Response to Offer from NZ Finance Holdings
To: The NZX
From: Jeff Staniland
Date: 15 December 2005
Subject: Independent Directors of Mike Pero Mortgages Limited Recommendation in Response to Takeover Offer from New Zealand Finance Holdings and Earnings Guidance
The Committee of Independent Directors (the Committee) of Mike Pero Mortgages Limited (MPM) has today released to the NZX the attached letter and annex to shareholders of MPM from the Chairman of the Committee.
The letter, annex, Target Company Statement and Independent Adviser’s Report are being printed and it is expected they will be dispatched to shareholders on Monday 19 December.
The key points contained in the letter and annex are:
- The Committee recommends that shareholders DO NOT ACCEPT the OFFER for their ordinary shares from New Zealand Finance Holdings Limited (NZF).
- The Independent Adviser’s Report prepared by Crighton Anderson Corporate Finance Limited assesses the fair value of MPM’s ordinary shares in a range of NZ$0.96 to NZ$1.09 and concludes that the offer of NZ$0.82 for each ordinary share is not fair.
- The Committee recommends that option holders ACCEPT the OFFER for their options from NZF.
- The Independent Adviser’s Report prepared by Crighton Anderson Corporate Finance Limited concludes that the offer of NZ$0. 02 for each option is fair.
- MPM has updated its forecast for the surplus after tax for the 2006 financial year. The forecast is for a surplus after tax of $1.9 million compared to reported surplus after tax for the 2005 financial year of $1.6 million.
Chief Executive Officer
16 December 2005
SAY ‘NO’ TO THE TAKEOVER OFFER FROM
NEW ZEALAND FINANCE HOLDINGS!
PLEASE READ THIS DOCUMENT CAREFULLY - IT CONTAINS IMPORTANT INFORMATION ON THE OFFER BY NEW ZEALAND FINANCE HOLDINGS LIMITED FOR ALL THE SHARES AND OPTIONS IN MIKE PERO MORTGAGES LIMITED
You will have received an offer document from New Zealand Finance Holdings Limited (‘NZF’), an Auckland finance company, giving details of its takeover Offer (‘the Offer’) for the securities that you hold in Mike Pero Mortgages Limited (‘MPM’). This letter includes the recommendation of the committee of Independent Directors in relation to the Offer. Attached to this letter is the ‘Target Company Statement’, which we have prepared in compliance with the requirements of the Takeovers’ Code. The Target Company Statement includes the Independent Adviser’s Report to the Independent Directors, providing an assessment as to the merits of the Offer.
- The Independent Directors of MPM, having reviewed the Offer and received the Independent Adviser’s Report, unanimously recommend that shareholders DO NOT ACCEPT the Offer in respect of the Company’s ordinary shares.
- However the Independent Directors do recommend acceptance in respect of any options that you may hold in MPM, notwithstanding a technical impediment to their transferability. (For details please see the Annex to this letter.)
Mike Pero Securities Limited, an associate of Mr Mike Pero, who is an Independent Director, will NOT be accepting the Offer with respect to its ordinary shareholdings in MPM (details of which are set out in Section 5 of the attached Target Company Statement). Mr Pero’s interests represent the only securities held by the Independent Directors.
The reasons for the Independent Directors’ recommendation in respect of the ordinary shares include:
- The Offer price for MPM ordinary shares is
considered by the Independent Advisers, Crighton Anderson
Corporate Finance Limited, to be NOT FAIR.
- The Offer price is below Crighton Anderson’s valuation range of NZ$0.96 to NZ$1.09 for MPM ordinary shares.
- The Independent Directors consider the Crighton Anderson valuation to be fair and reasonable.
- Only by achieving 100% ownership can NZF unlock full synergy benefits. The Offer price is too low to recognise the importance of full ownership to NZF.
- The Offer under values MPM, especially given MPM’s positive trading in the opening months of the current 2006 financial year, and the attractive current gross dividend yield of 10.9% on the ordinary shares at the Offer price of $0.82 a share.
