Tenon Ltd, the former Fletcher Challenge Forests, went into the Easter break believing it was worth substantially more than it had told institutional investors on 18 March, but was being told by shareholder Rubicon Ltd its shares weren’t worth a premium in a takeover bid.
Monday afternoon, Tenon told its shareholders to wait for a report from its independent directors before acting, then proceeded to chop the legs off the mean Rubicon bid.
Mean, because Rubicon’s 185c/share offer, to take its stake from 19.997% to 50.01% of Tenon, was just 3c more than Thursday’s closing price, a small price for absolute control. It would cost Rubicon $156 million, of which $70 million would be from Tenon’s first capital return.
Rubicon’s board – including chairman Michael Andrews, who’s also on the Tenon board, and 3rd-generation founding-family member Hugh Fletcher – would have known as well as Tenon chief executive John Dell the significance to Tenon’s overall value of an 18% first-quarter rise in price for mouldings & better lumber.
Mr Dell told the market on Thursday the price for mouldings & better lumber had risen 24.4%, from the December level of $US1050/thousand board feet used in the explanatory memorandum’s earnings projection to $US1240.
He said ebitda (earnings before interest, tax, depreciation & amortisation) for continuing operations for the June year would be in the $58-60 million range, including $7 million of attributed realised forex gains announced in March. That’s up a minimum 24.4% on the $45 million explanatory memorandum projection.
Net profit after tax for the continuing operations would be 52.4% higher – up from $21 million to $32 million, including the aforesaid $7 million forex gains.
Tenon would still make a loss – about $33 million – after accounting for its discontinued forestry segment.
Rubicon then came in with its bid, after the exchange closed for the Easter break, saying its $1.85/share controlling stake price was:
full & fair
higher than Tenon had traded at in 2 years (during which it owned forests it decided it no longer wanted to own)
it was above brokers’ average 170c/share valuation, and
it was the midpoint of the 175-195c/share range given by Tenon chairman Sir Dryden Spring in the January explanatory memorandum & 18 March presentation to the institutions.
Rubicon will get 20% of Tenon’s 115c/share capital return after selling its forests and would then pay out 30% of the Tenon 115cs, plus 70c/share for the continuing Tenon business, which it said gave a 19% premium to the implied market value of Tenon’s shares from the announcement of the Tarawera forestry rights sale until Thursday.
Rubicon said there had been speculation of a Tenon takeover, which had driven the share price above most brokers’ valuations.
It’s 3 years since the Fletcher Challenge breakup, in which Rubicon was the company of bright ideas, pegged back with a large slab of Fletcher Forests shares. The breakup was a good idea, Fletcher Challenge decided, because the market wasn’t valuing the tied divisional stocks at their true worth.
Now, Rubicon said on Thursday, “We do not have the level of influence we need to really drive value for Rubicon and Tenon shareholders.”
It was a shock to the eyes to read this one from Rubicon: “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 & 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 & how value is created in the forestry industry.”
Haven’t we been through that before?
Sir Dryden Spring said on Monday Tenon’s management team had already created value this year. It had, he said:
§ achieved agreement for the sale of the company’s forest estate for a price 50% above the implied value attributed to the forests by the market
§ returned a significant amount of capital to shareholders (with a further 115c/share to come
§ Substantially achieved the previously announced targeted reduction in shared services overheads of $13 million
§ increased its investment in the high-value distribution chain by acquiring a majority shareholding in US-based Empire Group and a cornerstone shareholding in the European furniture company Zenia House
§ agreed terms for settling the contractual dispute with major pulpwood customers, Carter Holt Harvey and Norske Skog, that related to historical contractual obligations, and
§ announced on Thursday that net profit from continuing activities for the current year was expected to be $32 million, over 50% higher than expectations at the start of the year.
“These initiatives have resulted in Tenon’s share price rising by approximately 18% since the start of the year, outperforming the benchmark NZSX50 gross index by over 11%,” he said. To be fair to Rubicon & the NZX index, that purple patch is but a patch against a very large backdrop of poor performance, and with a bottomline loss still to come.
Still, looking forward, Sir Dryden is right in saying the offer ignores the latest valuation range of 206-232c/share based on the new projections.
Rubicon’s offer can’t be made until 22 April. The report from Tenon’s independent directors & their independent advisor will go to shareholders 14 days later.
Websites: Rubicon
Tenon
