ozl rejects rival offer, page-18

This article touches on the dilutive nature of the RBC/RFC deal. Great for the syndicate members, but potentially destructive for us. How else would they have got 20 major investors and bankers to stump up the bonds?

RBC/RFC life raft for OZ Minerals must pass the test

June 05, 2009: The Australian

IF, as is expected, the Royal Bank of Canada and the RFC investment and advisory group today present OZ Minerals with an 11th-hour binding commitment to raise between $1.5billion and $2billion, the board and its advisers will have to urgently consider whether it is a superior proposal that warrants tearing up the agreement to sell all of the company's assets other than its Prominent Hill copper mine to the state-owned China Minmetals.

The key tests will be whether the new proposal offers both certainty and greater value.

OZ is on the brink of receivership. Its banks want out and their $1.3billion is due to be repaid on June 16, but the banks have given an extension to June 30, conditional on shareholders approving the Minmetals transaction next Thursday. Minmetals has offered $US1.2billion ($1.5billion) which would be sufficient to pay off the bank debt. If the deal were to fall through it would be open to the banks to demand repayment and, as OZ would be unable to comply, call in the receivers which would be massively value-destroying for OZ shareholders. The Minmetals deal is ready to roll. It needs only shareholder approval to be implemented, which would ensure that OZ has a future, albeit as a much-slimmed down company.

But, as is the case with proposed Rio Tinto-Chinalco tie-up, the deal was struck when commodity prices were much lower, and debt and equity was much harder to obtain in the wake of the GFC.

And, as with Rio Tinto-Chinalco, that has led to criticism that the deal is too favourable to Minmetals. The independent expert Grant Samuel values the assets to be sold to the Chinese group in a range of $US1.385 billion to $US1.6billion , and on that basis it would be picking them up at a discount of almost $US200 million to $US400 million.

RBC and RFC, approached OZ about two weeks ago, and believed to be poised to propose a recapitalisation involving a $US1 billion ($1.25 billion) issue of convertible bonds and a $US200 million ($250million) equity placement, followed by a $300 million to $400 million entitlement issue to all shareholders, to offset some of the dilutionary impact.

There would be two tranches of bonds, a senior and junior issue.

They would be medium-term maturities and convert at a premium to market. RBC and RFC are believed to have obtained binding commitments from approximately 20 professional investors, including several of the existing institutional shareholders of OZ, to take up the bonds and the equity placement.

The funds to be injected by the new investors and Minmetals would be around the same, but under the new proposal OZ would retain the assets to be sold to the Chinese group, in particular the Century zinc-lead mine in Queensland and the Sepon copper-gold mine in Laos.

If the bonds are treated then OZ would still have $1.25 billion of debt, and if they convert that would mean a handful of new investors would obtain a significant shareholding in OZ, diluting the interest of existing shareholders. At a conversion price of $1 a share that would convert to an equity stake of 28 per cent, at $1.25 a share it would be 24 per cent and at $1.50 a share it would be just over 20 per cent.

It's likely that would require shareholder approval which would require at least one month's notice of meeting.

If OZ is persuaded as to value, and that's by no means certain, it's unlikely that it would call off the Minmetals deal unless it had absolute certainty that the proposed new investors would be unconditionally obliged to stump up the money, and assume all risk, including the risk that the banks would nevertheless pull the plug.

That the new investors would risk such an exposure has to be considered unlikely. More probable is that they would want the banks to agree to a further extension to enable all of the issues to be settled in a timely manner; and, depending on the bank's view as to the certainty of the proposal, they may be prepared to agree.

There have been mutterings that OZ will face conflicts of interest in considering a rival proposal because its chief executive Andrew Michelmore has agreed to jump ship to Minmetals before the deal is approved; however, it's assumed that he has stood aside from any involvement in the transaction to avoid any potential for conflict.

Barrett ruling

NSW Supreme Court judge Reginald Barrett has made a significant addition to the law relating to the duties imposed on the chairman of a public company meeting.

Barrett yesterday ruled that Drillsearch contravened the misleading and deceptive conduct provisions of the Corporations Act by announcing to the ASX that a shareholder's meeting called to vote on the removal of warring factions of the board would be adjourned because the board had agreed to a "renewal process".

He ordered the meeting to proceed next Tuesday, as scheduled, and for Drillsearch to publish advertisements to notify shareholders.

Barrett found that a resolution by the board was invalid because it was not agreed to by a majority of the directors, and the representation that all directors had agreed to a board renewal was false and misleading.

Two of the directors, Jim McKerlie and Choo Beng Kai convened a meeting of shareholders to remove three other directors, the executive chairman Peter Simpson, Peter Wicks and Russell Langusch, with the recently appointed managing director Brad Lingo sitting on the sidelines. Barrett's decision is a victory for McKerlie, who brought the proceedings.

Simpson proposed, as chairman of the meeting, to adjourn the meeting, without putting it to the shareholders, relying on an adjournment power in the company's constitution. That would have prevented the shareholders from determining the issues.

Barrett ruled that to do so would not be consistent with powers of the chairman. Any question of adjournment would need to be considered according to the circumstances existing at, and in relation to, the meeting when it occurs and a genuine appraisal of those circumstances, made in good faith and in the light of the purposes for which the adjournment power exists.

Barrett said the requirements of good faith and proper purpose applied to the chairman of a meeting, and failure to proceed accordingly would lead to a conclusion of fraud on the power.

"It follows from the nature of the chairman's role, and the responsibilities it entails, that it is foreign to the chairman's function to exercise the power of adjournment to further some personal preference of the chairman or some policy of a body of which the chairman is a member," Barrett said. "It is thus foreign to the chairman's function, when the chairman is a director, to exercise the chairman's power to implement some policy or decision of the board of directors.

"This is particularly so in a context such as the present where the purpose of the general meeting is to determine the constitution of the board itself.

"The right of a general body of members to remove directors by resolution is a statutory right.

"It would be an abuse of the power of a chairman to remove the opportunity to exercise the right, except for some good and proper reason," Barrett said.