In reaching their unanimous view the Independent Directors are aware that, if the NZF Offer does not reach the 90% compulsory acquisition threshold, the MPM share price may be volatile in the short term. However, that risk does not persuade the Independent Directors to recommend the Offer which is priced below independently assessed fair value.
The Independent Directors have no knowledge of any likely higher value offer for the shares in MPM from NZF or any other party.
Given the reasons set out above, the Independent Directors believe the Offer should not be accepted. In the event acceptances do not reach the 90% threshold, the Independent Directors believe that, subsequent to the expiry of the current Offer, a reasonable possibility would exist of NZF making a fresh offer at a higher value, although the Independent Directors have received no information or assurances on that.
Further details of the Offer and the Independent Directors’ recommendation are set out in the Annex to this letter and in the Target Company Statement.
The Independent Directors recommend you consider the information in this letter and attachments carefully. The following pages explain in more detail why you should NOT ACCEPT the Offer for your ordinary shares.
If you are in any doubt as to how to deal with the Offer, you may wish to seek advice from an independent financial or legal adviser in respect of the Offer and consider that advice in the light of your own circumstances.
SHAREHOLDERS SHOULD NOT ACCEPT THE OFFER.
COMMITTEE OF INDEPENDENT DIRECTORS
MIKE PERO MORTAGES LIMITED
ANNEX TO LETTER FROM CHAIRMAN OF MPM INDEPENDENT DIRECTORS
- On 18 November 2005 NZF gave notice of its intention to issue a takeover notice.
- On 21 November 2005 the NZF takeover notice was received.
- The Offer is dated 6 December 2005 and is currently scheduled to close at 5.00 pm on Thursday, 12 January 2006 unless extended.
- NZF seeks to purchase all of the shares (being all voting securities) of MPM not already held by NZF.
- NZF also seeks to purchase all of the options (the other equity securities on issue in MPM) of MPM not already held by NZF.
- The Offer is a cash payment of $0.82 for each share and a cash payment of $0.02 for each option.
- The Offer has a number of standard conditions and an important condition related to a pre-bid agreement. On 7 December 2005 Gould Holdings Limited accepted the Offer in respect of its 54% shareholding in MPM in accordance with a pre-bid lock-up agreement entered into on 17 November 2005, and the Offer was declared unconditional.
As a result of the Offer (including any revision or extension of the Offer) two broad outcomes are possible:
a) NZF does not receive enough acceptances to give it control of 90% of the voting rights in MPM. In this circumstance MPM will continue as a listed company controlled by NZF, which will be able, as a majority shareholder, to nominate directors to the MPM Board.
b) NZF receives enough acceptances to give it 90% of the voting rights of MPM. In this circumstance NZF will be entitled to compulsorily acquire all outstanding shares in MPM and would then achieve 100% ownership. MPM would then cease to be a listed company.
Independent Directors’ Process and Views
Following receipt of the notice of NZF’s intention to issue a takeover notice the Board of MPM established a committee of Independent Directors comprising Humphry Rolleston, Mike Pero and Abigail Foote (the ‘Independent Directors’) to act on all matters relating to the Offer. The two members of the MPM Board who do not sit on the Committee of Independent Directors are Messrs George Gould and Kevin Arscott, who are associates of Gould Holdings Limited (‘Gould Holdings’).
The Independent Directors commissioned an Independent Adviser’s report from Crighton Anderson Corporate Finance Limited (‘Crighton Anderson’) on the merits of the Offer, as required by the Takeovers Code. This report, which we recommend you read, is included in the Target Company Statement.
MPM has one major shareholder holding 54% of the shares on issue. Until 7 December 2005 that shareholder was Gould Holdings, which entered into a pre-bid lock-up agreement with NZF. The major shareholder is now NZF. Messrs Gould and Arscott will, however, remain directors of MPM until after the closing date of the Offer.
