WMC Resources Ltd - Panel Concludes Proceedings

TP05/013

The Panel has concluded the combined proceedings arising from the application from Xstrata Capital Holdings Pty Ltd (Xstrata) dated 12 January 2005 (the Xstrata Application) alleging unacceptable circumstances in relation to Xstrata's takeover offer for all the shares in WMC Resources Ltd (WMC), and the application by WMC dated 14 January 2005 (the WMC Application) in relation to Xstrata's takeover offer. The Panel's previous media releases TP05/04, TP05/07, TP05/09 and TP05/10 provide further details regarding these applications.

Summary of Decision

The Panel has accepted an undertaking from WMC to release and dispatch a supplementary target's statement, in a form approved by the Panel, which addresses a concern the Panel had in relation to one of the issues raised by Xstrata in its application. The concern relates to disclosures on page 4 of WMC's target's statement dated 4 January 2005 (Target's Statement) regarding the "effective" value of Xstrata's offer and comparisons made of that "effective" value with an historical WMC share price.

Based on the undertaking provided by WMC, the Panel concluded the proceedings arising from the Xstrata Application on the basis that it was not necessary to make a declaration of unacceptable circumstances and that no order was required.

The Panel did not consider that any of the issues raised in the WMC Application constituted unacceptable circumstances, and therefore concluded the proceedings arising from that application without requiring any further action to be taken.

Xstrata Application

The Xstrata Application raised a number of concerns regarding the Target's Statement and the independent expert's report prepared by Grant Samuel & Associates Pty Ltd (Grant Samuel), which was included in the Target's Statement at Annexure A. Xstrata alleged that:

  • The front section of the Target's Statement included references to Grant Samuel's valuation of WMC and its conclusions, without an accompanying explanation of the basis on which Grant Samuel assessed the value of WMC shares. The Grant Samuel valuation includes the value of the administrative costs savings that would be available to a bidder for WMC which already has an existing presence in Australia. Xstrata submitted that the absence of such an explanation meant that the Grant Samuel valuation is misleadingly presented in the Target's Statement as a "stand-alone" valuation (meaning a valuation of 100% of WMC which does not take account of any cost savings that may be available to a bidder).
  • The Grant Samuel report does not quantify the premium for control included in its valuation and should do so.
  • Page 4 of the Target's Statement refers to an "effective" offer value of $5.85. In presenting this "effective" offer, WMC reduced the amount of what it described as Xstrata's "headline" offer of $6.35 by 50 cents, to take account of an anticipated 2004 final dividend of 20 cents per WMC share and an anticipated capital return of 30 cents per WMC share (together the distributions). The Target's Statement presented this analysis in the form of a graph. In the following paragraph, WMC compared the "effective" offer to a historic WMC trading price of $5.98. Xstrata submitted that this comparison was misleading due to the comparative trading price being too old to be relevant, and the failure to present that trading price on the same discounted basis as the "effective" offer.
  • Grant Samuel used its own commodity price and exchange rate assumptions in its valuation of WMC. The WMC directors used higher commodity price and exchange rate assumptions in preparing their 2005 earnings forecast. Grant Samuel then used the WMC directors' 2005 earnings forecast (which incorporated the higher assumptions) in an earnings multiple analysis as a validity check of its valuation of WMC. Xstrata submitted that this use of different assumptions, and the failure to disclose the differing assumptions, rendered Grant Samuel's earnings multiple analysis misleading.

WMC Application

The WMC Application raised the following concerns about a press release issued by Xstrata plc (parent company of Xstrata Capital Holdings Pty Ltd) on 4 January 2005 (Xstrata Release) regarding the Target's Statement and the Grant Samuel report:

  • The Xstrata Release contains statements regarding the assumption in Grant Samuel's valuation of "head office and Perth office annual cost savings". WMC submitted that these statements misrepresent the nature of the Grant Samuel valuation and imply that Grant Samuel's valuation methodology is unusual and inappropriate.
  • The Xstrata Release contains a "recalculation" of the low point in Grant Samuel's valuation range in an attempt to exclude the impact of the cost savings referred to in that release. WMC submitted that Xstrata's recalculation is inappropriate and irrelevant, and therefore Xstrata's reference to it is misleading.
  • The Xstrata Release compares WMC's reporting of its 2004 profit in the Target's Statement to the reporting by WMC of its 2004 profit in an announcement made on 9 December 2004. WMC submitted that in making this comparison, Xstrata claims that WMC has changed its position in relation to its 2004 profit, which claim is false and misleading.

