Edison plays broker game on Contact

Friday 23rd November 2001

The public relations and advertising impact on takeover activity took a new angle this week when Edison Mission Energy took full-page advertisements in daily newspapers exhorting Contact Energy shareholders to accept its $4.15 a share offer.

There is nothing new in companies resorting to paid advertising to push their case but Edison Mission's ads went further than merely advancing its own arguments.

The ads in Wellington's Dominion began with the statement "We believe $4.25 is a good price for Contact shares."

"Good price" was emphasised, to the extent the words were printed in red while the rest of the sentence was in normal black type.

Nothing unusual in that, but the next section was the new angle. It comprised a clipping from the Dominion of November 14, with the headline "Broker endorses Edison offer for Contact shares."

"New Zealand's biggest retail broker, Forsyth Barr, is recommending Contact Energy shareholders accept the Edison Mission $4.14 plus an 11c dividend takeover offer."

The advertisement's text went on to say Forsyth Barr were leaders in sharemarket investment, so their advice was worth listening to.

"Accept our offer for your Contact shares today. We'll send you a cheque for $4.14 per share within a week of the offer becoming unconditional. And that's on top of the 11c per share dividend you'll soon receive from Contact. The offer price is final and closes December 6. So get your acceptance form, fill it in and post it today."

It seemed clear Edison Mission had no intention of increasing its offer but the use of one broking firm's views as reported in a newspaper raised an interesting question.

The same publication had also reported, as a news matter and faithfully, other brokers' assessments of Contact's value a share, as did The National Business Review, before and after Edison Mission increased its original offer of $3.85 a share.

Calculations went close to $5 a share. Edison Mission's advertisements seemed aimed at what are commonly and perhaps disrespectfully referred to as "mum-and-dad shareholders." They would have little, or no, effect on institutions, which have their own analysts and receive all the detailed analytical material from brokers.

It was unsurprising, in the retail context, that the ads referred to Forsyth Barr's position as the biggest retail broker.

Forsyth Barr is an organisation with a well-earned reputation, particularly for its development from a relatively minor Dunedin-based operation to a significant player in the New Zealand securities industry.

The broker's assessment of the merits of Edison Mission's bid is not the issue. The offeror's tactics were questionable to the extent that its ads referred to only one broker when others pitched estimated values for Contact much higher.

General prognostications of brokers' analysts also became relevant in the Contact Energy context.

Contact reported on October 26 for the year ended September 30. Net profit was $130.7 million, including unusual items.

Pre-result estimates from brokers' analysts went from less than $100 million to around $150 million.

The people involved were dealing with the same published data, plus whatever they could glean from other sources and their own analytical/guesstimate calculations.

The issue then became whether too much credibility is given to analysts' forecasts, particularly when release of information from companies, or detailed comment on outside profit forecasts, could be caught in complex insider trading rules.

There was a time when analysts put a profit forecast to company executives with confidence it would be affirmed or quietly and discretely suggested that another figure would be appropriate.

The proposed merger of the then Wright Stephenson and the National Mortgage & Agency Co in the early 1970s was threatened when a weird reincarnation of an old and respected UK company, Vavasour, tried to acquire NMA.

A strong ad campaign, based on techniques used through the pages of London's Financial Times, was put in train to ward off Vavasour. Subsequent events (including then Finance Minister Rob Muldoon's warning Vavasour to get off the patch) resulted in nothing being published.

New Zealand is in a peculiar situation. Securities law has been revamped and companies must disclose their souls when making or receiving takeover offers. Schemes of arrangement (the Fletcher Challenge letter stocks, for example) require explanatory documents that run to books.

There are still opportunities for companies to resort to general advertising to push cases using selective - but not necessarily misleading - data.

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