Lion searches for Montana hangover remedy

Friday 8th June 2001

By Nick Stride

Montana's independent directors sat down yesterday to consider a report that poses more questions than it answers.

The Stock Exchange committee's verdict was clear enough. On the evening of February 8 Lion Nathan's sharebroker, Credit Suisse First Boston, breached the Stock Exchange's listing rules, and Montana's constitution, by buying 21 million Montana shares.

As a result Lion was a "defaulter" under the listing rules. So far so good.

Working out what happens now is a theoretical exercise because many of the procedures laid down in the rules have never been tested.

Listing rule 4.7.1 says an issuer - in this case, Montana - "may, following a default, exercise a power described in rule 4.7.2(a) or (b) in respect of all or any quoted equity securities in which the defaulter has a relevant interest ('defaulter's securities')."

Rule 4.7.2(a) says a defaulter can't vote its shares. Rule 4.7.2(b) gives the defaulter one month, either to sell its relevant interest in "the securities" or to remedy the default, if it can be remedied.

That's the hard bit.

The report of the exchange's standing committee heard arguments from lawyers for Lion, Montana and rival Montana bidder Allied Domecq on how many of Lion's 133.1 million Montana shares are "defaulter's securities." Montana and Allied Domecq argued that encompassed Lion's entire 62% holding.

Lion's counsel, Anthony Lusk QC, conceded the rules might deliberately have provided for wide-ranging consequences to deter people from breaching them. Certainly Stephen Franks, the securities lawyer who drafted them, has said that was the intention.

But Lion asked the committee for the right to go back to it to get a ruling on how many of the shares were at risk, should it disagree with the view Montana's independent directors take.

The 62% holding is effectively divided into four tranches - 28.3% bought before February 8 this year, 22.7% bought on the night, 4.9% bought the following Monday, and 6.1% acquired since then.

Montana's directors' immediate job is to state what will satisfy them as a "remedy" for the default, if anything will.

The committee's report identified 15 transactions involving 20,634,920 shares, and two other transactions involving 800,000 shares, as transfers made during the restricted period before midnight on February 8. Lion was a defaulter because of these transactions.

This will be the narrowest interpretation of "defaulter securities" and the one Lion will be keen to see adopted. The question then will be how the default can be remedied.

A simple sale of that number of shares, to anyone not connected to Lion, will suffice only if Montana's independent directors agree. Reversing the transactions is also possible, but only if all of the 17 institutional investors agree to take their shares back and repay Lion its money. Again, Montana's independent directors would also have to agree that is sufficient "remedy" - otherwise the committee will have to rule.

Montana could also propose that either of these options - sale to a third party or reversal of transactions - would be a remedy if applied also to the shares bought on February 12, or to all of those, and to the shares bought later.

The least vulnerable part of Lion's stake is the 28.3% it held before February 8. The early indications are that Lion has a good chance of hanging on at least to these.

Mr Franks has said the intention of the listing rules was that they should restore the status quo before a default occurred. Considering the question of a 62% default the committee declined to say whether it thought "such harsh consequences" were intended.

Any resolution that sees Lion hold on to at least 28.3% is likely to reignite the bidding war with Allied Domecq, which has 27%.

With the Takeovers Code taking force on July 1, Lion would presumably be in a straight fight for 100% of Montana.

But it would have a huge advantage in that its average entry price is far lower than the $4.76 Allied paid for its stake. At the 28% mark it had paid an average $2.39 a share. Even at 62% its average price is only $3.68 a share.

The worst-case scenario for Lion is that Montana's directors decree only outright sale of the entire 62% holding will suffice, and the committee agrees.

If that happens, and if Lion is unable to find a buyer before its time expires, Montana will be entitled to sell the shares "through the exchange or in a manner approved by the exchange."

Again, the listing rules are silent on what exactly that entails. If it gives Montana complete discretion the shares could go to Allied Domecq as part of the 100% takeover of the company Allied has proposed and Montana's board has endorsed. In any case Lion's consolation prize would be a handsome profit on its investment.

Another possibility is an effective auction in which Lion is entitled to participate. Again, at anything less than 62% its low average entry price would give it an advantage over Allied Domecq - it would be able to afford to pay more for each additional share than Allied but still end up with the same number of shares at a lower overall cost.

A bidding war could still see Montana's shares priced at over $5 but the beneficiaries will be few. Only 24 million shares comprising 11% of the company are still in minority shareholders' hands.

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