Transactions

BEFORE THE TAKEOVERS PANEL

Background

[1]  Powerco Limited (“Powerco”) is a New Zealand incorporated company. It is a party to a listing agreement with New Zealand Exchange Limited and as such is a code company for the purposes of the Takeovers Act 1993 (“the Act”) and the Takeovers Code (“the Code”). Powerco has two classes of “equity securities”1 on issue, ordinary shares and unsecured subordinated capital bonds (“capital bonds”).

[2] Prime Infrastructure Networks (New Zealand) Limited (“Prime NZ”) is a wholly owned subsidiary of Prime Infrastructure Management Limited (“PIML”), an Australian incorporated company. Shares in PIML are “stapled” with units in Prime Infrastructure Trust, an Australian managed investment scheme. The “responsible entity” in respect of Prime Infrastructure Trust is Babcock & Brown Investor Services Limited (“Babcock & Brown”).

[3] On 6 August 2004 PIML and Babcock & Brown entered into a lock-in agreement (the “lock-in agreement”) with New Plymouth District Council, Taranaki Electricity Trust Incorporated, Powerco Wanganui Trust Incorporated (together the “Council Vendors”) in respect of a proposed takeover offer for Powerco by Prime NZ.

[4] The lock-in agreement provides that:

“The Offeror shall ensure that the takeover Offer provides for an offer price of NZ$2.15 per Powerco ordinary share and includes an option for the Vendors (and other Powerco shareholders) to receive, as consideration for their Powerco ordinary shares, 62.5% in cash and 37.5% in subordinated securities having terms acceptable to the Vendors (acting reasonably), and each Vendor agrees to accept such option in respect of all their Powerco ordinary shares.”

[5] At the same time that the Council Vendors, Prime NZ and Babcock & Brown entered into the lock-in agreement they also signed a letter (the “side letter”) which contained the key terms of the proposed offer referred to in the lock-in agreement. The side letter states that:

“The Offeror will offer Powerco shareholders the ability to elect, at the individual shareholder level, their preferred mix of consideration, either:

(a) 100% cash (subject to the Cash Cap as discussed below);

(b) 100% SPARCS securities issued by Prime Infrastructure NZ;

(c) 62.5% cash and 37.5% SPARCS (subject to the Cash Cap).

The amount of cash which will be available to accepting shareholders will be capped at 62.5% of the total consideration payable under the Takeover Offer”.

[6] On 20 September 2004 Prime NZ gave notice, under rule 41 of the Code, of its intention to make a full takeover offer for Powerco. The draft offer document which accompanied the takeover notice stated that the following consideration would be offered to Powerco security holders:

(a) Capital bond holders would be offered one subordinated Prime NZ adjusting reset convertible security (“SPARCS”) for each capital bond;

(b) Shareholders would be offered a choice of:

(i) $2.15 in cash (the “cash option”),

(ii) 2.15 SPARCS (the issue price of the SPARCS being $1); or

(iii) a combination of 62.5% cash and 37.5% SPARCS, being $1.34 in cash and 0.8063 SPARCS for each share (the “combination option”).

[7] However, consistent with the side letter, the draft offer stated that the total amount of cash consideration available to shareholders would be capped at 62.5% of the total consideration payable in respect of acceptances received, with the remainder to be paid in SPARCS. A form of scaling would be applied as required to ensure the cash cap was not exceeded. Shareholders opting for the cash alternative would be scaled first.

[8] Under the proposed offer, and pursuant to an exemption from rule 20 contained in the Takeovers Code (Prime Infrastructure Networks (New Zealand) Limited) Exemption Notice 2004 (the “Exemption notice”), certain overseas security holders and holders of unmarketable parcels (“priority cash recipients”) would be able to accept cash consideration in respect of their shares or capital bonds. Under the offer the acceptances of priority cash recipients would not be subject to the cash cap and consideration payable in respect of such acceptances would be deducted from the cash cap before being applied to the acceptances of remaining shareholders. Accordingly, the greater the number of priority cash recipients that accept the offer, the less cash that would be available for remaining shareholders who chose one of the options with a cash component.

