Rubicon issues Takeover Notice to Tenon - $1.85 ps
Rubicon issues Takeover Notice to Tenon - $1.85 per share
8 April 2004 – Rubicon Forests Limited (“Rubicon Forests”), a wholly owned subsidiary of Rubicon Limited, today announced its intention to make a partial takeover offer, at $1.85 per share, to all shareholders of Tenon Limited.
The Rubicon Group currently owns 19.997% of the shares on issue in Tenon. Under its Takeover Notice, Rubicon Forests’ intention is to acquire ordinary and preference shares in Tenon to increase the Rubicon Group’s shareholding in Tenon to 50.01%.
Under the Takeovers Code, the Offer cannot actually be made to Tenon shareholders until 14 days after the issuance of a Takeover Notice – i.e. April 22. The two key conditions of the intended offer will be that the Rubicon Group achieves a 50.01% ownership position in Tenon, and that OIC consent (which has already been applied for) is obtained. The making of the Offer is conditional upon obtaining certain exemptions from the Takeovers Code.
Price - Full and Fair
The Board believes $1.85 per share represents a full and fair price for Tenon shares, for the following reasons:
• It is higher than any price Tenon has traded at in the last two years (even adjusting for share consolidations)
• It is above the brokers’ average valuation of approximately $1.70 per share
• It is in the middle of the Tenon value range of $1.75 - $1.95 per share that was referenced by the Chairman of Tenon in his letter to shareholders included in the company’s January 2004 Explanatory Information Memorandum and also by the company’s CEO in a presentation to institutional investors on 18 March 2004.
Moreover, the cash price would provide Tenon shareholders with the full value today (and with certainty) of Tenon’s planned $1.15 per share second capital return, as well as 70 cents per share of value for Tenon’s residual processing and distribution assets - i.e. a 19% premium to their implied share market value (based on the weighted average Tenon share price in trading on the NZX over the period from the announcement of the Tarawera forestry right sale up until the day the Takeover Notice was issued).
The Board is aware that there has been considerable speculation recently regarding the potential for a takeover of Tenon, and that this speculation has driven the Tenon share price up above most broker valuations. Although several names (other than Rubicon) have been raised in both media and analyst reports, to date there has been no apparent substance to such rumours. As the 19.997% cornerstone shareholder in Tenon, it would be natural for such parties to approach Rubicon in relation to our shareholding were they interested in making a move on the company. Despite having a strategic stake in Tenon, we have had no approaches from the supposedly interested parties – either directly or through intermediaries – which suggests the speculation may be nothing more than speculation.
It should be noted that there is still considerable uncertainty surrounding Tenon’s valuation and future share price.
Tenon is only partway through the divestment of its forest estate for a total of $725 million. While the freehold portion of its estate has been sold and the cash consideration settled, leasehold interests representing $170 million in total have not yet been settled as they require the consent of the lessors and those consents have yet to be obtained. Settlement of the recently announced Tarawera forestry right sale for $165 million is still subject to the buyer satisfying its own financing conditions.
In addition to the uncertainties surrounding the current forest sales activities, there are also business risks relating to Tenon moving forward. These include the cyclicality of the company’s earnings and the impact of the US dollar on Tenon’s 2005 forecast earnings (assumed to average 60 cents in the forecasts included in the January Information memorandum).
Benefits to Rubicon and Tenon shareholders
The Board has considered the best use of Rubicon’s current cash balance. Whilst one of the alternatives considered was for the Company to return capital to its shareholders, the Board believed the best use of funds was to invest further in Tenon, in order to bring greater value to its forestry portfolio – and, in so doing, generate greater value for all Rubicon shareholders.
From Rubicon’s perspective, Tenon is an important and strategic asset. It is the Company’s single largest investment, comprising around 65% of Rubicon’s non-cash asset base. But while Rubicon has a cornerstone shareholding position and board representation, we do not have the level of influence we need to really drive value for Rubicon and Tenon shareholders.
While Rubicon believes $1.85 per share represents full and fair value for Tenon’s business today, it also sees value upside if the growth of the company is managed effectively in future. It is Rubicon’s desire to build Tenon’s business into a leading international supplier of forest products to high-value end-users, and in the process, bring considerable value to Rubicon shareholders, Tenon shareholders and the New Zealand forestry industry.
We believe this can best be achieved by Rubicon moving to a majority shareholding position in Tenon. Rubicon has the capability, skills and knowledge to drive value in Tenon. Its Board and management have a broad range of restructuring and operational skills, as well as extensive knowledge of the forest products industry (both domestically and globally), and importantly of Tenon itself.
Rubicon is a value-orientated investor. Increasing our investment in Tenon fits naturally with Rubicon’s primary focus today of bringing value to our core forestry portfolio. With a 50.01% shareholding in Tenon, our forestry portfolio would reach from the end-market where products and solutions are sold to final customers, right back through to the resource end of the value chain in the provision of superior tree stocks for the forest industry to plant. This “full industry” involvement gives us insights into where and how value is created in the forestry industry.
Rubicon, since its inception three years ago, has been a supportive shareholder in Tenon (formerly Fletcher Challenge Forests). In 2000/1 it invested $157 million in Tenon by way of participation in an underwritten rights issue and a share placement, providing Tenon with the financial and balance sheet strength to become a standalone entity. Then, in 2003, it invested an additional $15 million when it moved from a 17.6% to a 19.997% shareholding position.
It was only when the strategic direction of Tenon has departed from Rubicon’s (i.e. when Tenon put a proposal to its shareholders to double up on forest ownership and introduce a new cornerstone shareholder into the company as part of the CNIFP-CITIC transaction) that Rubicon was forced to reconsider its shareholding position.
Were Rubicon to move to a 50.01% shareholding position, it would be strongly incentivised to create value in Tenon.
Funding the Acquisition
The acquisition cost to Rubicon would amount to $156 million – i.e. $1.85 per share for 84 million shares. This would be funded by utilising Rubicon’s current cash balance of $98 million (which includes $70 million in cash it received from the first Tenon capital return) and a new committed bank bridge facility.