RPI pulls crafty Wrightson ploy

By Peter V O'Brien

Friday 27th August 2004

The always fascinating subject of companies' capital restructuring programmes got more attention in recent weeks, with announcements about buybacks, cash issues and special dividends, the last being effectively a reorganisation of shareholders' equity.

Rural services company Wrightson announced a buyback proposal that would qualify for the "boy, have we got a deal for you" stakes if it came off in its entirety.

The company said it intended to make a buyback offer to all shareholders to acquire shares in a 1:6 ratio at $1.56 a share. Explanatory comments accompanying the announcement were logical in relation to the buyback's benefits to shareholders and to the company, at least in their initial paragraphs.

Chairman Keith Smith said the offer acknowledged the high level of scaling shareholders experienced during Rural Portfolio Investments' (RPI) recent takeover, due to milk giant Fonterra's "late decision to sell into the takeover offer."

He said the buyback would result in Wrightson increasing its gearing to achieve a more cost-effective capital structure, "thereby reducing our overall cost of capital." It was also expected to increase earnings a share. The last was a logical observation, assuming the company's profit did not fall more than 16.66%.

Wrightson's offer was "entirely optional." Shareholders could choose to participate and, if some did not take it up in full, there would be an opportunity for others to ask the company to buy more of their shares.

Then came a possible sting. Smith said it was anticipated RPI would not participate in the offer, in which case the majority shareholder would be required to sell down its shareholding within six months to take it back to its 50.01% holding, unless it got Takeovers Panel exemption or obtained shareholder approval. The board was "in the process of seeking a Takeovers Panel exemption."

That was a totally legitimate procedure and the Takeovers Panel could be presumed to consider objectively the doubtless dispassionate request, the latter based on some yet-to-be revealed reasoning.

An exemption would allow RPI to increase its percentage holding in Wrightson, irrespective of the merits of the case for exemption and equally irrespective of the basic benefits to shareholders from the buyback's terms.

The question would seem to be whether the buyback's general benefits to shareholders, and to Wrightson as a specific corporate entity, both discounted for RPI's higher percentage and outweighed the desirability of allowing the majority shareholder to lift that percentage effectively through the back door.

Capital reorganisations also involve decisions to raise new equity through cash issues. That can lead to finely tuned exercises when a company has a relatively low base share price.

Widespread Portfolios found itself in that situation. The company's main investment is in Asian Mineral Resources which, in turn, now has 90% of a nickel mining prospect in Vietnam.

Widespread's shares sold at 2.2c on Monday, after the company announced a 1:10 renounceable share issue at 1.7c a share. The issue was not underwritten but shareholders would be offered the opportunity to tender for any shortfall shares.

Widespread's issue would raise $503,880 if subscribed in full, based on the current 296.4 million shares on issue. Hardly earth-shattering news for the market but an example of how even small companies organise their equity bases.

Northland Port Corporation announced a special dividend of 10¢ a share with its annual result, to accompany a final dividend of 5¢ a share.

The company had shareholders' equity of $83.66 million at June 30 and total assets of $86.98 million, giving a proprietorship ratio of 96.2%. Debt was only $2.55 million.

A 10¢ a share special dividend was therefore an effective return to shareholders of part of their equity, irrespective of its technical treatment. It amounted to $4.15 million, in a year when net profit was $3.36 million, including gains on sale of assets.

Northland Port shares sold at $2.70 on Monday, cum dividend, and the 10c a share special dividend was 3.7% of that figure.

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