'NAUGHTY BOYS - don't do it again'

Friday 7th June 2002

Takeovers Panel flunks Otago Power test

Before its first birthday, the Takeovers Panel has already flunked its first real test. The battle for control of Otago Power has been raging for six weeks and has proved a veritable breeding ground for dodgy takeover tactics.

Both PowerNet, which has played a very aggressive game all along, and Otago itself have fallen foul of the panel, which polices the Takeovers Code.

Within days of Otago calling for bids for its assets PowerNet jumped the queue with a $3.10 a share takeover bid.

The offer closed two days before the asset sale deadline. PowerNet presumably hoped thereby to grab control of the company before any other bids could be put before shareholders.

Dunedin Electricity responded with a bid of $3.15 a share. But under the code, offers have to stay open for at least two weeks and Dunedin's would have closed after the asset bids' deadline.

Otago's directors were outraged at PowerNet's tactics, arguing shareholders should have all the bids on the table before they had to decide on PowerNet's offer.

They found a clause in the company's constitution that allowed them to refuse to register share transfers.

PowerNet was in turn incensed, arguing the move was a defensive tactic banned by the code's rule 38. The whole affair went before the panel.

The panel found Otago guilty on the defensive tactics charge. It also pulled PowerNet up on the wording of its offer document, which would have provided it with voting rights it wasn't entitled to under the code.

The panel's "as you were" orders left PowerNet as the low bidder and it came back with a letter offering Otago's nine largest shareholders $3.25, provided they all accepted within 24 hours and kept the letter's existence a secret.

Of course it remained a secret only for minutes and Dunedin hauled PowerNet back before the panel.

In the meantime Otago tried to get around the defensive tactics ban by sending its shareholders a notice of meeting containing a resolution retrospectively approving the board's actions.

The panel's second ruling was released last Friday. It found, unsurprisingly, that PowerNet's letter breached the code's rules 28 and 29 by not telling all shareholders at the same time it was lifting its offer and by not keeping it open for 14 days.

It also found Otago's resolution was in breach because it was retrospective.

In PowerNet's case it said simply no further action would be taken. It ordered Otago to withdraw its resolution.

To Shoeshine's mind these two slaps on the wrist have sent the worst possible message to the business community.

Otago's breach was, admittedly, pretty small beans.

PowerNet's is altogether more serious. Anyone with the slightest acquaintance with the code knows that its essence is that all shareholders should be treated equally.

The Takeovers Act provides for the courts to impose a fine of up to $5 million on a company that contravenes or "has attempted to contravene" the code.

It also provides for a fine of up to $500,000 for individuals, including anyone who has "aided, abetted, counselled or procured any other person" or "conspired" with them, to breach the code.

That should send a shiver down the spines of the hordes of advisers who sell their services to companies during takeover battles.

In PowerNet's case these include none other than sharebroker Colin Giffney, a member of the Takeovers Panel.

Giffney didn't sit in the panel "division" that considered this battle or appear before the panel on PowerNet's behalf.

Nor is it known whether he knew in advance about PowerNet's letter or whether he advised against sending it. But the mere fact PowerNet tried to keep its offer secret suggests it knew it wouldn't find favour.

The panel argues nothing more stern can be justified because the two breaches were in the nature of "proposals" rather than irreversible actions. No harm done, in other words.

This seems analogous to the curious legal principle of handing down lighter sentences to attempted murderers than to those who succeed.

It's unclear to Shoeshine's non-legal brain why someone should get credit, or in effect a discount, for being a bungler. Surely the intention is what counts.

The message the panel has sent is that companies and individuals can breach the code with impunity in an effort to win advantage.

And if they get caught - hey, it was worth a try, wasn't it?

Quite why everybody is so keen on buying Otago is a bit of a mystery. Electricity lines companies are, let's face it, not the most exciting investment prospects on the planet.

It's true they're virtual monopolies.

But their capacity to lift profits consistently by screwing their captive customers is strictly limited.

The old "revalue your network upwards every year so your return on assets looks smaller" trick has now been well and truly sprung and Energy Minister Pete Hodgson is watching from the sidelines, tapping the price control crop against his jackboot.

As things stand PowerNet and Dunedin are each offering $3.25 a share.

But at that price PowerNet, a management company owned by Invercargill City Council-owned Electricity Invercargill and Southland rural lines company The Power Company, will be paying $95 million or 1.7 times Otago's 2001 ODV (optimised deprival value) of $56 million.

PowerNet manages Otago's network and those of its two owners but it feels it needs to expand to survive.

It plans to debt-fund the entire acquisition. If its capital costs, say, 8% its annual interest bill will be $7.6 million.

That's twice Otago's after-tax profit and considerably more than the pre-tax $5.9 million gain announced last year so it's hard to see how an acquisition would be value-creating.

Alert Invercargill citizens have been questioning why some councillors seem disposed to risk ratepayers' money funding PowerNet management's imperial ambitions.

Dunedin has similar ambitions. Although it's the country's fifth largest lines company its two networks, in Central Otago and Dunedin, are separated by Otago's.

If it wins the day it will have one big network covering nearly all of the region.

It will no doubt be able to benefit from scale economies but surely not to the extent of paying twice what ownership of Otago will return to it.

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