Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

This is what I see as the downside of the RPI offer .

1/  Dividend Shrinkage:   Based on the 51.7+18.0 million WRI shares
that RPI want to own to enable them to control the company, a net
return of 9.5c per share this year is predicted.  That equates to an
income for RPI of 

(51.7+18.0)x 0.095= $6.62m (net return).

That dividend is fully imputed, so it equates to a gross return of 

$6.62m/0.67= $9.88m.

The proposal is for RPI to issue 85m income notes (preference shares)
half paying 9% and the other half paying 10.25%.   The purpose of
these shares is to pay for the shareholding in WRI that RPI wants. 
For the next three years I make that an average interest rate of
9.625%.

85m x 0.09625= $8.18m.

That leaves a gap of $9.88m- $8.18m= $1.7m per year.    These funds
are effectively siphoned off and consumed by RPI, before the RPI
preference shareholders get their payout.   WRI direct shareholders
will get exactly the same income stream without the filtering.

2/ High Leverage Risk.

I draw investors attention to page 19 of the offer document.  It shows
$40m of equity put in by Norgate and McConnon in the 8 months to 
March
2004.   Look at note 6 on page 51, and then the qualifying note on
page 56 which I will repeat:

"notwithstanding the determination of the NZX to treat the Redeemable
Preference Shares as equity (rather than debt) securities for the
purposes of the NZX listing rules."

To me, the way the figures are presented on page 19 is outrageous.  
The casual impression given is that Norgate and McConnon have put 
in
$40m of their own money.    The reality is this $40m is a debt that
can be repaid on demand to McConnon and Norgate at any time.      
The amount of 'at risk capital' that McConnon/Norgate plan to leave in 
RPI is a mere $100! (note6, p51).

It comes as no surprise then, that RPI have chosen not to disclose
'the information specified by "clause 8(5) of the First Schedule to
the Securities Regulations" (page 44).    They don't tell you what
that means, but I looked it up.   The information they don't want to
tell you is the net tangible asset backing for RPI.     It is close to
zero!

Note that on page 16 the offer document says
"None of Aorangi Laboratories Limited (McConnon interests) or MCN
Rural Investments (Norgate interests) give any guarantee in respect of
the offer." This is their out clause.   In the off chance that things
go pear shaped McConnon/Norgate can bail out, and guess who will 
be holding the bathwater?    That's right, the preference shareholders.

Contrast that to WRI itself where if things go wrong the net tangible
asset backing per share is 92c.

3/ Lost Capital Gain Opportunity

If the share price of WRI appreciates more than 10% within the next
five years RPI preference shareholders won't get the extra benefit
from it.  If the WRI share price appreciates but at less than 10%,
then RPI noteholders will get some benefit, but it will be taxable,
whereas the capital gain to WRI shareholders  is tax free.

Summary

Those RPI notes may be OK compared to other preference share 
offerings in the market.    But I think they stack up poorly with WRI
shares.    They give a lower return but at a higher risk than holding
the head shares directly.   The one advantage RPI notes do have is a
preferential entry ticket to any RPI ordinary share offer in the
future.   For me this RPI carrot does not compensate for the higher
risk of losing your capital.   I don't think I'll be swapping my WRI
shares for RPI notes.   Will I be selling to RPI for $1.50 (the cash
offer)?   I'll wait and read the Grant Samuel report when it comes out
next week before I decide that.

SNOOPY

--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."




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