Brierley Hong Kong arm shows wav in tenders

Press, 27 May 1985, Page 26

Brierley Hong Kong arm shows wav in tenders

By Stuart Foster, of Christchurch, national technical manager of Arthur Young, chartered accountants, and Roy Hasseldine, senior lecturer in accounting, University of Canterbury.

Industrial Equity Pacific, the Hong Kong company to be used by Ron Brierley for world-wide expansion, is offering an attractive and innovative package. It contains four exciting elements. First, the track record of the Brierley organisation. Second, the opportunity to invest offshore. Third, the opportunity to participate in an investment company (these are very much the in thing in New Zealand). Fourth, the issue introduces New Zealanders to the tender-offer method. There is much evidence that these four factors will attract investors to the issue. lEP, by opting for the tender offer method for raising new capital, is following a well-proven method, and one which was used by the owners in Reuters Holdings PLC in 1984. The New Zealand Government has for some time used the tender method for marketing public-sector debt securities. However, no New Zealand company has so far taken the plunge. It is not surprising that Brierley, as a market leader, is the first to introduce New Zealanders to this feature. It is a matter for speculation how long before a New Zealand-based company follows Brierley. lEP is offering for tender 19M ordinary shares, which will raise the issued number of shares from 81M to 100 M. The shares will be offered by tender in blocks and multiples of 1000. Applications close on Thursday. Intending investors should note that final instalments are due no later than Thursday, June 13. Applicants have the option of choosing between two strategies. First, they could specify the number of shares and the price they are prepared to tender. If this strategy is selected and the striking price is above their tender price, then the applicant receives nothing. If their tender price exceeds the striking price, then only the striking price is available. Therefore, pitching your tender price at the correct level is a critical decision. The second strategy is to tender at the striking price, and not specify an exact price. In effect, investors are opting out of the tendering process, and becoming price takers. This method does not necessarily ensure a full allocation of shares tendered for. This is because the prospectus indicates those selecting the

first strategy of stating a firm tender price above the striking price, will be allocated in full and in priority to those selecting the second strategy. After satisfying the successful applicants selecting the first strategy, a pool of shares will be available for striking-price applicants. Investors should note this allocation procedure gives rise to potential risks. By submitting a firm tender price, the investor runs the risk of tendering too low and competely missing out. However, he or she has the advantage that if the tender price is above the striking price, a full allocation of shares tendered will be received. Although they will not know the exact amount of their commitment until the striking price is announced these tenderers do know their upper limit of their potential investment in Hong Kong dollars. Those selecting the second strategy do not know the upper limit of their commitment. Using the second strategy and tendering at the striking price, contains the risk of having to accept a striking price which is high. Also there is the risk of receiving a scaled down allocation, or at worst, none at all, if sufficient numbers are tendered for under the first strategy. Possibly, however, the directors will reserve a pool of shares for allocation to those selecting the second strategy, as the prospectus indicates they have considerable flexibility. Paradoxically, the only way to ensure full allocation in this issue, at not to tender at the striking price,

but rather to use the first strategy and tender at a high-enough price. This is reinforced by the fact that in allocating the pool of shares for strikingprice applicants, priority will be given to Hong Kong residents. This contrasts with many tendering schemes, where the strikingprice applications are targeted to small investors who are virtually guaranteed an allocation. The prospectus indicates the current share price has been ?HK23, during May which indicates the issue will raise approximately SHK3BOM (?NZ110M) assuming a striking price in the region of ?HK2O which some commentators consider likely. This indicates that the issue is large, even by world standards. The prospectus indicates shareholders’ funds, including the recent rights issue, but excluding profits earned since last balance dates, are SHK22S. The asset backing excluding any revaluation effects is just SHK2.7B. However, assuming SHK3BOM is raised by the issue, the asset backing increases to ?HK6.05, still without taking an allowance for revaluation effects. This issue creates a range of investment options. Not only can investors tender for shares adopting either strategy, but they can also purchase shares directly on the Hong Kong Stock Exchange. These strategies are clearly for the more adventurous investors. Or, investors could purchase shares in lEL, the listed Brierley Australian company, which will effectively control lEP through its subsidiary Wilbur Limited. This strategy is

available to those who miss out on the tender, and still gives an offshore investment. Finally, a strategy is to buy shares of Brierley Investments, Ltd, which has a controlling interest in lEL. In choosing one’s -s. strategy, investors should remember the volatility of..> the Hong Kong market. This -- is compounded by the low ... volumes of lEP shares traded in the past, which ': makes tendering in situation more difficult. However, lEP has intro-in-duced an innovative marketing package to the New ~<• Zealand investor. Only time will tell how successful its.:.will be. ■•.»>