Opinion: Merger mania powering up and hollowing out sharemarket

By NZPA

Friday 11th May 2007

The economy has been stuttering at best for over two years but the sharemarket's benchmark index powered to a record high this week because of merger mania.

It's up in the stratosphere because of so-called M&A (mergers and acquisitions) activity, known to most of us as takeovers.

It's not just happening in New Zealand. The world has gone crazy about takeovers with deals announced every day -- some in the hundred billion dollar plus range.

Much of the activity is being driven by private equity funds, somewhat shadowy bodies not dissimilar in nature to hedge funds -- unaccountable and ill defined except in their goal to maximise returns to investors.

As the name implies, they raise capital privately and their equity is not freely tradeable. Investors, often including institutional funds, have to be passive and trust the firm's management.

Private equity firms often buy publicly listed companies and take them private. Although not necessarily asset strippers, unencumbered by the need for public disclosure, they usually drive assets harder.

They typically bring in new management teams that focus on making the company more valuable in the short to medium-term.

To make money above the profits of their units, private equity firms have to flick on the companies they buy. If improvements can be demonstrated, they can usually make a trade sale to another company in the sector at a higher price.

A less preferred option is an initial public offering (IPO), but investors are well to be wary of these as it usually means trade buyers have rejected the company on offer. Feltex was a classic example in New Zealand.

This week's local scene saw takeover offers made for two more mid-sized companies, one by private equity and one a trade deal.

Australian private equity firm Ironbridge Capital bid $2.43 a share for CanWest MediaWorks, valuing TV3's owner at $551 million.

It has already has secured 70% in a lock-up agreement with Canadian media company CanWest.

On Monday, Queensland tourism company MFS Living bid $2.80 a share for Tourism Holdings Ltd (THL), valuing that company at $275m.
Although much more modest in scale than the deals overseas, they are commensurate to the local market's size and represent a further hollowing out of the local sharemarket.

Apart from minnow NZ Experience and Air New Zealand, which is 81% state owned, THL is investors' only real chance to gain exposure to New Zealand's biggest industry.

Similarly, the media sector is being thinned out. New Zealand Herald owner APN News & Media had a secondary listing here, but is being taken over by Tony O'Reilly's Independent News & Media.

If MediaWorks disappears from the exchange, it will leave just Sky TV and that is controlled by Rupert Murdoch's News Corp.

Following the rejection this week of the private equity bid for Qantas, it will be interesting to see how investors respond to these latest offers. There are some indications the bidders may not have it all their own way.

THL's board plans to recommend the MFS deal, if no higher offer is made and if the independent appraiser deems the bid fair.
The offer is at a 29% premium to what the shares were trading at before the announcement.

THL, which operates iconic tourism ventures such as Kelly Tarlton's Underwater World and the Waitomo Caves but is primarily into campervans, is a perennial underperformer. In 2000, it even blamed the Sydney Olympics for a downturn in tourism in this part of the world.

At least three shareholders have the power to block a full takeover -- US investor Sterling Grace with 17%, fund manager AXA, with about 13%, and Sir Selwyn Cushing and family with 9.5% (assuming he can muster another 0.5% support).

All say they are awaiting the independent assessor's report.
No counter bidders are evident but private equity firms are awash with cash and have few available targets.

Forsyth Barr valued THL at between $2.58 to $3.17 a share against the $2.80 bid. Head of research Rob Mercer said earlier valuations were conservative and did not factor in some revenue opportunities.

THL was a better company than reflected by the market, he said.
MFS Living's offer was credible but did not reflect growth prospects. Shareholders should wait for the independent adviser's report, he added.

Ironbridge's offer is a 49% premium on where MediaWorks shares were trading at before the company was put on the block in October.

Since the bid, MediaWorks' second largest shareholder, Brook Asset Management, has been buying to lift its stake to 8.3% -- just under the 10% needed to block a full takeover.

Brook's Simon Botherway will only say he will await the independent valuation to decide whether or not to accept the offer.

Most media analysts yesterday judged the Ironbridge offer to be reasonable and recommend accepting the bid. A higher bid was unlikely following a vigorous tender process for CanWest's stake.

However, First NZ Capital analyst Sarndra Urlich said shareholders should hold out for a better offer.

In two recent big local takeovers, those who have held out have been rewarded. Contact Energy's price has climbed above the effective price offered by parent Origin Energy last year and those Carter Holt Harvey minorities who held out against Graeme Hart received an improved offer.

Goldman Sachs JBWere supports the Ironbridge offer as fair and noted if an improved offer did not eventuate then the shares would fall back to around Goldman Sachs' valuation of $2.15.

On the other hand if you believe Ironbridge will do what private equity firms are supposed to do, and TV3 continues to grab market share from TVNZ, then you may as well go along and enjoy the ride.

Comments from our readers

No comments yet