF made its first move early in March when it bought 2% of the Brisbane-based but New Zealand-run IFA. On March 28 it picked up another 5%. Significantly, the seller was IFA's biggest shareholder, the state government-owned Queensland Investment Corporation, which still holds 8.6%.

AIF fended off questions about a possible takeover bid by saying it was "comfortable" with a 7% stake.

In an apparently unrelated incident three days later, on March 31, IFA's share price fell 6.6% to 71Ac (85c) after late trading on the Australian market. The company has called on regulatory authorities to investigate.

IFA has declined to discuss its concerns but is reported to be upset the low share price on March 31, the end of a quarter and the financial year for many investors, may affect many valuations of IFA.

The possible manipulation of IFA's share price was an unneeded distraction while the company was discussing a potential merger with AIF. After talks failed, AIF on April 11 announced a hostile takeover bid. It is offering two of its own stapled securities (a share with option attached) for every five Infratil shares. This values IFA at $340 million or $1.01 a share, based on IAF's $A2.10 and IFA's 85Ac closing prices the day before the bid.

IFA's rejection of the offer was as swift as it was firm. In a statement the same day it noted the weighted average price of AIF in the three months before the offer was $A1.96, valuing IFA at 78Ac, a premium of "only" 12% to the weighted average price of IFA shares over the same period. It pointed out this was 8% below a pre-bid closing price of 85Ac.

It stressed the offer was also pitched at a substantial discount to IFA's December 31 estimate of its net asset value of $A1.21 per share. Based on the comparable figure for AIF of $A2.14 on the same date, the discount was more than 29%, it said.

Finally, it pointed out AIF shares were "thinly traded," the offer required IFA shareholders to give up their dividend for the six months to June 30 and the bid was highly conditional.

Some of these points are debatable and depend on how various numbers are crunched.

For example, AIF prefers to look at IFA's average share price in the three months before the latter announced a share buyback, a proposed sale of assets and merger talks with AIF. On this basis, it said, the takeover offer represented a premium of 35%.

From a shareholder's point of view, even IFA's assessment of a 12% gain is better than a decline, which has been the trend for IFA shares. After floating in 1997 at $1.30 a share, they lost nearly half their value by mid-1998 before recovering to $1.15 in early 1999.

Since then, there has been a steady decline to a low of 75c last month. At the recent price of 95c, the shares are still down 27% on their float price.

Coincidentally, AIF also floated in 1997, at $A2. Its shares are trading at 2% above that figure. AIF has been quick to blame its target's comparative underperformance on IFA's manager, Morrison & Co.

Claiming the company's share price is less than that of the underlying assets is unlikely to wash with investors either. Investment companies are almost always valued at a discount and AIF is in the same basket, although the discount at 5% is much lower than for IFA.

In performance terms, comparing the two companies is difficult because of the different ways they put their accounts together. AIF (a trust) counts unrealised asset gains as profits and pays out distributions as a percentage of that. IFA (a company) counts only realised gains as profit.

In their latest annual results, AIF reported a $A32 million net profit while IFA claimed on the same accounting basis it would have delivered $A48 million. This is from asset bases of $396 million and $298 million respectively.

Despite such justifications, IFA has been conscious of its poor share price performance and has been keen to improve it. It has announced a share buyback and plans to sell its larger assets, holdings in the Perth and Northern Territory airports that represent half its portfolio.

It intends holding its stakes in Northern Territory airports, the Victorian port of Portland and its Southern Hydro power asset.

From Shoeshine's perspective, the concept of a merger between the two infrastructure funds makes a lot of sense. Their asset bases are complementary, with only a minimum of duplication, and investors would benefit from economies of scale. A combined group would have a market capitalisation of more than $700 million and be around the 120th-largest listed company on the Australian Stock Exchange.

However, success is not assured and the price is a stumbling block. It would take only one of IFA's major institutional or corporate shareholders to decline to sell to thwart the takeover. Both IFA and AIF's prices have declined since their initial surge after the bid announcement, which indicates investors are not confident about the deal going through.

That may change if AIF waives its 90% condition and decides to sit on its enhanced stake until the time is right to try again.

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