Metlifecare – Big discount in a thin market

January 24

The sharp decline in Metlifecare’s share price, from $7.00 to $5.25 yesterday, reflects the difficulty of selling large share parcels in a thin market.

Two years ago Metlifecare was subject to a takeover offer from the Macquarie controlled Retirement Villages New Zealand at $3.90 a share. The bidder failed to reach its 90% compulsory acquisition target because a number of shareholders refused to accept the offer.

As at August 31 last year, Retirement Villages owned 82.0% of Metlifecare, Fisher Funds Management 12.5% and the remaining 5.5% was held by 338 other minority shareholders.

The hold-out strategy has been successful as Metlifecare reported net earnings of $26.1 million for the December 2006 year, compared with a $21.5 million forecast included in the Grant Samuel independent adviser’s report, and its share price shot up to $8.25.

These hold-out situations develop into a game of cat and mouse between the bidder and the minority shareholders. Graeme Hart immediately made a new offer when he was faced with a similar situation at Carter Holt Harvey as did the private equity firm bidding for CanWest MediaWorks.  Toll Holdings has mopped up the Toll New Zealand minorities but Retirement Villages has steadfastly refused to make a higher offer for Metlifecare.

Just over 800,000 Metlifecare shares, representing approximately one-sixth of the shares not held by Retirement Villages and Fisher Funds, went through the market yesterday. This confirms the view that in a thin market the seller of a relatively large parcel is a price taker.

The seller may continue to have a positive view of the company but can be forced to reduce its holding because of redemptions by investors or a decision by the holding entity to liquidate.
   
Metlifecare & Ryman Healthcare: NZX’s listed retirement village operators

 

Metlifecare 

Ryman Healthcare 

Share price 

$5.27 

$1.76 

Market value

$460.8m 

$880.0m 

Net earnings

$30.7m 

$46.0m 

P/E 

15.0 

19.1 

Gross div yield

4.2% 

2.5% 

The interesting issue now is whether Retirement Villages will take this opportunity to make another offer for Metlifecare and/or will the share price recover to its previous high. Metlifecare has more attractive multiples than Ryman Healthcare but the latter may be vulnerable in a nervous market because it has a relatively high P/E and low dividend yield.
      
Brian Gaynor, 24 January 2008