F&P faces flak over stock issue at 'big discount'

By Nick Stride

Friday 2nd November 2001

HEALTHCARE BLUES: F&P says the indicative range 'was always a moving target'

A war of words has broken out between Fisher & Paykel and institutional shareholders over the upcoming Healthcare division float.

Some 17.6 million shares in the Healthcare division will be sold to international investors as part of the new company's listing on the US Nasdaq market next month.

Fund managers Alliance Capital, Arcus Investment Management, BT Funds Management, and New Zealand Funds Management say both the Deloitte Corporate Finance independent appraisal report and the "indicative range" F&P has given for the shares seriously undervalue the company.

They fear that will influence investors to bid at prices well below the shares' true value, to the detriment of existing F&P shareholders.

"We have concerns about what we consider to be shortcomings in the independent valuer's report and the fact the company appears to have endorsed the value range for the IPO [initial public offering]," Arcus' Simon Botherway said.

"We're concerned that in order to attract US investors to what is a relatively small company they're going to issue stock at a very substantial discount to its true value."

Michael Lang, equities manager at New Zealand Funds Management, said shareholders strongly supported the split but had had to vote on the entire package, including the US IPO process.

"The independent report is below what many analysts both on the buy and the sell side value the company at and it looks significantly below what people buying the shares today think they're worth."

He said it was hard to reconcile the two views of Healthcare as Deloitte and F&P had refused to disclose their basic assumptions.

Alliance Capital's Andrew Bascand said the Deloitte report was "extremely disappointing."

"We were puzzled by the initial indicative range [$US17 to $US19 an American Depositary Share, representing four Healthcare shares] and we were further puzzled when they lowered the range [to $US16 to $US18]."

Over the same time period, September 14 to October 23, the share prices of the two most comparable healthcare companies, ResMed and Respironics, rose 11% and 12% respectively, Mr Bascand said.

F&P chief executive Gary Paykel denied there was a valuation problem.

"Analysts have valued Healthcare all over the place, some higher, some lower. The indicative range was always a moving target," he said.

"At the end of the day the board takes the decision whether to go ahead or not, taking the interests of all shareholders into account, not just some who cry from the sidelines."

He said the indicative range, set by F&P's adviser, Deutsche Bank, fell within the range of most analysts.

"I don't know what these guys are trying to achieve, frankly. We've had extremely strong interest to date to be part of the IPO. Maybe this is a way to put their stake in the ground, I don't know."

Under the split plan existing shareholders will get 550 shares in Fisher & Paykel Appliances, 528 F&P Healthcare shares and pro-rata entitlement to a cash payment of the proceeds of the US IPO less $105 million.

The Deloitte report valued the whole package at $9.77 to $12.05 an F&P share. The shares finished trading on Wednesday at $14.25.

The price for the Healthcare shares on offer in the US IPO will be set by F&P's underwriters following a book-build process.

Deloitte's valuation of Healthcare shares, arrived at by multiplying 2001 ebitda (earnings before interest and tax) by 12 to 14, was $10.30 to $12.30. The indicative range values them at $9.73 to $10.95 at the recent exchange rate.

Mr Bascand said it was "absolutely astonishing" that Deloitte used last year's ebitda when Healthcare's earnings were growing at 20-25% annually.

Another fund manager, who didn't want to be named, was more bearish.

"There are problems for projected ebitda in terms of the currency. And the cost of capital in the US is four percentage points lower than here," he said.

"If the US dollar keeps falling from its overvalued point, what do these ebitdas look like in New Zealand dollars?"

He suspected F&P's rebel fund managers might be pushing for a larger float allocation - although he conceded this was a view suggested to him by Deutsche Bank.

"The plan could be to give the Yanks a big hard-on about the company and then flog them all the stock you've been accumulating for a while now."

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