Sticking to our Guns

Many of us remember the underarm bowling incident a number of years ago when Australian cricket captain Greg Chapple instructed his brother Trevor to bowl underarm in a one day international.  While the Chapples played within the rules of the game, they failed to respect the spirit of the game.  This in some ways is similar to the way the takeovers game is being played by a couple of Australian companies.  We have seen two attempts by Australian companies to effectively bypass the takeovers code by calling them mergers.  The target companies were Waste Management and Contact Energy. 

When the Waste Management merger was announced there was a lot of adverse publicity which did not reflect well on the management.  Two fund managers did their best to block the merger, but at the end of the day, they had to renege, since they held insufficient shares to be able to force a vote.  The end result is that this week, Waste Management was delisted from the New Zealand Stock Exchange.  Everyone in Whakatane will now effectively be contributing to the Australian economy, as we put out our rubbish and recycling.

The proposed merger between Contact Energy and Origin Energy looks like it will fail because several institutional shareholders are opposed to it.  Blocking the merger will most likely be the Accident Compensation Commission.  While a lot of people grumble about their dealings with ACC, they are very professional when it comes to funds management.  They hold a very significant portfolio of shares, and their funds management team is well respected.  They have a significant holding in Contact Energy and do not agree with the proposed merger. 
 
ACC has obtained a Queen's Counsel opinion from Bill Wilson that would sink the Contact Energy and Origin Energy merger if it were accepted by the High Court.  Wilson’s opinion is that for the merger to be approved, Contact shareholders must pass two resolutions by a vote of 75 per cent.  The voting is to be in August.
 
Under the companies' scheme of arrangement, only one resolution requires 75 per cent approval.  Origin, with 51.4 per cent, is allowed to vote on that and needs 24 per cent backing from other shareholders.  As local institutions including ACC hold around 21 percent of Contact it is very unlikely that the vote will pass the first hurdle.  The second vote, on which Origin is excluded from voting, requires a 50 per cent majority. 

From a New Zealand investor’s perspective, it is about time that investors were not just bulldozed into giving up our better assets.  History shows that we do not really value our companies, a number of whom are, or were, world class.  For years, as a whole, New Zealanders have been weak sellers. 

Compulsory super in Australia has really benefited their investment market.  A lot of companies and fund managers are flush with money.  We are seen as being close to home, with assets favourably priced, especially those with high income yields.  With the proposed changes to investment taxation and the likely remittances of a reasonable portion of offshore investments, a higher proportion of the market will most likely be owned by New Zealand investors.  This will at least provide some competition for the Australians.