Published 17 September 2005
Carter Holt Harvey Ltd’s independent directors said on Thursday Rank Group’s offer to minorities was below fair value, but Rank made its unchanged offer unconditional at the close of business on Friday.
Rank (Graeme Hart) already has agreement with US forestry company International Paper Ltd to buy its 50.5% for $1.65 billion at 2.50/share. The offer to minorities, at the same price, closes on Thursday 13 October.
Grant Samuel & Associates Ltd said in its independent appraisal it valued Carter Holt at $2.55-2.95/share ($3344-3864 million equity value, $3505-3975 million enterprise value), with a $2.75 midpoint. Rank’s offer is at a 9.1% to the midpoint.
“Under a full takeover offer Rank Group should pay a price equivalent to the full underlying value to the minority shareholders despite having previously agreed to acquire a controlling shareholding,” Grant Samuel said.
Local investment bank Cameron & Co examined management plans & forecasts, held discussions with management and reviewed the Grant Samuel report, said it generally agreed with grant Samuel’s view on the merits of the offer and also noted the significant opportunities to enhance the performance & value of the business.
Rank said the premium in its offer was around 16% after adjustments for the recent sale of Carter Holt’s forests, the dividend payment & the general sharemarket improvement. Grant Samuel said the offer represented a 1.6% premium on the $2.46 closing price the day before Rank made its offer in August, and a 29.5% premium on the 24 closing price, the day before International Paper announced it was considering strategic alternatives for its stake.”
Grant Samuel said it valued Carter Holt by aggregating the estimated market value of each of its 4 operating divisions together with the value of non-trading assets & liabilities and adjusting for corporate costs & net borrowings. It estimated the value on the basis of fair market value as a going concern.
“The valuation of CHH is appropriate for the acquisition of the company as a whole and accordingly incorporates a premium for control. The value is in excess of the level at which, under current market conditions, shares in CHH could be expected to trade on the sharemarket.”
Grant Samuel said it had used discounted cashflow analysis to value the company: “DCF analysis is commonly used to value forest estates because it allows prices, exchange rates & harvest profiles to be modelled explicitly. It is also appropriate in valuing downstream processing of logs into wood products, pulp & paper and packaging because it enables the valuer to test the sensitivity of earnings to fluctuations in key underlying assumptions, capture the impact of lumpy capital expenditure and to reflect different levels of performance at different stages in an economic cycle.”
New valuation approaches change forest assumptions
In its valuation summary, Grant Samuel said: “Based on recent sales of forests it can be assumed that buyers believe there will be log price appreciation. Valuations based on today’s log prices would not support the prices paid for the forest estates. Timos (timber management organisations) & reits (real estate investment trusts) have brought a new method & approach to the funding of forests which enabled Tenon (formerly Fletcher Forests) and more recently Carter Holt to sell assets at above book value which were not delivering earnings close to their cost of capital.”
Grant Samuel valued the Carter Holt forests at $1250-1400 million, using a 7.4% real discount rate and assuming the $NZ:$US exchange rate declines from US69c to US60c by 2009, but recognising that even slight shifts in log prices can have significant impacts (a 2.5% move would change the value by 12.2-12.3%).
Carter Holt got an average $2500/ha for the 94,600ha of freehold land it sold in July and Grant Samuel has used that to value the remaining 126,000ha. However, Grant Samuel said later in its summary the July sale to Rayonier and RREEF Infrastructure “achieved a price of $US3263/ha”, while in a chart on transactions it put that sale value at $US3139/ha â€“ unexplained confusion.
The comparative sales chart puts the Carter Holt deals in July at the bottom of the heap:
Evergreen Forests Ltd’s sale of forests this quarter is put at $US4029/ha
Rayonier’s sale into the joint venture which bought the Carter Holt forests was put at $3850/ha
Weyerhaeuser’s 3rd quarter 2004 sale of forests to Hancock was at $4534/ha
Kiwi Forests Group’s acquisition of Fletcher Forests was at $4204/ha
The Kiwi/Hancock acquisition of the Tarawera forest from Fletcher was at $6184/ha, and
The sale of the Central North Island Forests Partnership assets to the Harvard fund was at $4012/ha.
Carter Holt is also in the process of selling another 11,000ha of non-strategic forests & freehold land and, for a number of years, has been selling land for dairy conversions & lifestyle blocks.
“The range of prices received has varied significantly but is averaging around $7000/ha. CHH has estimated that it will take 10 years for all HBU land to become available for sale, and accordingly Grant Samuel has assumed the sale of 3600ha of HBU land each year for the next 10 years to determine a net present value for the HBU land.”
The valuation attributes a forests value of $US3565-4410/ha (which I think refers to net stocked hectares).
On the issue of deferred tax, Grant Samuel said: “The remaining forests after the sale announced in July have a deferred tax liability of $361 million, which could be crystallised if the forests were sold directly to a purchaser or over time as the trees are harvested by CHH. A significant proportion of the residual forests are held in subsidiary companies. If the remaining forests were sold, CHH believes about 75% could be sold by way of a share sale, effectively transferring the full amount of the deferred tax liability to the purchaser.”
Grant Samuel presented some fairly dark possibilities in the outlook for minority shareholders in a Rank-controlled Carter Holt which remained listed, although it said some of these options were unlikely. The dark-side options were based on Rank making a highly leveraged purchase and seeking, by one method or another, to transfer that debt either to Carter Holt or to minorities.
Grant Samuel said:
Rank has little or no synergy with any of the Carter Holt business
Carter Holt has $1.7 billion of available subscribed capital which it could repay to shareholders tax-free, thus reducing Rank debt by halving Carter Holt shareholders’ funds but still leaving the debt:equity ratio conservative
Carter Holt could raise debt to repay shareholders, transferring some of Rank’s acquisition debt to Carter Holt
Carter Holt could pay surplus cash from asset sales or an increase in debt through a dividend without imputation credits, leaving the tax bill to shareholders to pay
Grant Samuel said if Rank had accumulated tax losses it mightn’t incur any tax liability from that option, but it was an unlikely course for rank to pursue
Takeover by Rank would probably lower Carter Holt’s investment ratings, raising its borrowing costs.
Despite the possible downside, Grant Samuel expected a low takeup of Rank’s offer, given Mr Hart’s record of successful business transactions, and the fact that Carter holt was well positioned for earnings growth after comlelting a substantial proportion of its restructuring initiatives.
Websites: Carter Holt Harvey
19 August 2005: Hart buys control of Carter Holt, plans full takeover
28 June 2005: 28 June 2005: International Paper considers “strategic alternatives” for Carter Holt stake