[9] As at the date of the takeover notice the number of Powerco shares held by priority cash recipients was very small. However, in the days following the date of the takeover notice there was an extremely high level of reported trading in Powerco shares. Market reports suggested that the number of security holders with overseas addresses has increased significantly. Some analysts suggested that the effect of these acquisitions would mean that remaining shareholders accepting the offer could, as a result of scaling, receive almost 70% of their consideration in the form of SPARCS.

[10]  On 1 October 2004 the media reported that representatives of New Plymouth District Council were of the view that, regardless of the level of acceptances received by Prime NZ from priority cash recipients, the Council would receive a guaranteed minimum cash amount for its shares under the terms of the lock-in agreement.

[11] The Panel executive wrote to Simpson Grierson, the legal adviser to New Plymouth District Council, noting that the statements made to the media on behalf of the Council were inconsistent with the draft offer document which accompanied Prime NZ's takeover notice. The terms of the proposed offer in that document did not refer to a minimum cash amount for Powerco's New Zealand shareholders. The Panel executive reminded the Council that any takeover offer made by Prime NZ must be made on the same terms to all security holders of the same class (except to the extent permitted by the Exemption notice).

[12] On the afternoon of 1 October 2004 Simpson Grierson wrote to Prime NZ's legal adviser, Harmos Horton Lusk, advising that they had been instructed to record New Plymouth District Council's view that the form of the offer attached to the takeover notice was not in accordance with the terms of the lock-in agreement. Simpson Grierson also stated that:

“New Plymouth District Council reserves all rights in this respect including (without limitation):

• not accepting the proposed offer;
• accepting the proposed offer on a basis which reserves all legal rights.”

[13] From 1 October to 4 October 2004 Prime NZ and the Council Vendors participated in discussions and negotiations to try and resolve this issue.

[14] On 4 October 2004 New Plymouth District Council issued a press release stating that the difficulties in respect of Prime NZ's offer had been resolved to the satisfaction of the Council Vendors. The press release stated that New Plymouth District Council would be getting 62.5% of the consideration for its shares in cash and the remainder in SPARCS. The press release stated that:

“Prime has put more cash into the deal and our advisers PricewaterhouseCoopers have arranged a binding agreement to sell all of the surplus SPARCS we receive; beyond the agreed 37.5 per cent of the total price.”  

“The SPARCS will sell at their par, or full face value, of $1 each.”

[15] It subsequently transpired that on 4 October 2004 PricewaterhouseCoopers, as agent for New Plymouth District Council and Taranaki Electricity Trust Incorporated, had entered into an agreement (“the resale facility”) with Tricom Equities Limited (“Tricom”), a Sydney based broker, under which Tricom would acquire from those parties any SPARCS received as a result of the offer in excess of 37.5% of the total consideration received.

[16] PricewaterhouseCoopers had advised the Council Vendors in respect of previous negotiations regarding the sale of the Council Vendors' shares in Powerco, concluding with the lock-in agreement, and the proposed takeover offer from Prime NZ.

[17] Shortly before midnight on 4 October 2004 Prime NZ provided the Panel with its signed takeover offer. The terms of the offer differed from the proposed terms set out in the draft offer which accompanied the takeover notice in that:

(a) If there are acceptances from priority cash recipients which amount to more than $50 million, Prime NZ will provide additional cash to pay the consideration above that amount (i.e. acceptances from priority cash recipients which exceed $50 million will not result in further scaling); and

(b) Cash consideration paid to overseas capital bond holders will no longer impact on scaling. Prime NZ will provide the cash to pay overseas bond holders.

Initial actions by the Panel

[18] On 5 October 2004 the Panel met to consider whether the resale facility raised any issues regarding compliance with the Code.

[19] Rule 20 of the Code provides that:

“An offer must be made on the same terms and provide the same consideration for all securities belonging to the same class of equity securities on offer.”

[20] The Panel noted that the effect of the resale facility could be a breach of rule 20 if that facility was provided by, or on behalf of, Prime NZ.

[21] The Panel noted that it was not clear from the press release of New Plymouth District Council who had provided the resale facility.

