Forum Archive Index - August 2001

["G Stolwyk" <stolwyk@wave.co.nz>]

Peter and Snoopy,

 

I have read your comments and wish to mention that:

 

1. I see the merger worth what has been paid for in shares. If only cash had been paid out for this ' takeover ', then DAD most likely would have paid less assuming they had access to cash. Working at the coal face makes me realise that this perceived difference between any payout of cash or shares will disappear as the goodwill is deducted over time.( In this particuIar case, I am not concerned with the amount of goodwill per se )

 

Although each year some $20-25 mill. of this goodwill will be deducted, the previously recognized overall value of the merged entity will grow over time, assuming that Baycorp Advantage will perform. Apart from any perceived benefits, it is now more difficult for an outsider to pick up this merged company for a song:

 

Previously, BCH was more liable to be taken over at a lower than desired value - The company's share price sagged whenever there was doubt about the merger - While this was not likely, it was still a possibility. There is also a scarcity of NZ retail investors.

 

2. There still is a penalty to pay when the merger takes place: The goodwill has been replaced by an increase in the number of shares and this affects the value of E/S:

 

If the increase were not justified, then the E/S will be lower than desired and the P/E before deduction of goodwill, could be temporary higher followed by a decline. I think that this increase is fully justified:

 

Both companies were already working together on the key issues. I have expressed some doubt about the success of the Alliance, their joint venture. That doubt is now gone as the MD will ramp up the activities of this unit.    

 

3. My report of 23 April, 2001, item 7, forecasted the P/E of BCH to be 45, to 31 march 2002. The merged entity could have a P/E of between 45 and 50, before the effect of intangibles is applied. That should fall once the benefits of synergies come to fruitition and the consolidated entity makes its presence felt. 

 

Due to extra costs, the P/E could be closer to 50, I think. I believe that the merger will be worth that, provided that the forecasted profits of that segment at present under the control of DAD will eventuate in the following years.

 

4. The new entity will be in the top 70 companies in Australia; this, together with the standing of BCH in the financial world; with mr. K G McLaughlin, the MD  as the key man in this equation, will ensure that there won't be much stock, if any, overhanging the market.

 

5. I have supported the merger but at better terms than the 1.5 DAD shares for 1 BCH share. The agreement with its payout of fully franked credits, will mean that this effectively allocates 1.6 DAD shares, instead of the 1.56 shares mentioned.

 

I am happy with that and support the merger.

 

Gerry    

Holds BCH and CLH.

 

PS: In my opinion, the market with rapidly increasing new business ( outsourcing ) will be sufficiently large for both Baycorp Advantage and DAD to operate in.