Consideration of issues by the Panel – Xstrata Application

"Effective" offer and comparisons with historic share prices

The Panel considers that the disclosure at page 4 of the Target's Statement relating to the "effective" offer value of Xstrata's bid is misleading and constitutes unacceptable circumstances. The disclosure on page 4 of the Target's Statement is misleading for several reasons:

  • the use of the terms "'Headline' offer" and "'Effective' offer" are confusing and inappropriate and imply that the stated price of the Xstrata offer is misleading;
  • it implies that the value of Xstrata's offer is less than $6.35 per share;
  • the page is headed "Your Directors believe that Xstrata's Offer is materially inadequate" and then directs shareholders to consider the figure of $5.85 as the "effective" value of that offer;
  • the 5.85 "effective" offer value is compared to the historic trading price of WMC on one day, almost 12 months prior to the date of the Target's Statement (i.e. $5.98 on 6January 2004, which yielded the most favourable comparison for WMC). If WMC wished to compare the Xstrata offer to historic trading prices prior to announcement of the Bid, a far more relevant comparison would be to trading prices closer in time to the Bid being announced1. The Panel does not wish to be prescriptive about the choice of share price for such comparisons. A target may choose a share price on a particular day or the average price over a period of time. That target must ensure, however, that the price is relevant to the offer and the relevant date is clearly identified; and
  • the comparison between the so-called "effective" offer of $5.85 and the above share price of $5.98 is a comparison of apples with oranges; any comparison should have applied a similar discounting to the $5.98 price as that applied to derive the "effective" offer of $5.85.

The Panel acknowledges that it is common, and indeed often essential, for bidders and target companies to explain the treatment of distributions under a takeover offer in their respective disclosure documents. However, the disclosure at page 4 has the capacity to mislead, rather than ensure that shareholders are properly informed. If WMC wished to clarify this issue, it could have drawn attention to the relevant clauses from Xstrata's offer and advised shareholders that they will not receive both the $6.35 offered under Xstrata's offer and the anticipated distributions (i.e. they would not receive a total amount of $6.85).

The Panel considers that comparing the Xstrata bid price with a WMC share price (in this case $5.98) which is close to twelve months old, when used in isolation and with no proximate explanation in the Target's Statement as to why it is now relevant, is unlikely to be useful to WMC shareholders. While WMC did clearly state that the figure was the highest WMC share price over the previous twelve month period, there is no clear or explained basis for using such an old figure in isolation, other than it being the highest price in that period. There is also no indication of the actual date of the market price used. The Panel considers the use of such an old price in isolation will normally run a severe risk of constituting unacceptable circumstances.

The Panel considers that the effect of the graph and following paragraph on page 4 is sufficiently misleading to require corrective disclosure directing shareholders to disregard that information on page 4 and provide replacement information which is limited to that required to properly explain the treatment of distributions under the terms of Xstrata's offer.

However, the Panel considers that the disclosure on page 4, when taken either separately or together with the disclosure on page 5, does not invite a direct comparison of the $5.85 figure with the Grant Samuel valuation. The Panel notes that page 5 reverts to the use of the $6.35 figure when comparing Xstrata's offer to the Grant Samuel valuation. Therefore the Panel does not require any adjustment to the presentation of the Grant Samuel valuation.

Presentation of Grant Samuel valuation

The Panel does not consider that the references to the Grant Samuel report and the Grant Samuel valuation in the front section of the Target's Statement are misleading. The Panel considers that it may have been clearer, and better practice, when making references to the Grant Samuel valuation in the front section of the Target's Statement, for WMC to give a clear and proximate reference to the very useful summary of the Grant Samuel report (set out in Grant Samuel's letter to WMC dated 22 December 2004), which clearly explains that the Grant Samuel valuation was commissioned in the context of a takeover offer by a bidder with an Australian presence, and that synergies and cost savings available to such a bidder had been taken into account in that valuation.

