The O'Brien Column: NTA not the beginning and end of measuring takeover prospects

Friday 20th April 2001

Air New Zealand's recent share price slump had a fallout beyond the market's current troubles which included problems with the Ansett 767 fleet, fuel costs and the probability of a sizable loss when the company reports for the year ended June 30.

Investment company Brierley Investments will have taken another hit in its investment portfolio, some personal reputations in the aviation industry have suffered and the airline's sharemarket capitalisation went under $1 billion (at the time of writing; it may have recovered since or gone down further).

The company's capitalisation is about half what it was two years ago and the share price last week for the A shares was less than half net asset backing. Air NZ's B shares were just above half nta.

Assuming Brierley Investments was prepared to sell at current levels, the airline presented a classic takeover situation, although there would be two caveats to that comment.

Any bidder would need appropriate approvals related to international landing rights' agreements, regulatory authorities' agreements to who owns what and the group's current profit problems.

There was also the point that nta is not the beginning and end of assessments of the merits of acquiring a company.

Air New Zealand's assets include an aircraft fleet, specialised properties and other items, all of which have limited use for anything but running an air transport operation.

In passing, it should be mentioned senior people are on record as saying some Ansett matters apparently were not picked up in due diligence last year.

We now hear the current Ansett fleet problems were the fault of the Aussie company's internal culture and some of its executives.

Air New Zealand is not alone in having net asset backing less than half the current share price or close to it.

On Wednesday, April 11, (see The National Business Review, April 12) Carter Holt Harvey was among the notable. The share price was $1.80 and nta $2.68. That meant the share price was 67.2% of nta. Or, as a reciprocal, the price/nta ratio was 0.67.

Carter Holt's relationships between price and nta were the same when the Stock Exchange closed for Easter.

Companies with forestry interests have been discounted for reasons discussed in NBR last week. They have substantial assets which increase in value regularly, even when offsetting the trees chopped against incremental growth of standing trees and replacement plantings.

Meat processor Affco suffered from speculation around the departure of several executives, its price closing last week at 33c, 3c above its low for the past two years and well below the two-year high of 48c.

Affco's nta last week was 64c, so the share price was only 51.6% of nta. The company was another with specialised assets, apart from its land holdings and general assets.

What do you do with a meat-processing company's specially designed buildings and plant and equipment, apart from using them for meat-processing?

There is another side to the price/nta relationship. Many companies have massive ratios, usually because of the rule that intangible assets are excluded from nta calculations.

Patents, trade marks, goodwill paid on the basis of increasing one's earnings in a merged group and intellectual capital issues peculiarly relevant to IT companies obviously have a real "value," although they lack physicality and see realisation values change dramatically, as shown in the collapse of high-tech stock prices in the past 15 months worldwide.

Frucor Beverages Group was an example of a non-technology company with a high price/nta ratio as a result of intangibles.

The share price was $2.25 at the Easter close but, after deduction of intangible assets, nta was 3c, producing a price/nta ratio of 72.

While it is obvious "net tangible assets" excludes intangibles, by definition, investors do not seem to care much about the relationship between price and nta, but the issue is relevant to corporates on the raiding trail.

A raider might discount the value of brand names, for example, unless they have considerable fame, as in the case of some types of liquor.

Some investors have done well in the past if they bought shares selling at a substantial discount to real, tangible asset values.

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