IF BID SUCCEEDED: C.F.M. Directors Would Resign

Press, Volume CIX, Issue 31942, 20 March 1969, Page 26

IF BID SUCCEEDED: C.F.M. Directors Would Resign

If the take-over by Waitaki Farmers’ Freezing Company, Ltd, for Canterbury Frozen Meat Company, Ltd, were successful, the C.F.M. directors feel they could not continue their proper function in the interest of C.F.M. shareholders, and therefore they would resign.

The C.F.M. chairman (Mr L. D. Cotterill) says this in a report to shareholders, which outlines the reasons why they recommend again rejection of the new take-over bid by Waitaki.

each C.F.M. share at balance date was 236 c.

“Thus the shareholders’ funds of the combined company under the new offer should equal only 144 c a share, compared with 236 c a C.F.M. share as at the last balance date." The chairman then reveals that the replacement value of the fixed assets of C.F.M. has been assessed by independent valuers at $20,178,423, compared with a book value of $8,000,140.

“While the terms on board of management level, from the point of view of C.F.M. shareholders are less arbitrary than those contained in the previous take-over bid, Waitaki’s board would still be the controlling board and would consist of 14 directors of which the majority, namely eight, would represent Waitaki,” he says.

offer denies C.F.M. shareholders who accept Waitaki’s offer, the right to obtain the benefit of the bonus issue and of the cash issue unanimously decided upon at the last annual general meeting and which, the previous take-over having lapsed, will be proceeded with. These issues will apply to those shareholders who are on the register of shareholders on April 30 next. In this connection, Waitaki’s comparison of future dividend receipts overlooks entirely the additional income from these issues which those C.F.M. shareholders who do not accept the bid will receive. The comparison also presupposes that C.F.M. will continue to pay out in dividends a much lower percentage of its profits than Waitaki. Earnings In respect of earnings, C.F.M. once again contends that the loss to Waitaki of the $840,000 to be paid to C.F.M. shareholders must be deducted from Waitaki’s profit, and that after deducting the cash payment, Waitaki would bring into the combined company 99c for each Waitaki share. “This is after revaluation of Waitaki’s investments, whereas the asset backing of

Referring to C.F.M.’s plan to build a new beef house at Pareora, Mr Cotterill says that the decision to build this slaughterhouse was made in response to the demand for such works by the farming ~ community of South Canterbury and is also based on a thorough study of the future cattle population of the area north of the Waitaki River.

“Apart from being unwieldy it would be the main board controlling the majority of C.F.M. shares and it would have absolute control over C.F.M.,” says Mr Cotterill. In stating the reasons for the recommendation, the report makes these points:—

“Your company’s investigations into the expected growth of cattle population—and the figures arrived at approximate closely those arrived at by a working party of the national development conference —indicate clearly that in the next few years ah additional beef slaughterhouse in that area is not only desirable but necessary. C.F.M. obtained from the Meat Board approval to build the slaughterhouse at Pareora. “If the take-over bid were successful and the Waitaki board, being the main board, decided to delay the building of the slaughterhouse at Pareora for the benefit of Waitaki, it is probable that a licence will be granted to a third party to build a slaughterhouse near Timaru to the detriment of any merged company.”

Directors’ Points They make the following points:—

1. The profitability and asset backing of C.F.M. are such that the contribubution C.F.M. shareholders would make to a combined company would be well in excess of the value of the shares and cash offered by Waitaki under the terms of the new take-over bid, as it was under the terms of the previous one. All the new bid does is to increase the future equity holding of C.F.M. shareholders from 54.2 per cent to 56.8 per cent of the combined capital if the two companies were to be merged. 2. The tax paid profits of C.F.M. during the last three years were $1,594,156; those of Waitaki were $1,093,802. The dividends distributed during those three years were $586,500 in the case of C.F.M., while those of Waitaki were $674,360. This means that while Waitaki distributed more than 60 per cent of its profits, C.F.M. distributed less than 40 per cent of its profits during the period. But C.F.M. applied the balance towards capital expenditure which has improved and will improve still further the efficiency and profit potential of C.F.M. Waitaki shareholders would fall heir to almost half of all this if the take-over were to succeed. 3. In his letter to C.F.M., the chairman of Waitaki emphasised that the benefits which Waitaki claims, could result only from complete integration, yet this time Waitaki makes its offer conditional upon the acceptance of only 51 per cent of the shares of C.F.M., and thereby is prepared to impose its will on a minority of 49 per cent of shareholders. An integration of operations would clearly not be possible as a substantial minority of shareholders in C.F.M. would be left who retained their shares. In such case, both companies would have to continue as separate entities not only in structure but also in operations. By making the take-over conditional on an acceptance of 51 per cent only nf C.F.M. shares, Waitaki shows clearly that, for reasons of its own, it aims for control rather than a merger. 4. If the bid should become' unconditional, the new

[Waitaki claimed last week that the new beef house would result in excess capacity in the area.]

Having Effect

“The directors considered it preferable in the long term interest of shareholders to conserve the company’s resources to improve its efficiency and future profitability. That this is having the desired effect is borne out by current results.

“The bonus issue and cash issue, together with the proposed note issue next year, should enable the company to follow a dividend policy somewhat more generous than in past years, although if a company in this industry wishes to remain efficient and profitable it has to spend substantial amounts in capital expenditure," Mr Cotterill says.

He then draws attention to the fact that under present articles of association, the voting limit in Waitaki is one vote for each 100 shares, with a maximum of five votes for each shareholder. In the event of a take-over, this would give Waitaki shareholders with a relatively large number of holders of small parcels of shares, a voting strength out of proportion to their holdings. Regarding the value of the Waitaki bid, C.F.M. says “with all due respect” that the basis of the Waitaki calculation which puts a value of 315 c on the C.F.M. shares is fallacious, as it assumes that the value of the combined company increases each time Waitaki offers more shares.

“What actually happens is that each time Waitaki increases the number of shares lit offers, the same value of the combined company has to be divided by a larger number of shares.” Deduction

C-F.M. says that on Waitaki’s own calculations the combined market value of the combined enterprise would be $11,790,798, but the cash payment and the resultant losses of earnings thereon requires a deduction of $840,000. This brings the total market value down to $10,950,798. If this total is divided by the 7,042,232 shares in the combined enterprise, Waitaki shares would have a future value of 156 c. Thus, the share and cash offer placed a total value on C.F.M. shares of 236 c.

[This was demonstrated in a calculation on the financial page last Monday.]

“If Waitaki considers that the combined company is worth more than the figures on which it based its arguments, then this can be due to only one cause, namely, that the real value of the C.F.M. shares was at all times much higher than their price quotation, before the takeover bid,” says Mr Cotterill. “This is the view of the directors on which their rejection of the offer is largely based.

“If instead of less than 40 per cent of its profits over the last three years, C F.M. had distributed more than 60 per cent of its profits, as did Waitaki, it is reasonable to assume that the market price would have been about 250 c,” the chairman says.