Allied Farmers' pre-existing shareholders are on track to end up with a bigger slice of the company following this week's announcement the acquired Hanover loans and assets have deteriorated further.
Allied Farmers’ pre-existing shareholders are on track to end up with a bigger slice of the company following this week’s announcement the acquired Hanover loans and assets have deteriorated further.
As part of the last year’s debt for equity swap, existing Allied shareholders were issued bonus shares to provide an adjustment mechanism should the value of the acquired loans and securities be materially lower than the price paid for them.
The function of the bonus shares was explained in Grant Samuel’s independent report on the deal, which said:
“If in June 2011 Allied Farmers determines that the value of the loan assets acquired is less than $396.177 million, the shareholders of Allied Farmers prior to the transaction will receive more ordinary shares to compensate them for Allied Farmers having issued too many shares when purchasing the Hanover Group Securities.
“Such an issue is likely to lower the value of the shares held by the existing shareholders as more shares are being issued without Allied Farmers receiving anything for those shares.”
The Allied Farmers share price slid this week after the company released a valuation that showed the Hanover and United assets are now worth less than half the amount paid for in Allied shares.
The assets have slumped to $175.5 million under NZ IFRS reporting, from a gross realisation value of $396 million at the time the deal was announced last year.
How the adjustment works
Allied Farmers has provided a calculation method here for the conversion of the bonus shares, but its slightly more complicated that the formula used. Also, much depends on what value Allied ascribes to the assets.
The calculation will be made as part of the audit of Allied Farmers’ financial results for the period ended June 30, 2011.
It is expected that Allied Farmers will bring in a third party valuer to help assess the loans and assets prior to the accounts being released.
Importantly, the value attributed to the assets and loans is to be made under the same accounting standards used at the time of the December transaction.
That means NZ IFRS reporting does not apply to the value effecting the bonus shares. Most of the $220 million mark down this week was applied under the new standards.
“It’s not as if the old shareholders are going to end up with 90% of the company, but they will end up with a lot more if there’s a $200 million write down than a $20 million writedown,” said a source with intimate knowledge of the deal.
“Going in, the Allied assets were about 3-4% and the Hanover assets were about 97%. Say Hanover’s book is worth a lot less, then it might rebalance it more like 10% to 90%.
“It could be more but need to be a pretty bad outcome for it to be horrendous.”
Conversion price significant
NBR understands the conversion rate of bonus shares to ordinary shares would be at the same issue price as for the shares issued to Hanover investors on December 18 – $0.20693281 – not the then market value.
Therefore, if the share price is at 10c on June 30 2011, the shares convert at $0.206 and not at 10c. If the shares are trading at 50c, they still convert at $0.206.
It’s worth remembering that before Guinness Peat Group sold its shares ahead of the vote, the volume weighted average price of Allied shares was around 30c.
The result was that Hanover investors got a greater number of shares at the outset than what was forecast in the modelling.
