King Country Energy minorities extracted higher price from Mangahao than Todd got paid

Monday 12th August 2013

A group of minority shareholders in King Country Energy extracted more for their shares than the issue price at which Todd Energy sold down its Mangahao Power Station stake, raising concern the deal gave Todd control of the company too cheaply.

The energy arm of New Zealand's wealthiest family lifted its stake in KCE to 54 percent from 35.4 percent by selling its 50 percent of Mangahao to KCE, which owned the other half, for $33.8 million cash and 7.6 million KCE shares issued at $4.75 apiece, valuing the transaction at about $70 million.

That share price was a 44 percent premium to where it was trading on the relatively illiquid Unlisted platform but was at a discount of between 12 percent and 26 percent to the $5.41-to-$6.39 underlying value of the shares assessed by Simmons Corporate Finance in its report to KCE's independent directors. Those directors, Toby Stevenson and Brian Needham, recommended the deal, as did Simmons despite its valuation.

Buying the other half of Mangahao in itself made sense because KCE was a mismatched company, meaning its own production was only about half its requirement, forcing it to hedge its needs, typically buying spot power at a higher price. The dissenting shareholders, though, objected to the issue price to Todd Energy, who had tried to wrest control of KCE on two previous occasions since late 2006.

Shares of KCE last traded at $4.31 and in nine years of trading they haven't climbed above $5.05, according to Unlisted data.

Yet Brian Gaynor, the NZ Herald columnist and chairman of Milford Asset Management's investment committee, says that dissenting shareholders were awarded $6.39 a share plus interest and costs after first requiring the company to buy back their shares and then taking the issue to arbitration when they were paid out at the same rate as Todd - $4.75 a share.

KCE won't release details of the arbitration but the notes to its 2013 annual report identify 1.07 million shares held as Treasury stock, which it bought from the dissenting shareholders for about $5.07 million plus transaction costs of $2.1 million. That adds up to a per-share cost of about $6.74 though it is understood the number of shares that were actually disputed at arbitration was closer to 927,000.

"Credit must be given to shareholders who were prepared to utilise their rights under the minority buy-out provisions of the Companies Act and to Craigs Investment Partners, which funded the shareholders' arbitration costs," Gaynor wrote in a recent column.

He told BusinessDesk that his purpose in writing the column had been to highlight the rights minority shareholders who vote against a special resolution have under the Companies Act to require a company to buy back their shares.

Craigs chairman Neil Craig confirmed his firm had taken the case to arbitration on behalf of clients of its custodial services and other individual customers of Craigs that wished to go down that route. He declined to comment on the arbitration, citing confidentiality.

Toby Stevenson said the KCE independent directors were "very, very comfortable with the price."

"We remain of the view that the transaction will continue to be in the best interest of all shareholders," he told BusinessDesk. Notwithstanding the valuation range given by Simmons, the advisory firm had deemed the proposal fair and reasonable, relative to market trading.

"When we were doing the deal we were focussed on a control premium based on the market," he said. "We were persuaded by the strategic value of the deal provided to KCE."

BusinessDesk.co.nz

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