Independent reports more than a valuation

By David Bridgman

Friday 17th September 2004

Just over three years have passed since the Takeovers Code came into force on July 1, 2001, bringing to an end, some thought, to New Zealand's reputation as the last bastion of the "wild west" when it came to corporate takeovers.

Much of 2001 was marked by New Zealand's most contested takeover when Allied Domecq and Lion Nathan fiercely battled to acquire leading wine-maker Montana Wines.

This battle spanned the code's introduction, and in August 2001 PricewaterhouseCoopers prepared the first Independent Adviser's Report (IAR) on Allied Domecq's offer for Montana's remaining shares.

Since then, more than 40 takeovers have been made under the code most involving listed companies. However, a number have been unlisted companies also subject to the code those with more than 50 shareholders and total assets greater than $20 million.

The code prohibits a shareholder going above 20% ownership without making either a partial or full offer or gaining shareholder approval.

An offer requires the target company's directors to issue a target company statement, which must be accompanied by an IAR assessing the "merits of the offer."

Where there are offers for more than one class of security, another IAR is required to assess whether the consideration and terms offered, as between the classes, are fair and reasonable.

IARs are also needed in connection with shareholder meetings to approve share issues or acquisitions that may involve a shareholder exceeding the 20% ownership level for instance, as a result of issuing shares to acquire a business. While it is possible to seek exemptions, the Takeovers Panel has been reluctant to grant these.

Although they have encountered criticism, IARs are an essential part of the takeover process. The criticism can often be attributed to a misunderstanding of the independent adviser's role.

An IAR must assess the "merits of the offer," rather than simply being a valuation exercise. The report must be completed in a very short time frame, typically 14-28 days, and must to a large extent rely on the earnings projections and strategic information prepared by the target company. The quality of information available can vary significantly.

Assessing an offer's merits requires not only a valuation of the target's shares and a comparison with the bid price being offered but also of equal significance commentary on the impact of various potential ownership and control scenarios on shareholders.

For example, if a shareholder moves from a 20% to a 40% shareholding as a consequence of selling assets to the company and receiving shares as consideration, this may convey effective control and act as an impediment to the prospect of a takeover emerging. Shareholders need to carefully weigh up the implications of this before approving such a transaction.

Similarly, what happens to minority shareholders if a bid is only partially successful, with the bidder ending up with say an 85% shareholding? In these circumstances, the prospect of another takeover offer could become quite remote, meaning minority shareholders might be locked in, with the major shareholder being able to use the "creep provisions" under the code to increase its stake over time.

The compulsory acquisition provisions also need to be considered. These enable a majority shareholder, once it reaches 90% ownership, to compulsorily acquire the balance of shares but they also entitle minority shareholders in that situation to require the majority owner to buy their shares.

The first time an expert was required to be appointed in connection with these provisions occurred in March this year with Shotover Jet and Ngai Tahu Holdings. An independent expert was required because Ngai Tahu had received objections to its compulsory acquisition consideration from shareholders who together held more than 10% of the outstanding shares.

Ngai Tahu had bid $1.03 under its takeover and reached the 90% threshold. However, the independent expert appointed by the panel determined that the consideration payable for the purpose of the compulsory acquisition should be $1.18, some 15% higher.

I have prepared numerous reports, both under the old NZX rules, and also more recently under the Takeovers Code. These include reports in relation to the Montana takeover, the takeover of Arthur Barnett and most recently Asia Pacific's takeover of DB Breweries.

In my view, IARs serve several purposes and must address the needs of diverse shareholder groups. IARs not only provide the requisite advice to shareholders concerning the merits of offers (as required under the code) but also provide a comprehensive and objective information source for shareholders wanting to fully understand the transaction.

From my experience, institutional shareholders prefer comprehensive reports providing as much information as possible, whereas many small shareholders may not read more than the executive summary and tend to rely on the recommendation of the target company's independent directors.

Overall, I believe the process for commissioning IARs under the Takeovers Code is working well. The Takeovers Panel has done much to improve the quality of these reports, ensuring shareholders receive a thorough and incisive analysis before making decisions likely to affect the value of their shareholding.

Previously emphasis on a value-based price comparison tended to obscure the potentially more far-reaching consequences of changes in control, that might preclude shareholders from fully participating in long term value gain. It is precisely these kind of issues that an IAR must address under the Takeovers Code.

David Bridgman is a partner in PricewaterhouseCoopers' corporate finance division. He can be reached at david.bridgman @nz.pwc.com

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