[22] At its meeting on 5 October 2004, the Panel passed the following resolution:

On 6 August 2004 Prime Infrastructure Management Limited, the parent company of Prime Infrastructure Networks, entered into a lock-in agreement with the Council Vendors in respect of a proposed takeover offer by Prime Infrastructure Networks for all of the equity securities issued by Powerco. The Council Vendors agreed to accept a takeover offer from Prime Infrastructure Networks in respect of all of the Powerco shares held by them. The lock-in agreement also provided that: 

“The Offeror shall ensure that the takeover offer provides for an offer price of NZ$2.15 per Powerco ordinary share and includes an option for the Vendors (and other Powerco shareholders) to receive, as consideration for their Powerco ordinary shares, 62.5% in cash and 37.5% in subordinated securities having terms acceptable to the Vendors (acting reasonably), and each Vendor agrees to accept such option in respect of their Powerco shares.” 

On 6 August the Council Vendors and Prime Infrastructure Management Limited also entered into a side letter which contained the key terms of the offer referred to in the lock-in agreement and stated that: 

“The amount of cash which will be available to accepting shareholders will be capped at 62.5% of the total consideration payable under the Takeover Offer”. 

On 20 September 2004 Prime Infrastructure Networks gave notice of its intention to make a full takeover offer for Powerco. The draft offer document which accompanied the takeover notice stated that the following consideration would be offered to Powerco shareholders:  

(i) $2.15 in cash,

(ii) 2.15 subordinated adjusting reset convertible securities (“Prime Infrastructure SPARCS”), or

(iii) a combination of 62.5% cash and 37.5% Prime Infrastructure SPARCS, being $1.34 in cash and 0.8063 Prime Infrastructure SPARCS for each share.  

The draft offer document stated that the total amount of cash consideration available to shareholders would be capped at 62.5% of the total consideration payable in respect of acceptances received, with the remainder being paid in Prime Infrastructure SPARCS. The draft offer document stated that the cash consideration payable to acceptors that are overseas shareholders, overseas bond holders, or who would receive an unmarketable parcel of Prime Infrastructure SPARCS, would be deducted from the cash cap before it is applied to the acceptances of remaining shareholders. To the extent that more acceptances requesting cash consideration were received by Prime Infrastructure Networks than the cash amount available, the cash amount payable to acceptors would be scaled and the balance would be paid in the form of Prime Infrastructure SPARCS. 

On 1 October 2004 the media reported that representatives of the New Plymouth District Council were of the view that regardless of the level of acceptances for cash received in respect of the takeover offer, the Council would receive a guaranteed minimum cash amount for its shares under the lock-in agreements.The Panel was advised that the Council Vendors and Prime Infrastructure Networks were involved in negotiations in respect of the proposed offer from 1 to 4 October 2004. On 4 October 2004 the New Plymouth District Council issued a press release stating that the difficulties in respect of Prime Infrastructure Networks' offer had been resolved to the satisfaction of the Council Vendors. The press release stated that the Council Vendors would be getting 62.5% of the consideration for their shares in cash and the remainder in Prime Infrastructure SPARCS. The press release stated that this would be achieved by Prime Infrastructure Networks putting more cash into the offer and PricewaterhouseCoopers agreeing, pursuant to a binding agreement with a third party, to sell, for face value, any Prime Infrastructure SPARCS which the Council Vendors receive under the offer above 37.5% of total consideration received. 

The Panel received a copy of Prime Infrastructure Networks' offer, dated 4 October, shortly before midnight on 4 October 2004. The offer does not contain any reference to the resale arrangement which the Council Vendors entered into.The Panel has decided to convene a meeting under section 32 of the Takeovers Act 1993. The Panel considers that Prime Infrastructure Networks, the Council Vendors and PricewaterhouseCoopers may not have acted or may not be acting or may intend not to act in compliance with the Code, because the effect of the resale arrangement may be that the offer is not made on the same terms and does not provide the same consideration for all securities belonging to the same class of equity securities under offer.  

The Panel has decided not to issue any restraining orders.

[23] On 5 October 2004 the Panel gave notice of its intention to hold a meeting under section 32 of the Act on Tuesday 12 October 2004 in Auckland. Prime NZ, the Council Vendors, PricewaterhouseCoopers and Tricom were requested to provide written submissions to the Panel by 9 a.m. Friday 8 October 2004.

