The Shoeshine Column: Mammoth and minnow - a tale of two takeovers

Friday 25th May 2001

At first glance the recent takeover offers for one of our largest listed companies, Contact Energy, and one of our smallest, Broadway Industries, look identical.

In both cases the largest shareholder owns around 40%. Neither is offering much, if any, of a premium to the market prices that prevailed before their offers. And neither is making a full bid, just an on-market stand to shift them past the incontestable 50.1% control level.

So the Grant Samuel report on Edison Mission Energy's Contact bid, which finds it fair if not generous, might be thought to apply equally to the Broadway bid. In fact they're two entirely different beasts.

Grant Samuel points out Contact is well-researched and its stock well-traded so the range of pre-bid market prices can be taken to be fair market value.

Edison's $2.90 to $3.25 offer falls within that range at the lower end, the appraiser says. It doesn't need to offer a control premium for going beyond 50.1% because it's generally accepted that, with 42.7%, it already has control.

In short, Edison is playing an entirely straight wicket with its small fellow shareholders. Contrast this with the situation over at Broadway Industries.

Broadway has one of the most woeful recent histories of any listed company.

Over the four years to last June its shareholders' funds shrank from $22.4 million to $4.7 million, its assets from $66 million to $16 million, and its normalised profit from an uninspiring $1.5 million to an anaemic $205,000 last year following two years of losses.

Years of "restructuring" have solved some but by no means all of the company's problems. Its bankers, who got twitchy two years ago, have been paid off with the proceeds of asset sales.

But the company still needs to repay, by the end of this year, a $4 million loan from South Island Finance, a company associated with its directors and major shareholders, Humphrey Rolleston and Allan Hubbard.

So the one-for-three rights issue announced on May 11 seemed at first glance to be a reasonable proposition, even though it would raise only $1.23 million if fully subscribed.

The company said the proceeds would be used to strengthen the balance sheet and buy capital equipment for its principal asset, Mercer Stainless.

The timing seemed as propitious as anyone can expect from this corporate basket case. Shoeshine last wrote about Broadway in September 1999, quoting chairman Ian Farrant predicting Broadway's results would "bear the fruit of the company redesign" in the next 18 months.

Twenty months later the turnaround has yet to become apparent but the company did note it had delayed its rights issue until Mercer had returned to sustainable profitability.

Even so it's unlikely many among Broadway's 600-odd remaining shareholders will subscribe. Almost any listed company, on past record, looks more deserving of scarce investment capital.

So the announcement, only five days after the rights notice, that major shareholder Duxford Investments was giving notice of a market stand, had Shoeshine' ears pricking up.

Duxford has 17 individual and corporate shareholders but is principally the vehicle of Hubbard and Rolleston.

It owns 40% of Broadway's shares. Its "associated persons," such as Hubbard and Rolleston in their own rights, hold a further 7.8%.

The notified buying range is 29c to 34c, at a premium to the rights price but not much higher at the top end than recent on-market peaks at 30c, and certainly ungenerous compared to last year's 40c high.

The dates are June 7 until June 29, which just happens to be the last day before the Takeovers Code becomes law.

So what? Isn't this the same as Contact, where the offeror already has effective control and doesn't need to offer a premium?

Actually no. If none of Contact's shareholders like Edison's offer, then they simply won't sell and Edison will remain at 42.7%.

In Broadway's case Duxford and its associates obviously intend to take up their rights entitlements in full.

Unless the minorities do likewise Duxford will sail past the 50.1% mark by default. In fact, even if the smaller holders all participate in full it will still get 62%, assuming it fills its on-market offer. If none takes part, Duxford will end up with 46% in its own right and almost 20% through its associates.

That incidentally will take it within groping distance of 66%, the level at which it can consolidate Broadway's tax losses. And all this for an outlay of $650,000-760,000.

All this will presumably be pointed out in the independent appraisal report of the takeover bid, if there is one. Stock Exchange listing rules dictate a report must be commissioned where the offeror is an "insider," which Duxford plainly is, and holds more than 20%.

In Broadway's case the directors are still deciding whether there will be a report. The company says there are "exceptions" to the rule, which presumably means the directors are thinking about asking the exchange's market surveillance panel for one of its ill-reputed waivers.

It all leaves Shoeshine wondering why directors Rolleston and Hubbard, and chairman Ian Farrant, who between them control nearly 57% of the company, are bothering with all this malarkey.

All three are wealthy men. At 34c, a price they obviously consider will be acceptable to the minorities, a straight bid for the remaining 43% of the company would cost a trifling $2.2 million, $760,000 of which they may have to come up with in any case.

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