41pc premium on current price, page-2

my only concern is the illiquidity of the Yarraman shares, may scare a few punters off!

jasper


Yarraman substantial shareholding notice needs watchdog's sniff
It's arguable that ASIC should require Yarraman to release the actual sale deed with Grape Expectation, writes Bryan Frith
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December 22, 2006
THE corporate regulator, ASIC, should take a look at the substantial shareholding notice lodged yesterday by Evans & Tate's bidder, Yarraman Winery Inc, to determine whether it complies with the substantial shareholding provisions of the Corporations Act.
Evans & Tate (ETW) incurred a $64 million loss and is currently working on a proposed balance sheet restructure which would involve a scheme of arrangement under which the company's existing unsecured convertible notes and WinES (Wine Income Exchange Securities - a form of reset convertible preference share) would be consolidated into a new preferred equity instrument, followed by an underwritten capital raising of those new securities.
Yesterday ETW obtained a trading halt and said that it had received a conditional proposal for a merger with Yarraman by way of a scheme of arrangement. ETW gave no details of the offer, in particular the offer terms, but it did say that Yarraman had lodged a substantial shareholding notice stating that it had obtained a relevant interest in 19.9 per cent of the company as a result of an agreement with Grape Expectations Enterprises Pty.

Grape Expectations owns 31percent of ETW and is associated with ETW director Franklin Tate, who last year stepped down as executive chairman.

However, Yarraman issued its own release in which it said that it had made a formal offer to merge with ETW, via a scheme, on the basis of one Yarraman share for every nine ETW shares. The offer would also extend to the WinES, while the convertible noteholders would be offered notes in Yarraman.

Yarraman would also refinance ANZ's $90 million of bank debt. Yarraman shares are currently trading at around $US2.35 ($3.05) a share, which values ETW shares at 34c - 11c, or almost 40 per cent, above ETW's present share price of 23c. The entire package would have have a value of around $US80 million ($105million).

Yarraman shares at present are traded on the Nasdaq OTC (over the counter) market, and are fairly illiquid, but if the merger goes ahead the US company plans to apply for listing on a more senior exchange, either AMEX or Nasdaq, and to also obtain quotation on the ASX.

ETW owns wineries in the Margaret River and Yarra Valley regions, while Yarraman has a winery in the Hunter Valley.

Yarraman's substantial notice stated that the company's relevant interest in 19.9 per cent of ETW was as a result of entering into a "conditional sale deed" with Grape Expectation.

The purpose of the deed was to "document the agreement for Grape to sell, and Yarraman to buy" the ETW share parcel. That's all, no price and no terms of sale.

The substantial shareholding provisions require the details of any relevant agreement through which a relevant interest is obtained and the provision of a copy of any document that contributed to the need to lodge a substantial shareholding notice.

It may be that Yarraman takes the view that the deed is only an agreement to enter into an agreement to buy the 19.9 per cent, on terms to be agreed.

It's inherently difficult to accept that the parties could agree on a sale deed without some understanding as to price, particularly as Yarraman has already announced the terms that it will offer other ETW shareholders. In any case, it's strongly arguable that Yarraman should be required to release the actual sale deed, and that ASIC should require it to do so.

There are suggestions that ANZ has a mortgage over the 19.9percent on which Yarraman has its foot and that Grape will receive the cash equivalent of the scrip terms to be offered to other ETW shareholders, with the funds going to the bank. Release of the sale deed might clarify the issue.

FONE Zone Group describes itself as Australia's largest mobile communications retailer, but after this week's events some shareholders consider it needs to work on its own communications. Fone Zone is Australia's largest Telstra Mobile Premium dealer, so it was always obvious that it would be affected by Telstra's national launch in early October of its new $1 billion high-speed NextG mobile phone network.

At the annual meeting on October 23 - only eight weeks ago - shareholders were told the company anticipated continued positive trading conditions in the mobile phone market, particularly with the recent NextG launch. The outlook for 2007 was positive and Fone Zone expected its profit would show a "satisfactory" increase over 2006. Moreover, first-quarter trading was in line with the forecast.

Fone Zone shares were selling at around $1.14 when the NextG network was launched. The price had risen to $1.28 by the start of December but had moved back to $1.14 by last Monday, perhaps influenced by reports in The Australian last week of a severe shortage of NextG handsets and that Telstra was favouring its own retail outlets ahead of its licensed shops or third party dealers.

On Monday trading opened as usual and in the first half hour more than 35,000 Fone Zone shares changed hands at $1.14. Then an earnings update was released to the market which forecast a 40 per cent fall in EBITDA. Moreover, second-half EBITDA was expected to be 10percent lower than the same previous period, which would translate to a full-year drop of 25percent.

Fone Zone confirmed the handset shortage and said that demand had run well ahead of supply and that margins had also been hit by a focus on incentive payments on NextG handsets.

The ASX decided it was a price-sensitive announcement and applied the customary 10 minute "pre-open" halt in trading, which is designed to alert the market and allow investors to adjust to the changed circumstances. Orders can be removed, and buy or sell orders posted on the screen, during the pre-open phase, but no trading can take place until the pause is lifted.

In practice many small investors nowadays trade via online brokers and do not have the ability, as do institutional and sophisticated investors, to continuously monitor trading. Many investors place orders the night before, or in the morning before the opening of trading, and then go about their business.

As a consequence, many such orders are not removed when a price-sensitive announcement is made and the stock is placed in pre-open. If the news is bad, as is the case with a downward profit warning, they get carted out at what becomes an above-market price.

That's exactly what happened in Fone Zone. Immediately after trading resumed a number of trades were booked, totalling around 200,000 shares, at $1.10 and $1.08, which almost certainly were orders that were placed before the announcement of the profit downgrade. Once they were taken out, the price plunged to 90c, and then to 80c. It has since recovered slightly, closing yesterday at $1.10, but those holders who were taken out straight after the trading pause are still well down.

Jaundiced observers suggest that the present system disadvantages many who trade through online discount brokers, and that the ASX should implement a longer pause than 10 minutes for profit downgrades, preferably a day, so that all investors would get the option to remove existing orders.

They also suggest that it would have been preferable if Fone Zone had obtained a trading halt, which can last up to two days. But that wouldn't have made much difference. Investors still wouldn't know what was in the announcement until it was made. The trading halt would then be lifted and the ASX would impose a pre-open pause - for all of 20 minutes.

Critics of the present system argue that a longer pause is required to enable investors to become fully informed, and that it's all about the integrity of the market. But markets are about liquidity - the more there is the better it is for the market, and halts in trading create liquidity gaps. With the technology in place today, the vast bulk of market participants know of announcements within minutes of their release.

Those investors who look after their own trading online, pay less brokerage than through full service brokers, but the flip side is that they take on more risk.