However, the references to the Grant Samuel report which are the subject of complaint in the Xstrata Application are limited to repetitions of either or both of Grant Samuel's conclusion (i.e. that the offer is neither fair nor reasonable) and its valuation (between $7.17 and $8.24 per share). These are statements of fact in relation to the Grant Samuel report, and are not misleading. Page 5 of the Target's Statement informs WMC shareholders that a complete copy of the Grant Samuel report is contained in Annexure A.

The Panel does not accept Xstrata's submission that the Grant Samuel valuation is presented, either in the front section of the Target's Statement or otherwise, as a "stand-alone" valuation.

Xstrata said that its current Application was not on the basis that the Grant Samuel valuation was inappropriate, and that the method used by Grant Samuel was unusual. Rather the complaint that it was making in the Xstrata Application was in relation to the presentation of the valuation.

It is difficult to see why WMC shareholders would have formed the impression that the Grant Samuel valuation being presented to them was a "stand-alone" valuation. Indeed, it would seem more likely for shareholders to expect the Grant Samuel valuation to be exactly as it is, given the purpose of the report was to advise WMC shareholders whether or not the Xstrata offer was fair and reasonable.

The Panel considers that the limited reproduction of Grant Samuel's conclusions and valuation in the front section of the Target's Statement was not sufficiently detailed to give a shareholder any real impression one way or the other regarding the methodology used by Grant Samuel. Any shareholder who was uncertain about the methodology used by Grant Samuel would be able to turn to the appropriate disclosure, namely the Grant Samuel report and the useful executive summary.

The Panel does not accept Xstrata's submission that a "stand-alone" valuation is information reasonably required to make an informed assessment whether to accept Xstrata's offer. Such a valuation may have been relevant if the report had been commissioned in the context of a takeover offer by a bidder who was not able to access the potential cost savings and synergies; but that was not the case in relation to the Xstrata offer. The Panel notes that Xstrata has made its own calculation of the value attributable to cost savings and synergies mentioned in the Grant Samuel Report, which it has publicised in part through the Xstrata Release of 4 January.

The Panel notes that information regarding the possible trading value of a WMC share, in the event that the Xstrata bid fails and no other bid is made, may be relevant to a WMC shareholder's investment decision. The Panel notes that both the Target's Statement (at page 20) and the Grant Samuel report (at pages 85 and 86) contain some discussion of trading value, without providing a specific indication of expected trading values in the absence of the Xstrata bid or any other.

Premium for control

The Panel accepts Grant Samuel's submission that it has not added any separate amount of value for premium for control to its valuation. The reference to "premium for control" in the final paragraph on page 51 of its report clearly states that because the valuation is an estimate of full underlying value, it inherently incorporates any premium for control, so that there is no basis for adding a further premium for control on top of Grant Samuel's estimated value. This is in contrast to valuations where a premium for control is added to a base figure relating to a trading multiple to arrive at the value.

In the context of the valuation methodology used by Grant Samuel, the Panel considers the discussion of premium for control in the body of its report appropriate (however, a suitable reference in the summary would have been useful to WMC shareholders).

Commodity Price and Exchange Rate Assumptions

Xstrata objected to Grant Samuel using earnings multiples based on the WMC directors' forecasts in checking the validity of its valuation. Grant Samuel submitted to the Panel that it had calculated earnings multiples for WMC based on the WMC directors' earnings forecasts for 2005 to use as a cross check of its own valuation. It compared them to the earnings multiples of comparable mining companies, which were calculated using the earnings forecasts of market analysts. The commodity prices and exchange rate assumptions in the WMC directors' forecasts are different from the assumptions used by Grant Samuel in its discounted cash flow valuation of WMC. Grant Samuel submitted that the assumptions used in the WMC directors' forecast were consistent with assumptions used by market analysts in forecasting earnings of comparable companies. On that basis, Grant Samuel submitted that it was valid to compare the earnings multiples derived from the WMC directors' forecasts with the multiples which independent analysts had derived.

Xstrata argued that the assumptions used in the WMC directors' forecast were not consistent with those used by market analysts and that the assumptions chosen by the WMC directors gave the impression that Grant Samuel's valuation was more conservative than it in fact was. Xstrata provided a table of analysts' assumptions to support this submission. The Panel considered that this table indicated that the assumptions used by both WMC and Grant Samuel fell within a broad range of assumptions that had been adopted by analysts.

