Fair, Reasonable … and Proven Incorrect

In a far corner of the Australian stock exchange, a little drama has been playing out over the last six months. Away from the headlines, it has demonstrated how easily money can be made or lost, the opportunism of watchful predators, and the falsity of expert reports.

Vital Harvest Trust is a listed agricultural real estate investment trust that owns the largest aggregation of citrus orchards and berry farms in Australia. The fruit acreage, spread across New South Wales, South Australia and Tasmania is leased to the Costa Group, one of Australia’s largest food wholesalers. From its listing in 2018, the VTH price had never risen above $1, and as a result of the drought and then bushfire damage had languished below 80 cents. We bought units at 77 cents, hoping for nothing more spectacular than a return to profitability after disastrous seasons. But last November, the depressed price attracted the eagle eyes in Macquarie Bank’s Infrastructure and Real Assets section. It offered $1 a unit, or a mere $300 million for the business.

Following proper procedure, the trustee commissioned an in dependent expert report on the offer as part of the booklet explaining the offer to unitholders. That report, by the Grant Thornton accountancy firm observed that the $1 represented a 13 per cent premium on the net tangible asset value of VFT as at last June. It also observed that there had been no alternative proposal, and importantly, that there was limited ability of potential alternative transactions to emerge. Grant Thornton valued VFT at between 97 cents and $1.11. It certified that both the trust scheme and the asset sale were fair and reasonable and hence in the best interests of unitholders.

How wrong that was! First, the Macquarie bidder was obliged by public pressure to promise that the December interim dividend of 2.5 cents would be paid after all. Then a bidding war began with a surprise challenge from a private equity company, Roc, which could see that Macquarie was getting off with the fruit cheaply.

In an auction over the last three months, Roc has made five bids, matched each time by Macquarie, exercising its right to respond within five days. Half way through this process, the trustee issued another scheme booklet, and Grant Thornton had to wipe some of the egg off its face. This time it declined to issue a range of values. It still declared the then-price of $1.08 fair and reasonable and therefore in the best interests of unitholders, but this time “ in the absence of a superior proposal emerging.” Amazingly, the price had another 16 cents to run and seems to have now valued VTH correctly at $1.24.

If that settles as the final price, it represents a 37 per cent premium to the market price when Macquarie first lodged its bid, proving just how bold the raid was. Too infrequently, there are no competing bids when asset raiders move to snap up bargains, and shareholders fail to get full value. But the market works precisely because outsiders (and foreigners) often have a better sense of value than the owners.

A more important issue is how much value independent reports are really worth, supporting bids. Like most consultants’ opinions, they strike me as apt to say what’s wanted to be said, supported by appropriate accountancy mumbo-jumbo. While “fair and reasonable” may be justifiable conclusions, these reports should not be allowed to declare an offer “in the best interests of the shareholders.”

  • DG

    Just after the AMP de-mutualised (which is like an army ‘unattacking’) they proudly advised, with sage tones, that shares were worth over $20, so snap up some more quick.
    I was dubious.
    My dubiosity has paid off.

  • Harry Lee

    The various systems that are used to determine value -that is, what is actually important- are subject to severe errors? That’s true all over, innit?
    Financial system. Legal/criminal justice system. Education systems.
    Immigration and refugee systems. Electoral system. Public service systems.
    And whatever system it is that the ABC, SBS and 90% of the commercial news/opinion media use to determine what is important.
    All kaput.
    How can any system that determines “value” work well -when “what is important?” has been illogically/maliciously demonised as a misogynist/racist/supremacist question that heterosexual white male tyrants used to oppress The Rest.
    Idiotic and evil, but that’s where things stand.
    In a social order that is so debased, and falling apart, of course, people who know money will scoop up money in any way they can and re-deploy that money in any way that enhances their material wealth and personal security.

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