Cooper's hostile takeover - update.

Lion bid tests Coopers' eccentric brew
By Stephen Bartholomeusz
September 13, 2005


One of the more curious takeover contests is playing out in South Australia, where a $352 million hostile bid by Lion Nathan for the family-controlled unlisted public company Coopers Brewery could result in acceptors receiving substantially less than the $260-a-share bid price.
The outcome appears to have bemused some observers, who see it as a gross failure of corporate governance and view the behaviour of the Coopers' board, which is opposed to the takeover, as denying shareholders the opportunity to receive a generous price for their shares. Coopers is, however, no ordinary company and this is no conventional bid.
Coopers has an unusual constitution and capital and voting structure. It has four classes of shares with effectively differential voting rights. The A-class shareholders have a right to appoint two directors, as do B-class shareholders. D-class shareholders can appoint one director. C-class shareholders, who hold more than 91 per cent of the shares, get to vote (alongside the other classes of shareholders) on directors' appointments only if all existing directors support a nomination.
It isn't just the voting rights that are different. Coopers' articles provide that any shareholder who wants to sell their shares has to give the company notice of their intent and the price at which they propose to sell the shares. The board of Coopers has the right to find an existing shareholder, or a relative of a shareholder, willing to buy the shares. The buyer has the option of asking that company's auditor, now KPMG, to fix the transfer price at "fair value".
If Coopers can't find an eligible buyer, the shares must be offered to AMP, as trustee for the Coopers superannuation fund. If it declines, then Lion Nathan, under a deal with the company struck a decade ago, is entitled to buy the shares.
Or at least it was. This month, the South Australia Supreme Court, in a judgement Lion Nathan is appealing, held in favour of an application by Coopers to remove Lion Nathan's pre-emptive rights on the basis that control of Lion Nathan changed in 1998 when Japanese brewer Kirin took a 45 per cent stake, triggering provisions in the agreement.
The eccentric provisions of Coopers' constitution are obviously defensive and designed to protect the Cooper family's control of the company. It is within the family's rights, given Coopers is unlisted, to have such a structure and, given the provisions are within the company's constitution, the board is obliged to observe them.
The defensive mechanisms do, however, have some consequences that in a listed environment would be regarded as unpalatable. They reduce liquidity and the prices shareholders can get for their shares by limiting the pool of potential buyers and because "fair value" in determining the sale price removes any strategic value for the shares.
The fair value approach will inevitably incorporate a discount for the limited liquidity, negotiability and absence of any potential control premium. That inevitably means the buyers are advantaged relative to the sellers.
Coopers has commissioned a valuation from KPMG to respond to the desire of a shareholder to sell to Lion Nathan. It is unlikely to produce a price of close to the $260-a-share bid, although Coopers' stellar performance in recent years means it will probably be multiples of the $45.01 a share at which KPMG last valued the shares in June 2003.
Nevertheless, any exercise of the first two rounds of pre-emptive rights will transfer value to either continuing family shareholders or the super fund.
Lion Nathan has tried to crash through the defensive screens around Coopers by offering a demonstrably generous (some analysts say too generous) price. It would be possible, with the approval of 75 per cent of shareholders voting, to alter the constitution and allow the Lion Nathan bid to be put to shareholders.
The core family groups have, however, made it clear that they have no intention of putting the company into play or doing anything other than resist Lion Nathan's bid.
Should the bid flush out masses of potential sellers, the defences - or, rather, the family's financial capacity - will be tested.
The company is apparently virtually debt-free and experiencing spectacular growth, so it is possible its balance sheet and cash flows could be tapped, directly or indirectly, to help take loose shares out of circulation. More likely, the family could borrow against the shares acquired - there is said to have been no shortage of financiers at their doors.
Coopers' board has commissioned a second valuation, from Grant Samuel, for its response to the Lion Nathan bid.
That valuation, presumably a conventional independent expert's report, may well put a price tag on the group above the Lion Nathan offer. That could complicate the board's efforts to convince aspiring sellers that the KPMG valuation does reflect fair value.
If it doesn't, or if Lion Nathan were subsequently to raise its offer to the level of value Grant Samuel places on the business, the confusion over Coopers' governance would get even more muddled and contentious.
The company's constitution effectively protects it from takeover regardless of price.
The directors, however, won't want to have to say that the company isn't for sale at any price, no matter how fair or full.