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Opinion: Sharemarket shootout as merger talk marks return to Wild West

By NZPA

Friday 31st March 2006

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All guns were blazing in the local investment community this week as another takeover - dressed as a merger - sparked fears of a return to the Wild West market of old.

Australia's Transpacific Industries announced plans to "merge" with the country's biggest landfill and rubbish collector, Waste Management.

Waste Management shareholders would receive $8.64 per share in cash, but no equity in the merged unit, meaning the deal was effectively a takeover, with another top New Zealand company set to bite the dust.

As a merger, the deal fell under the Companies Act, not the Takeovers Code. That meant it required a lower approval threshold, just 75% of votes at a May shareholder meeting, rather than the usual 90% shareholder support.

The news caused a stir on the sharemarket, with the first shots fired from the fund management camp, which claimed this "new breed of takeover" rendered the 2001 code powerless and set a dangerous precedent.

"If this is the new type of takeover then clearly the Takeovers Code is somewhat redundant," Brook Asset Management executive chairman Simon Botherway told the Dominion Post.

Waste Management chief executive Kim Ellis fired back at the recalcitrant shareholders, saying: "To hell with them, they'll never get an offer like this again".

Ellis told the Business Herald he did not care what the deal was called. In practice, it was a merger of two complementary businesses with strengths on opposite sides of the Tasman.

Waste Management directors had backed the merger structure because, under a takeover, if Transpacific had fallen short of the 100% target, but gained over 51%, Waste Management would be at the mercy of its major shareholder - who would likely stymie its Australian expansion.

The deal was black and white, Ellis said.

That view found some sympathy with Shareholders' Association chairman Bruce Sheppard, who said the ability for a bidder to waive any condition except price was a "fundamental flaw" in the code.

It allowed a company to reach 51% ownership, waive the full takeover provision, assume control, and bid the existing management adieu.

Despite his best efforts to get investors on side, some market commentators were not convinced about where Ellis' allegiances lay.

It was revealed this week that the talented - and ambitious - chief executive would head up the merged company's New Zealand operations.

Having impressed with his ability to warm shareholders to the merger and bedded down the deal, Ellis could eventually throw his hat in the ring to lead the much larger group.

Ellis raised eyebrows with some of his comments to the media.

The Business Herald quoted Ellis as advising shareholders to "buy a bach" or "take on holiday" on the profits of the deal - making him sound more like a bank mortgage manager than the head of a listed company.

And his no holds barred approach saw him threaten that, should the deal fall over: "I certainly won't be around to run the company."

Questions arose about why the directors of major New Zealand companies were so trigger-happy about recommending our best and brightest stocks slip into offshore hands.

The Waste Management proposal followed a similar move last month by Australia's Origin Energy to merge with its 51% owned New Zealand power company, Contact Energy.

Under that deal, which Contact shareholders will vote on in June, Origin would move to a 75.7% stake of the merged company, without any money changing hands. Contact shareholders, who currently own 49% of the local power company, would hold just 24.3% of the merged group.

The deal won unanimous support from Contact's directors - most notably chairman Phil Pryke, who, with fellow independent directors Tim Saunders and John Milne, recommended an earlier, failed, bid by former majority shareholder Edison Mission in 2001 at $3.85 per share.

Contact shares are currently trading at around double that price and the stock has grown into the second-largest company on the local bourse.

Like Ellis, Pryke would have a plumb job - deputy chairman - within the merged company. By contrast, then Contact chief executive David Hunt - who would be relegated to a position within an executive management team - voted with his feet on the potential deal, announcing his resignation for "personal reasons".

Market commentator Brian Gaynor said the issue of suspect recommendations by company directors was endemic.

He highlighted the recent example of Carter Holt Harvey, where independent directors recommended shareholders accept billionaire Graeme Hart's $2.50 per share offer. That lapsed and a fresh offer at $2.75 was launched to mop up a lucky few minorities.

Gaynor said the trend towards mergers, while worrying, did not spell a return to the Wild West takeovers of pre-2001 - where differential offers, often to the disadvantage of Mum and Dad investors, were the norm.

"I don't believe it's going back to the cowboy days, but I do think it's unsatisfactory," he said.

"I think that the Waste Management board of directors have misjudged this."

The offer found favour in some quarters.

"I think it is a very good offer price for Waste Management shareholders," Forsyth Barr analyst Guy Hallwright said.

"My best guess is that it will go ahead."

Transpacific's Australian investors also caught the whiff of a good deal - sending the ASX-listed stock's shares up 20% on the news.

Stock Exchange chief executive Mark Weldon was not commenting this week on the rise in mergers designed to avoid the Takeovers Code.

Last year he called for a review of the code, saying a rule insisting buyers purchasing over 50% of a listed company had to launch a full takeover bid, was forcing New Zealand's largest listed companies into overseas hands.

The scale of such deals meant "in practical terms" the code was dictating the sale of large companies to overseas players.

Stephen Franks, a commercial lawyer and former deputy chairman of the exchange's Market Surveillance Panel, called on the Takeovers Panel to clarify its position on takeovers conducted via the Companies Act.

"I think they should say whether they're going to let this develop. The main thing is integrity and delivering what the rules say."

A panel spokesman said that on the basis of information provided, the code did not apply to the Waste Management deal and it would make no further inquiries.

But the panel is obviously concerned. In a briefing for Commerce Minister Lianne Dalziel last November, it requested an investigation into the interaction between the Takeovers Act and the Companies Act on merger deals.

Under the Companies Act, mergers require the full support of boards to proceed. With both Waste Management and Contact jumping the gun and mooting deals without first seeking independent advice, their recommendations should be viewed with extreme caution, and suspicion, by shareholders.

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