[24] The Panel issued summonses under section 31N of the Act to Mr Christopher Chapman and Mr Gregory Horton, directors of Prime NZ, Mr Peter Tennent, Mayor of New Plymouth, Mr Rodger Kerr-Newall, Chief Executive of New Plymouth District Council and Mr Craig Rice of PricewaterhouseCoopers, requiring their attendance at the Panel's meeting and the production of relevant documents. The Panel also requested the attendance of Mr Lance Rosenberg of Tricom and Mr Peter Hofbauer, an employee of Babcock & Brown and a director of Prime NZ.

[25] Prime NZ, the Council Vendors, PricewaterhouseCoopers and Tricom provided their written submissions and the documents sought under summons as requested. Submissions were exchanged between the parties prior to the hearing.

[26] At the Panel's meeting on 11 October 2004 evidence was taken under oath from Tennent, Kerr-Newall, Rice, Rosenberg, Chapman, Hofbauer and Horton.

Further information arising from summoned documents and evidence given at section 32 meeting

[27] The submissions and evidence received from the Council Vendors, PricewaterhouseCoopers, Tricom and Prime NZ were generally consistent in describing the events leading up to entry into the resale facility and the terms of the facility. These are outlined below.

[28] Between 1 October and 4 October Prime NZ and the Council Vendors, with their legal and financial advisers, endeavoured to resolve the apparent impasse in relation to the different views held regarding the effect of the lock-in agreement and the side letter on the consideration the Council Vendors would receive. The discussions included the potential provision of additional cash from Prime NZ under the offer and a resale facility to be arranged by the Council Vendors to enable them to sell excess SPARCS received by them under the takeover offer.

[29] It appeared that the first mention of the resale facility as a contributor to resolving the impasse between Prime NZ and the Council Vendors may have been in a telephone conversation between Tennent and Chapman on the evening of Friday 1 October. Chapman recalls mentioning the possibility that the Council Vendors might wish to enter into a resale facility to achieve the percentage of cash consideration which they considered they were entitled to as a result of the takeover. Tennent said he had no recollection of reference to such a facility in the course of that conversation.

[30] On Saturday 2 October, during a telephone discussion between Hofbauer and Rice regarding the financial impact of any cash scaling under the terms of the proposed offer, Hofbauer suggested to Rice that the Council Vendors might be able to make arrangements with Tricom to on-sell any excess SPARCS they received as a result of scaling of the cash consideration under the combination option.

[31] This suggestion was made against the background that Prime NZ and Babcock & Brown had had a number of previous commercial and business relationships with Tricom. During September 2004, amid negative publicity about the SPARCS, Tricom and Prime NZ had had discussions regarding the establishment of a market resale arrangement in respect of SPARCS issued under the takeover offer. Prime NZ contemplated that this arrangement would be provided at the cost of the recipients and would be available to all holders of SPARCS. The discussions did not reach a conclusion.

[32] Hofbauer told the Panel that because Prime NZ had discussed a market resale arrangement with Tricom in September, and because of his perception of Tricom as a broker who could act quickly, he had suggested that PricewaterhouseCoopers might wish to discuss establishing a resale facility with Tricom. Hofbauer offered to contact Rosenberg at Tricom and to arrange for him to call Rice.

[33] Rice and Hofbauer both stated to the Panel that during this phone call Hofbauer emphasised that Prime NZ could not facilitate, or participate in, any discussions with Tricom about any such resale facility.

[34] Rice subsequently received a telephone call from Rosenberg indicating that Tricom might be willing to acquire up to $50 million worth of SPARCS from the Council Vendors in consideration for the payment of an underwriting fee. Rice advised Rosenberg that the Council Vendors wished to limit their exposure to SPARCS to 37.5% of the total consideration paid to them under the takeover offer.

[35] PricewaterhouseCoopers had authority from the Council Vendors to negotiate the resale facility. Rice advised that he kept the Council Vendors informed of the terms of the deal as it evolved and sought approval before committing the Council Vendors to any agreement with Tricom.

