F&P leaves $98m problem untreated

Friday 2nd November 2001

With the record date for Fisher & Paykel's healthcare-appliance split only a week away shareholders must be beginning to wonder what's got into the share price.

Not that there's much to complain about on that score. From around $7.15 before the split was announced in December last year the shares have climbed to a record high of $14.66 and on Wednesday closed at $14.25, almost doubling investors' paper wealth in less than a year.

Maybe it's that huge lift that's rendering the company deaf to the concerns of a substantial group of its institutional investors who believe F&P risks underpricing by a big margin the imminent US issue of Fisher & Paykel Healthcare shares.

How F&P can justify its stonewalling is a bit of a mystery as the institutions' view is entirely consistent with the message the share price is sending out.

And the market price is well out of kilter with the independent appraisal report written by Deloitte Corporate Finance.

According to Deloitte, the split-up package is worth just $9.77-12.05 per F&P share.

Plainly few shareholders are taking that valuation seriously. If they were they would dump the shares now for $14-plus, confident that once the market catches up with Deloitte's superior stock-pricing skills they will be able to pick them up again at prices within the valuer's range.

Deloitte's package value is made up of three components.

It values F&P Appliances, the old whiteware and finance divisions, at $7.07-8.81.

Shareholders will get 550 Appliance shares for each 1000 F&P shares held on November 9, the equivalent of $3888-4845 by Deloitte's calculations.

Holders will also get 528 Healthcare shares for each 1000 F&Ps held. Deloitte values these at $10.30-12.30 each for a "package" value of $5438-6494.

The third component of the package is cash, which will come from the proceeds of the US float of 17.7% of Healthcare's shares, less $105 million which will be used to fund F&P Appliances' own 19.9% stake in Healthcare and part of the costs of splitting the company up.

It's the last two bits of the package that are troublesome. Deloitte's Healthcare valuation is derived by multiplying normalised 2001 ebitda (earnings before interest, tax, depreciation and amortisation) of $85 million by a multiple of 12 to 14.

It derived this range from looking at the historic ebitda multiples at which "comparable" overseas healthcare companies - for example, ResMed and Respironics - have traded.

Also looked at were multiples at which "comparable transactions" (no details given) involving "businesses in similar industries" (no details given) were undertaken.

This examination yielded a startlingly wide range - from 7.3 times to 41.4. The average for healthcare companies was 18.9 and the average for comparable transactions 14.0.

That last figure is the multiple Deloitte has inexplicably taken as the top of its range for valuing Healthcare.

The valuer said it had considered the general growth prospects and competitive environments for the various sectors in which F&P and the comparable companies operated.

But, as Deloitte itself points out, ResMed, which operates only in the ultra-high-growth obstructive sleep apnea treatment area, trades at the high end - toward 41.4 - of comparable company multiples.

So how Healthcare, which also treats OSA but trades in addition in the wider, lower-but-still-high-growth respiratory humidification area, got itself demoted to a multiple of 12 to 14 times is beyond comprehension.

Deloitte's analysis makes no mention of Healthcare's formidable competitive strengths.

Healthcare has sunk considerable capital into research and development, has clinical acceptance of its products, has a well-established distribution network and has a monopoly, if recommendations are followed on the disposables associated with its equipment.

A multiple of, say, 18 times could easily be justified, valuing the shares at $15.35, 25% above Deloitte's high end.

F&P shareholders might wonder why they need worry. If Deloitte's analysis is wrong then the sophisticated investors who frequent the Nasdaq market, which will host Healthcare in two weeks' time, will quickly accord the shares their true value.

They may already have done so, pushing up F&P's share price in anticipation.

But first there's the issue of the price at which a band of US institutions will be sold 17.6 million Healthcare shares. The price will be established through a book-build in which they will bid for blocks of shares at different prices to establish demand.

But F&P's critics say those prices will be influenced heavily by the indicative price the company and its underwriters - Deutsche Bank Alex Brown, Bank of America, and Piper Jaffray - have already set.

This originally used Deloitte's $10.30 to $12.30 to calculate a price for each American Depositary Share, representing four Healthcare shares, of $US17 to $US19.

A "red herring" pseudo-prospectus is now being circulated on the US roadshow. But the range has been cut to $US16-S18 "to take account of current market conditions."

So the value F&P is encouraging prospective US investors to apply to the shares is $9.73-10.95 - a 37% discount, at the low end, to the price an ebitda multiple of 18 would imply.

If F&P's critics are correct, and the shares trade on the Nasdaq at a multiple of 18, then wealth of up to $98 million will have been transferred from F&P's current holders to US institutions. That amount would add $830 in cash to a 1000 share "package."

To go back now to the US investors with a higher indicative range would be a hard pill to swallow but it's one F&P, by ignoring the concerns of major shareholders, has itself manufactured.

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