Horizon An Unlikely Takeover

As required under takeover rules in New Zealand, Horizon Energy Distribution was required to issue a Target Company Statement on 13 October.  This requirement has been met, no doubt at a considerable expense to Horizon.  Marlborough Lines gave notice to the New Zealand Stock Exchange that by 9 October, they had obtained acceptances for 1.03% of the shares on issue.  This is not a full takeover offer, it is only for 51% of the shareholding.

It is almost bizarre that Marlborough Lines have attempted a takeover of Horizon.  They must have known before they made the bid, that unless they had the support of the Eastern Bay Energy Trust (EBET), that there was no way that the takeover attempt could gain any sort of momentum, let alone have a significant chance of success. 

We suspect that the only beneficiaries of the takeover attempt will be the advisers acting for their respective sides, the printers, the mail house and New Zealand Post.  The costs involved will probably be not short of $500,000 which is almost 10% of Horizons forecast profit for this year.

The directors of Horizon Energy in the report have urged shareholders not to accept the takeover offer for the following reasons:
1. They believe that the offer price of $3.96 per share is an inadequate value for shareholders.
2. The offer is only for 51% of the company meaning that shareholders will be left with small holdings with little liquidity and potentially lower share prices. 
3. The directors believe that the future direction of Horizon Energy is a relevant consideration for shareholders, and that the offer does not provide information on Marlborough Lines plans for the business or how Marlborough will add value to the business.
4. If the Eastern Bay Energy Trust is to sell shares then a competitive sale process may produce a higher value outcome than this offer for all shareholders.

For the partial takeover to proceed, the EBET must sell a significant shareholding.  Marlborough Lines are not at this stage interested in acquiring all of the EBET shares, which would mean that the EBET would still have significant voting power, enough to block important resolutions at general meetings.

We understand that Marlborough Lines needs to borrow to meet the costs of any share acquisitions.  If for some reason the dividend yield of Horizon was to fall significantly, this would have quite an impact on the economics of the share purchase.  If they had 51% of the shares, they would be in a very strong position to require high dividend payouts, which would decrease the amount of funding available for Horizon to reinvest into its lines infrastructure.  If this were to occur, the outcome most likely would be increased power outages, something that no consumers would want.

Our prediction is that this takeover offer will lapse, as it is unlikely that the Eastern Bay Energy Trust will agree to sell a significant portion of its shareholding at this stage.  Once they have an investment strategy in place, they may possibly be more willing to sell down one of their few investments that have a reasonably reliable income stream.  If they do this, hopefully the purchaser will be able to add real value to Horizon and the Eastern Bay of Plenty.