[36] From 2 October to 4 October Rice and Rosenberg negotiated the terms of the resale facility. An agreement was entered into on 4 October between Tricom and PricewaterhouseCoopers, on behalf of New Plymouth District Council and Taranaki Electricity Trust Incorporated who were described as “the intended beneficiaries”. Powerco Wanganui Trust Incorporated decided not to participate in the resale facility.

[37] The terms of the resale facility are as follows:

(a) Tricom would purchase any SPARCS received by New Plymouth District Council and Taranaki Electricity Trust Incorporated under the offer which exceeded 37.5% of the total consideration received by them under the takeover offer, up to a maximum level of $50 million;

(b) The purchase price would be $1 per SPARC;

(c) New Plymouth District Council and Taranaki Electricity Trust Incorporated would pay a fee for Tricom's services. The fee consists of two parts. The first being a non-refundable deposit of 0.5% of $50 million (the maximum level of SPARCS that could be acquired under the facility). The second part of the fee relates to the amount of SPARCS actually acquired by Tricom under the resale facility as follows: 

(i) 3% of the purchase price for the first $25 million worth of SPARCS acquired, and

(ii) 3.5% of the purchase price for the remaining SPARCS acquired.

The initial deposit of 0.5% of $50 million will be rebated against the fees in the second part relating to the number of SPARCS acquired. If $8.333 million SPARCS were sold under the facility the deposit would be fully absorbed. The fee is referred to as an “underwriting fee” but its effect is that Tricom will be purchasing SPARCS under the resale facility at a 3 cent discount to face value unless the number acquired is less than $8.333 million.

[38] New Plymouth District Council was confident, because of the probable level of SPARCS it would receive, that the fee actually payable in respect of the resale facility would be significantly less than the potential maximum level of fees under the facility.

[39] Rosenberg stated that Tricom intends to place the SPARCS purchased by it under the resale facility with its existing clients. Rosenberg stated that Tricom had already secured sub-underwriting commitments in respect of the SPARCS from a number of major clients. He confirmed under oath that none of the sub-underwriters were related to Prime NZ, PIML or Babcock & Brown.

[40] Rosenberg also told the Panel that Tricom had purchased as principal 713,400 shares in Powerco in the period from 4 August to 6 October 2004 at an average price of A$1.94 with the intention of accepting SPARCS under the offer.

[41] Representatives of New Plymouth District Council, PricewaterhouseCoopers, Tricom and Prime NZ confirmed to the Panel under oath that:

(a) Prime NZ did not have any involvement in the establishment of the resale facility, other than introducing Rosenberg to Rice; and

(b) Tricom had not received, nor had any agreement or arrangement to receive, any payment or other benefit, either directly or indirectly, in respect of the resale facility from, or on behalf of, Prime NZ; and

(c) New Plymouth District Council and Taranaki Electricity Trust Incorporated had not received, nor had any agreement or arrangement to receive, any payment or other benefit, directly or indirectly, from, or on behalf of, Prime NZ otherwise than pursuant to the takeover offer.

[42] During the course of discussions between the Council Vendors and Prime NZ on Sunday 3 October Prime NZ offered to change the terms of its proposed offer by reducing the impact of scaling on all acceptors of the combination and cash options. This would be achieved by contributing an additional cash sum to the offer in certain circumstances. Representatives of Prime NZ stated that at that time Prime NZ was aware that its proposal to contribute additional cash to the offer may not on its own be sufficient to give the Council Vendors comfort as to the effect of scaling. Hofbauer provided PricewaterhouseCoopers with several spreadsheets demonstrating the impact of an additional cash contribution by Prime NZ. These spreadsheets also referred to the impact of the additional cash on the SPARCS that would be sold under a resale facility to be arranged by the Council Vendors.

[43] On 4 October 2004 Simpson Grierson, on behalf of New Plymouth District Council, wrote to Prime NZ advising that the Council intended to accept the offer to be made by Prime NZ on the basis that the offer made would limit the effect of scaling of cash consideration. However, New Plymouth District Council stated that it would reserve any rights it may have in respect of the lock-in agreement. That letter also referred to the resale facility and stated that:

“[New Plymouth District Council] must reserve the right to seek to recover from Prime Infrastructure any costs, losses, expenses or damages it actually suffers as a result of receiving and disposing or securing the right to dispose of the SPARCS beyond those contemplated by the lock-in arrangements and, as noted, to do so notwithstanding any acceptance of the modified takeover offer. 

