Barrage of spin meets Rubicon offer

Shoeshine

Saturday 17th April 2004

Tony Gibbs, Luke Moriarty, Sir Dryden Spring, allegations of incompetence and misleading the market ah, yes, Rubicon's tilt at Tenon has all the ingredients for a first-rate punchup. And the clock has barely started ticking.

As with all things to do with the former Fletcher Challenge empire, lurking beneath the innocent-seeming question is $1.85 a Tenon share too heavy, too light or just right? is a whole array of hideously complicated issues.

The first shot was fired suspiciously, some might say before Rubicon's bid was even publicised.

Just before 10am last Thursday, Tenon upgraded its estimate of June-year ebitda (earnings before interest, tax, depreciation, and amortisation) from the $45 million contained in the January explanatory memorandum to between $58 and $60 million.

This included the $7 million of foreign exchange gains announced on March 11 and $5-7 million of additional operating ebitda.

Rubicon's bid was released hours later. As Sir Dryden headed off for the Easter break he shot off a press release strongly advising shareholders not to sell.

On Monday he interrupted his break by squeezing off another two rounds, hitting himself squarely in each foot.

First, he boasted that among Tenon's achievements was a significant return of capital "with a further $1.15 per share to come."

The trouble with that statement is that Tenon has to pull off some tricky negotiations before it can promise a return of that size. Rubicon objected, and Sir Dryden was forced to back down and reinsert the words "up to" before the number.

In the same release he argued the previous week's earnings upgrade meant Tenon's shares were worth between $2.06 and $2.32, or 11-25% more than Rubicon's offer.

This brought more howls of outrage from Rubicon, with good reason.

Blind Freddy can see, and independent appraiser Grant Samuel certainly will, that one-off foreign exchange gains can't be included in ebitda which exists, after all, to give investors the clearest possible picture of a company's continuing earnings from its operations.

Reversing the $7 million of forex gains, using Tenon's six to seven times multiplier, takes $42-49 million out of Sir Dryden's $2.06-2.32 a share valuation, reducing it to $1.91-2.14.

Also to be deducted are Tenon's corporate costs, which analysts using the January explanatory memorandum estimate to be $9 million a year. Applying the six-to-seven times multiplier removes a further $54-63 million, bringing the implied valuation down to $1.72 to $1.92 a share pretty much the range to which Tenon chief executive John Dell committed himself at the Sydney investment conference.

It's interesting to note that ABN Amro, whose investment banking arm is advising Tenon on its defence, in an April Fool's Day note on the Tarawera forest sale put a target price on the company of $1.60.

On Wednesday it bumped this up to $2.04. Subtracting the second capital repayment of (maybe) $1.15 from both these prices indicates the valuation has doubled in two weeks, on an ebitda increase of 15%.

Also complicating the valuation is the difficulty of pricing the company's different components.

Tenon equity-accounted the earnings of US wood products distributor Empire for the first four months of this financial year while it owned 33%, and consolidated its earnings in November, when it got 67%. It has an option to acquire the rest for an estimated $21 million, before the recent and largely unexplained North American earnings leap.

It equity-accounts its 50% stake in another US distributor, American Wood Moulding.

In the meantime, Tenon's institutional investors have been making predictable noises about how the offer is too low. As many hold shares in both companies, they will probably be inclined to sell part of their Tenon holdings into Rubicon's offer, provided they can be persuaded Rubicon's plans will benefit both companies.

The earliest date Rubicon can issue a formal offer is April 22, after which Tenon's independent directors have 14 days to make their formal response.

Once the offer is open it must be concluded within 30 days.

That gives anybody else eyeing Tenon plenty of time to cook up a counterbid, but they would have to take a deep breath.

The wash-up of the Fletcher empire left Tenon with a veritable horde of material contracts 29 are disclosed in the company's Securities and Exchange Commission form 20-F filed on December 5. They involve Fletcher Building, Rubicon, Shell, Apache, Norske Skog and a variety of other parties. There are also various log and pulp supply agreements.

With its intimate knowledge of the former Fletcher Challenge's affairs, Rubicon is well-placed to put a price on the contingent risks. Outsiders aren't.

The legacy also means it's extremely unlikely Tenon's directors will entertain bids for the company's assets alone, leaving them with a nightmare rump of contracts.

Yet another complication is the necessity for Tenon to conclude agreements with a gaggle of Maori interests that run forestry businesses on leased, non-freehold land. Those leases have to be transferred to Kiwi Forests but this can be done only with the lessees' consent.

If deals can't be cut by the August settlement date the properties concerned will remain in Tenon's hands, although Kiwi Forests is unlikely to walk away.

Knowing Tenon wants a clean slate and its shareholders want their cash about $80 million of the total $725 million price the lessees have every incentive to drive a hard bargain.

Shenanigans like this could keep the whole show on the road until Christmas at least, no matter what becomes of Rubicon's bid.

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