IN RESPECT OF THE OFFER FOR ORDINARY SHARES, THE INDEPENDENT DIRECTORS HAVE REVIEWED THE INFORMATION AVAILABLE TO THEM AND CONSIDER THAT THE OFFER IS BELOW FAIR VALUE AND UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS DO NOT ACCEPT THE OFFER.
In arriving at this recommendation the Independent Directors have considered a range of factors including:
1. The Offer Price is Too Low.
NZF’s Offer of $0.82 for each MPM ordinary share is too low and by accepting the Offer, shareholders would be ‘under-selling’ their shares, particularly given the prospective financial information for the 2006 financial year.
Crighton Anderson has assessed the value of the Company on a stand alone basis at between $0.91 and $1.04. Further they have assessed that an acquisition premium of $0.05 should be applied which brings the fair value range up to $0.96 and $1.09.
NZF’s Offer is too low.
2. The Company’s Current Trading Performance and Prospects: Underlying Growth is Expected to Continue in the 2006 Financial Year.
MPM is New Zealand’s largest mortgage broker. The Company’s net surplus in the year ended 30 June 2005 exceeded the 2004 prospectus forecast by 4%, despite reduced sales in the housing market and aggressive competition by lenders. The Company’s strong financial position has enabled the payment of a 2 cents final dividend for the 2004 financial year, and a total dividend of 6 cents in respect of the year ended June 2005.
As indicated at MPM’s 2005 annual meeting and re-affirmed in this and attached documents, the Company is trading strongly in the current financial year. As advised to the New Zealand Exchange on 15 December 2005, MPM is forecasting an after tax profit of $1.9 million in the year ending 30 June 2006. This represents a 19% increase over the 2005 year result of $1.6 million and builds on the long term trend of steadily improving financial performance.
While many commentators are predicting a slowing in house sale volumes and house price growth, the Company’s long term track record of growth and the strategies currently implemented suggest that on-going organic growth is possible by MPM even in a tightening economic cycle to that of the past few years. Monthly mortgage origination confirmations to the end of November 2005 have trended higher than average 2004-05 monthly confirmations.
An effective business model is in place and MPM’s growth strategy includes the development over the medium to longer term of a parallel activity in risk insurance.
With 42 franchisees and in excess of 50 individual brokers, the Company is the market leader in one of the key origination channels for mortgages. Future earnings should be underpinned by the strength of MPM’s market position, which may explain why NZF seeks to acquire the Company.
The Offer price of $0.82 represents a prospective price earnings multiple of 10.8 times forecast FY 2006 after tax earnings per share, which is significantly below the market median multiple. The Offer price of $0.82 represents a prospective gross yield of 10.9% on the ordinary shares, assuming an unchanged dividend at 6 cents per share fully imputed. MPM’s current dividend payout policy is to distribute 80-90% of available net surplus to shareholders. Shareholders accepting the Offer would need to identify an alternative investment of comparable attractiveness in order to sustain their existing level of return.
3. The Acceptance of the Offer by Gould Holdings.
The acceptance by Gould Holdings on 7 December 2005 satisfied the minimum acceptance requirement of the Takeovers Code and as a result NZF now controls 54% of the shares issued in MPM. The NZF Offer provides remaining shareholders with the opportunity to sell their shares to NZF on the same terms accepted by Gould Holdings. However, the fact that Gould Holdings has accepted the Offer at $0.82 does not mean minority shareholders should. Gould Holdings’ motivation for accepting is likely to remain undisclosed but is unlikely to apply to minority shareholders.
4. The Offer Creates Uncertainty.
Certain difficulties may arise if NZF does not acquire 100%. As mentioned in other parts of the attached documents it is unclear what NZF’s strategy is in respect of MPM as a majority shareholder in a listed company. It is unclear how NZF would manage this investment. This is an important question as NZF poses a competitive threat to the MPM mortgage origination franchise network. NZF itself undertakes mortgage origination through New Zealand Mortgage Finance Limited and Approved Mortgage Brokers, and clearly sees further organic growth and considerable potential for mortgage origination operations.
