Exchange rules challenged again as GPG thumbs its nose

By NZPA

Friday 5th July 2002

The Stock Exchange admitted today it was powerless to stop Guinness Peat Group thumbing its nose at the exchange's rules in its dawn raid on Rubicon.

Broking firm JB Were, acting for GPG, on Wednesday night approached several large Rubicon shareholders with an offer to buy stock at 75 cents against the prevailing price of 66 cents.

Having already bought 2 percent, GPG secured 19.9 percent Rubicon by the time the market opened on Thursday.

Stock Exchange rules require a member firm that receives an order to buy more than 10 percent of a company to "bid in the market for 20 percent of that order from other member firms".

The rule had its origins in the City of London and was designed to stop control of a firm changing hands in what were known as dawn raids before other owners and mangers had got out of bed.

Both GPG and JB Were said they had legal advice that they didn't need to purchase any of the stock on market. JB Were's head of investment banking Paul Harris argued they were only ever going to approach a select few investors and never intending to make an offer to many holders.

He also noted that it was only an exchange regulation and not a Takeovers Code rule which had the power of law behind it.

GPG director Tony Gibbs denied the raid amounted to a stand in the market.

"The purchase was done absolutely squeaky clean following the rules and Weres took advice and so did we all the way along."

Certainly, Sir Ron Brierley would be sure GPG did not repeat the disaster Brierley Investments created in 1990 when it was forced to make a full takeover for Mount Charlotte, now Thistle Hotels.

Having acquired 18 percent in the raid, some brokers argued GPG, should be forced under exchange rules to buy another 3.6 percent (20 percent of the raid) on market which would then put it over 20 percent of Rubicon and trigger a full takeover offer under the Takeovers Code.

But apparently not. The exchange said it was powerless to reverse or modify GPG's purchase. Although not saying so, it seems the exchange has discovered a bus could be driven through its rules.

It said it was "continuing to investigate whether the transaction was conducted in accordance with the rules and regulations of the NZSE".

If the raid is found to have transgressed the rules it will be interesting to see if GPG and or JB Were gets the proverbial whipping on the hand with a wet bus ticket. Options include giving GPG a yellow card suspension, or fining it or JB Were up to $1 million.

A number of observers have been watching how new exchange chief executive Mark Weldon deals with the situation. The old regime was not noted as a stern upholder of rules and regulations and many people are looking to Mr Weldon to alter attitudes so investors can have confidence in the credibility and fairness of the sharemarket.

A weak response would be a bad sign but his hands may be tied by poorly drafted rules.

No doubt lawyers are rubbing their hands in anticipation.

The episode has rekindled memories of unsavoury dealings last year in the battle for control of Montana Wines between Allied Domecq and Lion Nathan. Lion's midnight raid was red carded by an market surveillance panel which said it breached notice and pause provisions of the Takeovers Code.

Ironically, control of Lion was snatched by Japan's Kirin in 1988 in a lightning raid on a Monday morning, alienating many offshore institutions which were still sound asleep.

Shareholders Association executive director Oliver Saint said the Rubicon goings-on do not equate to the Montana situation where control of the company was at stake. However, there are serious issues involved, he said.

"If they have broken the rules, they should be punished for it.

"New Zealand has suffered both through the Stock Exchange and the Government, from a total lack of enforcement of the rules. At least this seems to be changing now and let us hope that it continues because what rules we have should be enforced otherwise people ride over them roughshod."

Mr Saint believes Mr Weldon has made all the right moves so far, particularly the "unbelievably good" move to revamp the New Capital Market.

Like GPG's Mr Gibbs, Mr Saint believes the deal for Fletcher Forests to buy the Central North Island Forestry Partnership (CNI), and for China's Citic to buy 35 percent of Forests including Rubicon's 17.6 percent holding, will fall over.

Although the Shareholders Association won a major victor by forcing Citic to agree, should the deal proceed, that it would not use its votes to influence the appointment of independent Forests directors, Mr Saint remains sceptical.

"I'm very, very suspicious of the whole deal. Citic are coming in from behind. The ultimate objective could be revenge," he said.

He said the deal was analogous to those Lion Nathan deals where one block of shareholders will get more for their shares than the anybody else.

Asked if small shareholders won't simply lose more if the deal collapses, Mr Saint said that history showed Forests had blown hundreds of millions already and there was nothing to say they wouldn't blow more if given the chance.

Mr Gibbs believes Rubicon will win either way.

"If it is implemented it would give rise to questions regarding Rubicon's future," he said, strongly hinting at Rubicon's break-up.

"We suspect that the total Forests-Citic deal will most likely collapse under its own weight and from GPG's position, we are comfortable with our position either way."

Macquarie analyst Arthur Lim said Rubicon could sell its Forests stake directly to Citic which would then buy CNI directly from the receivers.

He described the Rubicon raid as a classic Ron Brierley play of buying undervalued assets. He valued Rubicon at 90 cents/share currently and $1/share if the CNI deal proceeded.

Bagged by most analysts as a purposeless dog when set up on the break-up of Fletcher Challenge, Rubicon has risen 64 percent from 44 cents on listing in March last year, to 72 cents.

Mr Lim also believed Fletcher Forests was being valued on current log prices which are at 30 year lows. Based on the long-term average, he valued Forests closer to 60 cents/share.

"Fletcher Forests is severely undervalued," he said. He was sceptical about breaking up Rubicon, saying its biotech assets would not get a good price in the current environment.

Mr Saint said the long suffering Forests shareholders who have seen 90 percent of the company's value wiped over eight years, will have to be philosophical.

"Most shareholders hang in and hope it will be a beautiful fine day. Unfortunately, it rains a lot in New Zealand."

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