We understand that on legal advice Prime Infrastructure may not be able to confirm the acceptability of this reservation of rights. If this is so then [New Plymouth District Council] is prepared to proceed unilaterally as it would expect that this would be the position in any event. 

In addition, [New Plymouth District Council] understands that it is likely to be the case that if it recovers any sums from Prime Infrastructure then Prime Infrastructure will need to make the same “recoveries” to other acceptors so that all acceptors are treated in the manner contemplated by this offer.”

[44] The Panel indicated to Simpson Grierson and the representatives of New Plymouth District Council that if the Council intended to seek recovery of the amount of fees to be paid by it under the resale facility from Prime NZ that this could create difficulties under rule 20 of the Code. On identification of this issue by the Panel, New Plymouth District Council and Taranaki Electricity Trust Incorporated undertook, in relation to the current offer, that they would not seek to claim from Prime NZ any amount in respect of the resale facility.

Panel analysis

[45] The issue considered by the Panel was whether the effect of the resale facility was that Prime NZ's offer provided different terms and consideration to New Plymouth District Council and Taranaki Electricity Trust Incorporated from those offered to remaining Powerco security holders in breach of rule 20.

[46] Although the Code requires that all terms of the offer must be contained in the offer document, other benefits given as consideration for accepting the offer outside of the offer itself are still considered to constitute part of the offer for the purposes of rule 20. Accordingly, if a bidder offered or provided some collateral benefit to one or more shareholders that was not offered or provided to all shareholders, the provision or offering of such benefit can be a breach of rule 20, regardless of whether or not the collateral benefit was referred to in the offer document.

[47] The Panel needed to establish whether the resale facility constituted a benefit provided by or on behalf of Prime NZ to New Plymouth District Council and Taranaki Electricity Trust Incorporated and not to other shareholders.

[48] The Panel considered that in the current circumstances, the resale facility would only constitute a benefit provided by or on behalf of Prime NZ to New Plymouth District Council and Taranaki Electricity Trust Incorporated if either:

(a) New Plymouth District Council and Taranaki Electricity Trust have any ability to recover from Prime NZ, or a related party, any costs incurred by them in respect of the resale facility; or

(b) Tricom were to receive from Prime NZ, or a related party, any contribution or other benefit in respect of or arising out of the provision of the resale facility to New Plymouth District Council and Taranaki Electricity Trust Incorporated.

[49] The evidence given at the meeting, and in particular the evidence referred to in paragraph 41 and the undertaking described in paragraph 44, established that no collateral benefits were being provided by or on behalf of Prime NZ to Tricom, New Plymouth District Council or Taranaki Electricity Trust Incorporated in relation to the resale facility.

[50] Rule 20 of the Code is designed to ensure that Prime NZ is offering the same terms and conditions to all shareholders. Any shareholder is free to make its own arrangements at its own cost to on-sell any SPARCS allotted to it under the takeover offer. That is what occurred in this case. New Plymouth District Council and Taranaki Electricity Trust Incorporated entered into arrangements at their own cost for disposal of any unwanted SPARCS to Tricom.

Determination

[51] The Panel determined that it was satisfied that Prime NZ, the Council Vendors and PricewaterhouseCoopers acted in compliance with the Code. The Panel found that the resale facility entered into on Monday 4 October between Tricom and PricewaterhouseCoopers on behalf of New Plymouth District Council and Taranaki Electricity Trust Incorporated did not contravene rule 20 of the Code which requires the takeover offer to be made on the same terms and provide the same consideration for all securities belonging to the same class of equity securities under offer.

Confidentiality Order

[52] The Panel made a confidentiality order under section 31X of the Act in respect of information contained in the draft independent advisers report prepared by Grant Samuel & Associates under rule 21 of the Code, aspects of which were discussed at the meeting.

DATED at Auckland this 15th day of October 2004

SIGNED for and on behalf of the Panel by the Chairman

J C King