Why don't New Zealand companies adopt the Rio Tinto approach?
Last night’s media release by mining giant Rio Tinto, which is under a takeover threat from BHP Billiton, should be closely studied by Auckland International Airport, SkyCity Entertainment and other New Zealand companies subject to takeover offers. Rio Tinto has thrown down the gauntlet to BHP by announcing a number of wealth creation initiatives including: • The 2007 dividend will be raised by 30% with increases of no less than 20% in each of the next two years The announcement, and subsequent media conference, set out a clear strategy for Rio Tinto that shareholders can compare with any BHP offer. It also gives a clear message that Rio Tinto considers the offer price – three BHP shares for every one Rio Tinto share – is too low. By contrast New Zealand companies, particularly Auckland International Airport and SkyCity Entertainment, have not articulated clear medium and long-term strategies when faced with merger or takeover proposals. This places shareholders in a difficult situation because they haven’t been given a comprehensive plan by the existing board and management to compare against firm cash offers. It is not surprising that shareholders tend to accept takeover offers when the future direction of a company has not been clearly spelt out to them. The situation is often exacerbated when the target company appoints an investment banker to assist it in the takeover process and this adviser is incentivised to obtain the highest offer rather than defeat the bid. The offer for Abano Healthcare is a recent exception to the rule as far as New Zealand is concerned. When Masthead made its initial offer for 51% of Abano at $3.85 a share the target company went on the front foot and laid out a clear long term strategy, including comprehensive financial forecasts for the May 2008 year. Masthead has subsequently raised its partial offer to $5.00 a share but there have been minimal acceptances because Abano has enunciated a credible strategy that has encouraged shareholders not to sell. New Zealand companies under takeover threat have a great deal to learn from Rio Tinto and Abano Healthcare.
• Rio will double its West Australia iron ore production to 420 million tonnes
• Cost savings from the Alcan merger will be US$940 million instead of US$600 million previously announced
• The company will sell at least US$15 billion of assets.
Brian Gaynor, 27 November 2007
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