Whatever NZF’s strategy may be, it may face obstacles in achieving the desired outcome. Depending on whom NZF appoints to the MPM Board, there is potential for conflict of interest issues which would diminish NZF’s ability to exert effective control. MPM has a Corporate Governance policy with the mitigation of conflicts of interest as a core objective. These impediments suggest that NZF would wish to acquire 100% of MPM.
5. The Benefits to NZF of Acquiring 100%.
As set out on the Independent Adviser’s report there is a considerable financial benefit to NZF of acquiring 100% of MPM. The report estimates that cost reductions of $750,000 per annum could accrue to NZF which if valued at an EBIT multiple of 8 or 9 equates to a value of $6 million to $6.75 million. This will further reinforce NZF’s desire to seek 100% of MPM.
6. The Likelihood of the Offer being Successful at $0.82.
Taking all these factors into consideration the Committee of Independent Directors believes that the Offer is unlikely to be successful.
7. The Likelihood of Another Offer from NZF.
Given the operational and financial benefits that arise from acquiring 100% of MPM, NZF should be highly motivated to achieve full ownership.
If NZF does not acquire 100% of MPM at $0.82 and assuming it wishes to, it has two courses of action open to it. First, it could increase its current Offer. The Independent Adviser notes that because the Offer has become unconditional, NZF is unlikely to increase the Offer price if acceptances are lower than desired. (An increase in the price for this particular Offer would also mean paying more to Gould Holdings.) Secondly, NZF can wait until the Offer currently before shareholders has closed and launch a new takeover offer at a higher price for the shares held only by the remaining minority shareholders.
The overall outcome of NZF making a second offer could result in a conservative overall average purchase price. For such a revised Offer to have any reasonable prospect of success, it would need to fall, in the view of the Independent Directors, inside the upper end of the valuation range established by the Independent Adviser.
IN RESPECT OF THE OFFER FOR THE OPTIONS, THE INDEPENDENT DIRECTORS UNANIMOUSLY RECOMMEND THAT OPTIONHOLDERS ACCEPT THE OFFER.
In arriving at this recommendation the Independent Directors have considered the fairness of the Offer of $0.02 for each option on issue.
The Independent Directors note that optionholders may encounter a potential difficulty in accepting the Offer for the options. This relates to the non-transferability of the options, a restriction arising from their issue to employees, franchise holders and employees of franchise holders. There is no existing real market for the options because of this restriction. The restriction is not recognised for the purposes of the Takeovers Code, which requires a bidder to make an offer for all equity securities of a Target Company. In making their recommendation, the Independent Directors note that optionholders will be reliant on NZF making the payment despite the optionholders’ inability to transfer valid title to the options to NZF.
Risks for MPM Shareholders.
While the Independent Directors recommend against accepting the Offer in respect of the ordinary shares, shareholders should consider their individual circumstances and the following risks:
- The share price could fall below the Offer price before or after the Offer has closed. This could be due to unexpected external events which adversely affect financial markets and/or the property and mortgage markets. As discussed in the Independent Adviser’s report, MPM is exposed to a number of market factors outside the Company’s control.
- There can be no certainty that NZF will share the Independent Directors’ perspectives on the possibility or otherwise of a further offer and no such offer may be forthcoming.
- An offer from a third party is considered to be a relatively unlikely possibility because such a bidder could not obtain effective control whilst NZF controls a 54% interest in the Company.
- More generally, shareholders are reminded that shares are a relatively risky investment and other unanticipated risks could emerge. It is therefore possible that retaining MPM shares will produce a lower value outcome than accepting the Offer.
The Independent Directors of MPM gave careful consideration to the price, terms and conditions of the NZF Offer, the report of the Independent Adviser and the reports on the Company’s performance and prospects from MPM’s management before reaching their conclusion that the NZF Offer should not be accepted in respect of the MPM ordinary shares.
To reject the Offer, MPM shareholders should simply take no action and disregard the documents sent to you by NZF.