MacarthurCook wants to activate its poison pill

PROPERTY funds manager MacarthurCook is holding a gun to the heads of its shareholders. It has been forced to admit that it could be in financial difficulties if they do not ratify the defensive poison pill share placement to IOOF Holdings, which the board made to head off a potential takeover bid from AMP Capital.

Moreover, its problems are self-inflicted. Its debt blowout is due to MacarthurCook acquiring units in two of the funds that it manages, MacarthurCook Industrial Property Fund (MIFS) and MacarthurCook Property Securities Fund (MPS).

The purchases were largely funded with short-term borrowings as MacarthurCook intended to sell the securities, but a plunging share market has left the company unable to sell at a price the board views as in the best interest of shareholders. In other words, the company would be forced to incur significant losses.

MacarthurCook admits that if shareholders do not ratify the placement it no longer has sufficient cash to repay IOOF. Presumably the funds have already been used to pay down debt.

Moreover, it concedes that it would be “extremely difficult” to raise additional debt on commercially acceptable terms, and is unlikely to be able to raise equity on as favourable terms as the placement. And if it were forced into asset sales they would probably be at well below fair value. If MacarthurCook were forced to repay IOOF it would have a significant adverse impact on the company’s financial position.

Macarthur says that on a worst case scenario it may be unable to raise the funding to repay IOOF, which would have an even bigger adverse impact: indeed, it would raise solvency questions.

Perhaps that is why MacarthurCook director Nick Basile urges shareholders to ratify the placement, but vote against other aspects of an alliance including the poison pill. Its terms are that for two years IOOF can only dispose of its shareholding if there is a takeover bid or scheme of arrangement that is recommended by the MacarthurCook board, or a third party acquires more than 50 per cent (which would be unlikely in the absence of a board recommendation).

Basile is also MD of Ascalon Partners (jointly owned by funds manager Sam Kaplan and St George Bank), which earlier had entered into a pre-bid agreement with AMP Capital to accept for its 18.37 per cent holding if AMP proceeded with a cash bid for MacarthurCook at $1.35 a share.

When AMP Capital’s interest in a bid was disclosed in June, MacarthurCook’s share price was 80c, so the proposal represented a whopping premium of 69 per cent.

MacarthurCook shares jumped to $1.25, and it promptly raised $3.9675 million by placing 3.45 million shares with IOOF at $1.15, giving IOOF a 13 per cent stake.

AMP Capital obtained a ruling from ASX that the placement breached the listing rules because it lacked shareholder approval. ASX left a remedy to MacarthurCook, so AMP Capital went to the Takeovers Panel which made a declaration of unacceptable conduct and ordered MacarthurCook to obtain shareholder approval by September 1 or cancel the placement and repay IOOF.

MacarthurCook portrays the placement as part of an alliance with IOOF to jointly develop and market retail direct property and mortgage products. MacarthurCook would become the preferred direct property and marketing manager of the IOOF group.

The MacarthurCook Mortgage Fund would carry the IOOF prefix and IOOF would take over marketing and distribution.

Basile’s recommendation to ratify the placement is subject to no superior equity funding proposal emerging, and he says any such proposal should be “seriously considered and pursued”.

In the absence of a superior equity funding alternative, Ascalon will vote in favour of the placement but oppose implementation of the strategic alliance and the poison pill (euphemistically described by MacarthurCook as the “IOOF undertaking”).

The five directors who back all the proposals say IOOF’s agreement not to sell its stake does not bar AMP Capital from making a bid because it involves only 13 per cent of the capital. They omit to say that the directors speak for 13 per cent, which would mean they would have their foot on more than 25 per cent. That could well be a disincentive to AMP Capital or any other potential bidder.

Other big holders include Acorn Capital (12pc) and Wilson HTM (9pc) and it would surprise if they reduced bid prospects by backing the poison pill.

The shareholder meeting is on August 27. If AMP Capital is still interested it could turn the heat up on the MacarthurCook board were it prepared to state that, provided it was allowed to undertake due diligence which proved satisfactory, it would be prepared to do the placement at $1.35 a share and to make a bid at that price, subject to a board recommendation (in the absence of a superior proposal).

It would be difficult for the board to reject such a proposal as it would give the company a further $690,000 for debt reduction. Admittedly, it would not have the claimed benefits of the strategic alliance with IOOF, but it is very likely shareholders will in any case vote down the alliance, because it would reduce the prospects of a bid.

MacarthurCook claims that since its 2007 annual report its strategy has been to broaden the distribution of its products and increase funds under management by leveraging off the capabilities of “a larger organisation”, and to reduce its debt.

The annual report did say MacarthurCook planned to transfer the responsible entity role of its Diversified Property Income Fund and its Mortgage fund (which is not proposed in the IOOF alliance). The first reference this commentator can find to the need to cut rising debt was in February, in its half-yearly result. That showed debt had ballooned from $3.2 million to $10.2million at a time when, according to MacarthurCook, it was seeking to reduce debt and gearing.

The debt included short-term advances of $6.36 million and core amortising debt of $2.98 million. The company spent $5 million in picking up part of the shortfall to a rights issue by the Property Securities Fund and $3.9 million in acquiring units in the Industrial Property Fund when it listed last year.

The half-yearly accounts showed MacarthurCook valued the investments in its listed offshoots at $16.46 million, based on a “fair value” of 88c for units in the Property Securities Fund, 90c and 94c for units in the Industrial Property Fund and 62c for units in the Singapore-based Industrial REIT. On present market prices they would have a value of only $9.5 million. MacarthurCook says its core debt facility is due for renewal on December 31 and requires the debt to be reduced to $2.5 million by June 30 and $2.25million by September. The overdraft has to be reduced to $2.5million by June 30 and $2million by September 30, while a $4.3 million short-term advance is due for renewal on July 17.

The company releases its annual results in mid-September and it would be helpful to MacarthurCook holders were the release to be brought forward to before the meeting, or were they at least to be given a forecast and an up to date picture of the outstanding debt to enable an informed vote.

The signs of stress have been apparent for those investors prepared to pore over the details — and some clearly did, as MacarthurCook’s share price has plunged from $4 since last August, and is now back to 80c, reflecting uncertainty as to whether AMP Capital will bid.

Source : The Australian Business