Montana among corporates with strange strategies

Friday 22nd June 2001

By Peter O'Brien

The rush to acquire controlling interests in companies before the new Takeover Code comes into force on July raises the question of the relationship between prices offered and what the bidders will get if the offers are successful.

A company's value has two components: its current and potential profitability and the worth of the assets that generate the profit.

There is also the "value" of the people "assets" within the organisation without which other assets cannot be used in the most efficient manner to generate maximum profit.

The importance of having the right people cannot be underestimated - as seen in the many cases of companies with good assets which were mismanaged and turned around when the competent replaced the incompetent.

Assessing the value of the people assets is difficult, as summed up some years ago in the words of two US writers on investments analysis and portfolio management:

"The calibre of management, however, is not very amenable to quantification. To a certain extent it is true that management can be judged by its statistical record the growth of sales and earnings which it was capable of generating.

"But frequently it is impossible to separate the causes of the growth record into specific managerial decisions, on the one hand, and external factors over which management had little or no control, on the other. Moreover, the statistical record does not necessarily reveal very well management's capacity for coping with change.

"And if anything is certain about the future of most companies, it is that changes will occur with increasing rapidity."

Given that problem, most assessments of full or partial takeovers, including those in independent appraisal reports, concentrate on financial figures and leave the people value out.

That can create another problem, because people have walked in large numbers after a change of ownership, thereby affecting the eventual relationship between what was paid and what was received. The value components of profitability and asset worth in relation to the price per share come down to earnings a share, the price/earnings ratio and net asset backing a share.

A glance at the share tables in The National Business Review shows a widespread, but not universal, correlation between a high p/e (on an historical basis) and a high price to nta multiple.

Applying that concept to specific cases of current offers throws up some apparently strange corporate strategies.

Montana is one, ignoring for the purposes of discussion the arguments about the "punishment" facing Lion Nathan for breaching listing rules when it increased its stake in the winemaker.

UK Liquor group Allied Domecq paid $4.76 a share for its 27% of Montana and was able to re-enter the market this week for more shares.

Montana's share price was $4.80 at the end of last week, at which it had an historic p/e of 31.7 and sold at five times nta.

Using another multiple, an Australian analyst was reported in the New Zealand daily press as questioning why Allied Domecq would pay 18 times earnings before interest and tax for Montana.

The relationship between price and nta could be artificial in Montana's case, because nta of 95c in NBR's share tables excludes $92.67 million worth of intangibles, shown as brands and goodwill in the company's statement of financial position at December 31.

Inclusion of brand values in a company's accounts is a contentious issue, but any buyer of a winemaker or other liquor company would put a monetary value on such "assets" when contemplating a bid.

Assuming Montana's valuation of brand names and goodwill was an accurate assessment of "true" value, an adjusted asset backing a share would be $1.35 after removing capital notes from the calculation and the $4.80 price would be 3.55 times asset backing. That was still high, when taken with the historic p/e, suggesting Allied Domecq saw more potential in Montana than other people, got carried away in the corporate chase, or was bloody-minded.

There is a valid argument that a winemaker, or any other land-based company, should be discounted for factors outside the organisation's control, such as climate variations. A few hailstorms on unprotected vines, or other adverse weather, can have a serious effect on a winemaker.

Then we come back to the people asset.

Good wine depends on soil types, climate and similar natural phenomena, but is also dependent on the craft (should that be art?) of the people who make the stuff.

The Montana case is one example of what can happen in bidding wars for another company but emphasises the point that it is too easy to overbid and finish up in a position where one offered too much in relation to "true" value, with possible consequent trouble down the track.

There are only a few individual shareholders left in Montana but they are unlikely to be concerned about the current situation, given the stock's low for the year of $3.50 and the 2000 high and low respectively of $4.05 and $1.70.

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