Take Over or Take Off

On the 14th of September a proposed offer from Marlborough Lines was made for 51% of Whakatane based Horizon Energy Distribution Limited (HED).  The offer price of $3.96 per share was at a premium to the market price at the time of around $3.20. 

When an offer for a listed company such as HED is made, there is a set of statutory rules that set the framework.  There are key dates that need to be kept to.  In this case the takeover notice was filed on 14 September, the expected offer date was 29 September, 16 October is the last date for extension or a variation of the offer and 30 October is the date the offer closes unless it is extended.  Horizon is required to send a Target Company Statement together with an Independent Advisor’s report to shareholders by 13 October.

As is normal, the advertisements have begun appearing in the local papers urging investors to accept the offer.  At this stage it is rather pointless.  Investors should at least wait until they have received the Independent Advisor’s report.

We have also seen a dramatically revised profit forecast for HED issued to the NZX on 28 September.  This is around 33% higher than the guidance given by Chairman Rob Tait at the AGM a matter of weeks ago.  The offer price by Marlborough Lines will not reflect the latest profit guidance figures.  The revised profit figure, if it flows through to the dividend, means that the dividend yield in percentage terms will remain virtually identical at the takeover price as what it has been in recent months.

The offer by Marlborough Lines is dependent on the Eastern Bay Energy Trust (EBET) selling down a significant portion of its holdings.  Last year EBET and HED commissioned expensive reports on what options there were for HED.  Given the state of the share markets last year and the ability to raise finance at that time, it was decided to maintain the status quo that is EBET to continue to be the cornerstone shareholder.  With the economy rebounding out of recession it may be that there could be significantly more attractive offers for HED.

Some people will naturally feel that Horizon should continue to be owned locally.  There is almost a fear that service levels will be reduced if Horizon is sold.  Essential services such as that provided by Horizon and other lines companies are regulated by the government.  This includes service levels and pricing.  With regard to jobs, we would not expect that there would be any significant losses if Horizon were to be sold.

Horizon over the past year or so has diversified their revenue stream by purchasing businesses such as Total Power.  We would expect that HED will continue with this strategy.  Any acquisitions that they make must meet strict return on investment criteria.  Effectively this is a move to position an increasing portion of their revenue stream away from the government regulated area with controlled margins, to business areas where they can make typically higher commercial margins.

This business strategy to increase growth and profits should be successful, provided they do not lose focus of their core business areas, and have sufficient skills to manage and grow any acquisitions that they make.  This will make the HED shares more attractive for investors as the share price and dividends should increase over time.

Provided HED can deliver or exceed its profit forecast, it may well be that the offer by Marlborough Lines is too low to make it attractive for the Energy Trust to sell down its shareholding.  All will be revealed over the next few weeks.