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Keep an eye on price vs nta

By Peter V O'Brien

Friday 14th February 2003

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Strategic share acquisitions began 2003 with a spurt in activity, raising the question of how many companies will be targeted this year. The market learned last week of Guinness Peat Group's (GPG) holding in Tower increasing to 9.93%, a smidgen under the 10% cap.

Manoeuvering in meat company Richmond's shares continued this week when North Meats, the local subsidiary of UK company Bernard Matthews, bought 2.8 million shares, lifting its stake to 10.5%. That was a strategic move against South Island process PPCS and apparently designed to protect North Meats' relationship with Richmond.

Then we saw positions being taken in plastic moulding and packaging company Vertex.

GPG's higher stake in Tower could be an opportunistic market play, with the intention of getting out if another financial services group bid for the New Zealand-based organisation, or it could be the forerunner to an offer after expiry of the cap. Either way, it strengthened GPG's hand at Tower's annual meeting in March.

These illustrate different approaches to partial or full acquisitions, whether based on chance to take a flick on subsequent resale of shares, protection of relationships, a desire to take advantage of a company's profit performance or betting on the difference between share prices and net asset backing.

Tower could be an example for all four. The company underperformed recently in terms of profit performance and share price. A share price of $2.10 on Wednesday was less than half the company's latest net tangible asset (nta) backing a share, shown in the National Business Review's share table last week at $4.34.

The nta might, or might not, be fully realisable. Any eventual controller of Tower would be unlikely to attempt liquidation, given the company's involvement in insurance and managed funds' products and messy issues involved in such a procedure. It would probably prefer to dispose of bits of the business, subject to its perception of capacity to reorganise the lot.

Tower is a classic example of takeover target, or quick flick raid. GPG and other organisations have a mothlike attraction to such beckoning lights.

Richmond's share price was $2.93 on Wednesday, higher than the $2.88 nta, but values in the books sometimes fail to be directly related to real asset values.

Vertex's share price was well above nta, being more than twice the latter. The company was floated in June when then owners Pacific Equity Partners and Bain Capital sold a majority shareholding. That holding and new shares resulted in a float of 27.76 million shares at $2.05 each.

The stock peaked last year at $2.02, but it was downhill later, after the company downgraded prospectus profit forecasts. It forecast earnings before interest and tax (ebit) of $5.2 million for the six months ended September.

An announcement in early September said there would be a 15% shortfall in the ebit forecast. That would produce an ebit of $4.42 million. The actual result was ebit of $4.43 million and net profit of $1.7 million, and 19% increase on the 1.43 million earned in the corresponding period of the previous year.

Full-year ebit was downgraded 10% to $10.1 million, compared with the prospectus forecast of $11.2 million. The report for the six months ended September said a previously announced sales shortfall resulted mainly from customer delays in new product launches, reduced demand from exporters and the effects of the Australian drought on a number of customers supplying the agricultural industry.

"Lower than expected volumes and short-term variability with some customers have made production efficiencies harder to achieve."

Some people seem to think they can do better, given current share prices. The share price to nta ratio was relevant to 11 companies on Monday, excluding situations where a dominant shareholder owned more than 50% of the capital. There is always a problem in calculating the real value of assets and the capacity to get appropriate cashflow from them, a factor that influences opportunists or potential bidders.

Tranz Rail, for example, had an nta of $1.86 on latest figures, while the share price was $1.33 on Wednesday. The condition of the company's rolling stock and rail network, particularly in Wellington commuter services (which it wants to sell), could affect any buyer's potential offer.

Investors could do well this year if they do homework in identifying potential targets, or flick situations, and keep an eye on the relationship between share price and nta.

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