A prospectus with some interesting features

Press, 21 January 1987, Page 29

A prospectus with some interesting features

By

JOHN HASSELDINE

The Pacific Metropolitan prospectus which was issued recently to Landmark Corporation shareholders and which will also be available from sharebrokers for their clients has some interesting features. Landmark is adopting what is becoming something of a vogue among New Zealand companies — particularly those with property interests — of floating off a new or existing subsidiary company partly or wholly by way of a rights issue to its shareholders. National Pacific’s floating off of City Realties late in 1986 was another recent example in this mode. What is particularly interesting about the Pacific. Metropolitan float is that it combines elements of.' no less than six of the main methods of raising equity capital: • Issuing new shares to the public • Issuing new shares by placement • Issuing new shares by rights issue • Issuing new shares by share exchange in merger/takeover situations • Issuing new shares by sale of assets • Issuing new shares by sale of options or deferred shares. Apart from the issue of convertible securities, (already in use by Landmark itself) this just about exhausts the possible methods for raising equity capital. The total number of shares available to be issued is 125 million, of which about 42 y 2 million have been reserved for

the Fund of New Zealand under conditional agreements for the sale and purchase of assets.

Just over 17 million and 5% million shares are being placed with Landmark and Chase Corporations respectively. Five million are reserved for the directors and secretary. These five million shares will be paid to 1 cent only — but are to be allocated at a higher premium than the public issue, with call moneys payable after five years, although call moneys can be paid in advance if desired. These shares then are very like (but not identical to) options since the ' true cost includes the present value of the “exercise price” of the balance of 74c. These shares will participate in future bonus and rights issues even when partly paid — itself a quite valuable feature.

The issue to the public consists of about million shares of 50c at a 10c premium. A small number (788,000) are reserved for unit holders of the Fund of New Zealand and 38 million plus are reserved for a one for two issue to Landmark shareholders. Five million are reserved for allocation by the directors and 10 1 /, million reserved for allocation by the organising broker and other stock exchange members on a firm basis to their clients.

So the issue is a careful blend of a variety of methods of raising capital and one which should ensure a wide spread of shareholding for the new company. The five million shares reserved for allocation by the directors will enable them to meet (in whole or in part) applications by

Landmark’s shareholders for “excess shares.” In most rights issues, shareholders may not apply for shares in excess of their pre-emptive rights. In this one they can. If shareholders grasp this opportunity with enthusiasm, a rationing process will be necessary. The feature does allow Landmark’s shareholders to apply to round up their applications, say to the nearest 100 or 1000 above. This is at the least a useful feature to avoid odd lot parcels. Those who are really bullish about the issue would tend to go somewhat further and apply for more. The pros-

pectus is optimistic in tone to say the least and Landmark’s shareholders seem likely to grasp at the opportunity to apply for excess shares. Time will tell.

The 10i/j million reserved for allocation by brokers, despite the fact that there is no public pool, is for all practical purposes an issue to the public — since sharebroker clients form the set of equity investors. It does of course bar the totally new investor — but is little the worse for that. Again the lack of a public pool is not uncommon nowadays. Wellesley adopted the same principle in 1986. The net tangible asset backing is 65c so the issue price of 60c for public subscription seems generous. However, there are one or two minor caveats.

The managing director’s statement (pl 5/16) indicates that “blue chip retail investment produces up to half as much again” (of the 6.5% yield of blue chip office blocks). Pacific Metropolitan’s stated intention is to operate precisely in this area (i.e. of retail property). The directors, who severally and jointly have a magnificent record, are no doubt right in this decision.

Valuations of the properties to be acquired are included in the prospectus. The valuations are made by three different firms of professional valuers — each reporting on specific properties. The list of material contracts (p4O/41 of the prospectus) makes it clear that the valuations substantially form the basis of the acquisition prices of the properties or

underlying shares. Not all the reports give full details of rental income although additional data is available from the full prospectus filed with the Registrar of Companies in Auckland.

The one valuation that may perhaps give rise to a few lifted eyebrows is that of the Canterbury Arcade in Queen Street, Auckland. This is valued at $15,750,000. Its gross rental is estimated to be $973,000 for the year to March 31, 1987. Details of expected net rents from this particular property are not shown in the printed prospectus. It is clear from the report that the valuation relies in part on “the cost replacement and redevelopment potential.” As the buildings were erected in 1906 to 1914, the net yield seems unlikely to approach the “half as much again” benchmark, in the short run at least. And in the longer run? Well the future may have been discounted somewhat by the valuation of its “potential.” The “potential” may involve further outlay. Investors in the former DMS Mutual Fund will recall that the Canterbury Arcade was one of that Mutual Fund’s investments. It appears to be “going the rounds.” The transfer to Pacific Metropolitan will presumably yield a decent realised profit for the vendor (Landmark). The prospectus includes photographs of numerous properties — not all of which are to be owned by Pacific Metropolitan. Admittedly this is openly acknowledged on page 1 of the prospectus. But it is not a feature that all will commend.

Despite these minor caveats, the prospects look good. The record of Landmark is splendid as evidenced on page 19 (of the prospectus). Mind you, it will be truly remarkable if the record can be duplicated from the base of 1986-87 prices. If it is, Landmark’s shareholders will be wishing that their pre-emptive share of the issue had been even higher than it is. Finally a technical point. The blending of rights issues into new floats does make the calculation of ex-rights prices of the head shares of the promoting company rather more complex to calculate. The usual formulae (available in finance texts) do not work in these situations without modification. It may not be terribly important to be able to predict the exrights price — but it is not without its implications in finance and accounting contexts. In other words, the true cost of the new investment in Pacific Metropolitan for the shareholders of Landmark may, but does not necessarily, include a dilution element in their head shares. Of course all this may be more than offset by the favourable investment opportunity aspect of Pacific Metropolitan.

All in all the issue seems likely to be rushed when it closes in late January and probably deserves to be.

John Hasseldine is a chartered accountant. He recently completed a master of cqmmerce honours degree at the University of Canterbury. He holds no shares in Landmark, though some members of his immediate family do.