elders, discovery bids stir the disclosure pot

Elders, Discovery bids stir the disclosure pot
BY: BRYAN FRITH From: The Australian October 05, 2012 12:00AM

HARD on the heels of the High Court ruling on Fortescue Metals and its chairman Andrew Forrest, the application of the ASX continuous disclosure rules is likely to come under further scrutiny in relation to two potential takeover proposals disclosed yesterday.

The focus is likely to be on whether disclosure should have been made earlier. In both cases, approaches were made to the potential target companies, but no disclosure was made at the time.

The ASX continuous disclosure rules require the "immediate" disclosure of material price-sensitive information that a reasonable person would expect to have a material effect on the price or value of a company's securities.

Disclosure is not required if a reasonable person would not expect the information to be disclosed, the information is confidential and one or more of the following applies: it would be a breach of law to disclose, the information concerns an incomplete proposal or negotiation, comprises matters of supposition or is insufficiently definite to warrant disclosure, is generated for internal management purposes or is a trade secret.


Nowadays, instead of unilaterally announcing takeover bids, potential bidders tend to approach takeover targets with indicative, non-binding proposals that are conditional on being granted due diligence prior to firming up an offer. That puts the target board under pressure as to whether to disclose or treat the approach as confidential.

Frequently, where disclosure is not made, the putative bidder "outs" the target company by announcing its proposal or leaking it to the media, in an attempt to co-opt the major institutional holders into putting pressure on the target board to engage. It is known as the "bear hug" tactic.

Two potential offers were reported to the ASX yesterday, one in relation to Elders and the other to the copper producer and explorer Discovery Metals.

In the case of Elders, news of the approach, from Ruralco Holdings, came via a leak to the media, which was subsequently confirmed by the company in an ASX release, while in the case of Discovery the approach was revealed by one of the potential bidders, the Shanghai-based private equity group Cathay Fortune Corporation.

Elders said yesterday it had received a short, confidential letter from Ruralco regarding what Elders described as "the potential for a transaction opportunity" between the companies, but stressing that it had not received a formal proposal.

Elders said the Ruralco letter was conceptual in nature and lacked sufficient detail. It said it would consider and evaluate any sufficiently detailed proposal, should one be made.

The approach follows Ruralco acquiring 12 per cent of Elders for about $12 million or 23c a share, including 4.94 per cent obtained after closing out an equity derivative held by Ruralco, probably an equity swap, which then acquired the shares underlying the derivative.

Ruralco announced a holding of 10.1 per cent in June and on August 9 said it had increased the holding to 12.04 per cent. On both occasions, Ruralco said it was a strategic investment and there was "no current intention" to make a takeover offer.

Only weeks later, on September 10, Ruralco chairman John England wrote to Elders chairman John Bollard in relation to what it yesterday described as a "merger proposal".

However, the proposal related to a merger of Ruralco and the rural services business of Elders, rather than with Elders itself, which would be owned by both Elders and Ruralco shareholders, which suggests that Ruralco envisages offering scrip for the rural services activities.

Elders' automotive business and any residual forestry assets would be demerged and held by Elders shareholders, with value realised "on an orderly basis".

Ruralco said the merged business would undertake a substantial equity raising to restore debt to sustainable levels. While Elders has reduced its debt, it is still large. The company is capitalised at close to $120m, but has an enterprise value of $500m. Ruralco said yesterday that any merger proposal would be on a "nil-premium" basis and should be priced with reference to the Elders share price (about 18.5c) before Ruralco acquired its stake. Elders rose 1.5c to 27c.

Talk of a nil-premium basis was news to Elders because the September 10 letter gave no indication of a proposed offer price or any financial details.

Ruralco said that on September 17 Elders responded that it was not the right time to consider a merger of the rural services business and it had a strong preference for deferring any discussions. Ruralco neglected to mention that Elders also said if Ruralco's timeframe was such that it wanted to explore the possibility of a transaction then it would need to provide more information.

It is the lack of specific detail that led Elders to describe it as conceptual, and not justifying disclosure. It is also what decided Elders late yesterday to release both the September 10 and September 17 letters, to allow investors to judge for themselves.

The Discovery Metals proposal is a very different kettle of fish. Cathay has joined with the Chinese state-owned China-Africa Development (CAD) fund on a 75-25 per cent basis and put a proposal that, despite being described as non-binding and indicative, is nevertheless detailed and with a high degree of certainty.

Cathay's adviser Citigroup met with Discovery chairman Gordon Galt and outlined a proposal to offer $1.70 cash a share or $830m for the company -- a premium of 56 per cent to Discovery's 20-day VWAP (volume-weighted average price) and 50 per cent for the 30-day VWAP. The proposal was not subject to completion and would be funded by a term-loan of up to $US600m to be provided by China Development Bank and is only days from execution of documentation, plus cash and available liquidity of Cathay and CAD.

Chinese regulatory approval was well advance with both Cathay and CAD already having final approval from the National Development and Reform Commission and other necessary approvals expected to granted in the near future.

Moreover, Cathay already has FIRB approval and is now seeking approval for CAD. Cathay is already Discovery's largest shareholders with almost 14 per cent of the capital.

The proposal is subject to a unanimous board recommendation and satisfactory due diligence, but Cathay estimates it only requires 10 business days.

It is clear that Cathay and CAD were well advanced with the proposal before approaching Discovery. Still, Discovery did not immediately disclose the proposal, but one week later, on September 28, sought some further detail, probably related to funding and regulatory approvals, which was provided.

Discovery still made no disclosure, but since responding to that letter the Discovery share price has surged 21 per cent to $145.5, prompting the consortium to go public. In the same period, the shares of other comparable copper companies rose less than 1 per cent, the S&P ASX 200 resources index rose 1.5 per cent and copper price rose 2 per cent.