On balance, the Panel does not consider that the assumptions in Grant Samuel's earnings multiple cross check are misleading. The Panel noted that in its report, Grant Samuel cautioned readers about the earnings multiple comparisons.

If Xstrata remains of the view that it would be useful for shareholders to have a multiple analysis of Grant Samuel's valuation using different assumptions, then it remains open to Xstrata to publish its own analysis, provided that the basis of the analysis is properly explained and that it is not done in a misleading manner.

Consideration of issues by the Panel – WMC Application

Criticism of Grant Samuel valuation and recalculation without synergies

As indicated above, the Panel does not accept Xstrata's submission that the "stand-alone" value of WMC is "crucial" information required by a WMC shareholder to make the investment decision described in section 638(1) of the Corporations Act in relation to Xstrata's offer.

However, the Panel does not consider that it follows from this in any way that presenting WMC shareholders with a value for WMC which does not take account of the synergies and cost savings incorporated in the Grant Samuel valuation is, of itself, misleading. The Xstrata Release makes it clear that the value it has calculated and alluded to does not take account of those cost savings and synergies identified in the Grant Samuel report. The Panel notes that neither WMC's nor Grant Samuel's submissions contained any compelling evidence that Xstrata's representation of this "stand-alone" value was inaccurate, due to miscalculation or otherwise.

If WMC is concerned that WMC shareholders may misapply the "stand-alone" valuation contained in the Xstrata Release, it is open to WMC to reiterate and publicly explain its view that such a valuation is not relevant to WMC shareholders in assessing Xstrata's offer.

2004 Profit Forecast

The Panel considers that the figures regarding WMC's 2004 profit reporting set out in the Xstrata Release are consistent with the primary information set out in the Target's Statement. On that basis, the Panel does not consider that the statements in the Xstrata Release are likely to mislead WMC shareholders. The Panel also considers that the reporting regarding 2004 profit in the Target's Statement is essentially consistent with the earlier announcement by WMC on 9 December 2004.

However, the Panel notes that the use of phrases such as "contains some surprises" and "is now only" in the Xstrata Release unhelpfully infer that there has been some change in WMC's financial position since the 9 December announcement or that WMC withheld information from the market and shareholders in its 9 December announcement. The Panel does not consider either inference valid. It considers that any potential confusion is alleviated by a review of the primary information in the Target's Statement or the 9 December announcement– the Xstrata Release in fact brings this section of the Target's Statement to WMC shareholders' attention. To the extent that WMC considers that any confusion may persist, it remains open to WMC to explain the relation of its 9 December 2004 announcement to the subsequent disclosure in the Target's Statement.

The Panel also notes that WMC's 9 December press release prominently disclosed an upgrade of 2004 earnings outlook to $1.3 billion. Although it also disclosed the one-off items included in the announced figure it did not disclose the normalised earnings figure, which could only be calculated from the information in the release by making a number of assumptions. It may have been more useful to WMC shareholders for WMC to have also clearly disclosed the normalised figure at the time it announced the gross earnings figure.

Decision and supplementary target's statement

On 25 January 2005, the Panel wrote to parties advising them of its view in relation to the above issues and stating that it was minded to make a declaration of unacceptable circumstances and final orders to remedy the unacceptable circumstances it had identified in relation to the "effective offer" statements in the Target's Statement.

However, the Panel advised that it was prepared to accept a suitable undertaking by WMC to correct the Target's Statement. The Panel was prepared to accept corrective disclosure, in the form of a supplementary target's statement, which:

  • advises WMC shareholders that the information provided on the existing page 4 of the Target's Statement may have a misleading effect, and should be disregarded;
  • explains the proposed treatment of distributions under Xstrata's takeover offer, without using either a graphical representation of the proposed distributions or terms such as "effective" or "headline" offer;
  • does not undertake any comparative analysis using historical share price information; and
  • is released to ASX as soon as possible after the Panel has approved its form and is sent to WMC shareholders either with WMC's next dispatch of communications, or no later than two weeks prior to the closing date of Xstrata's offer (whichever is earlier).

The Panel considers it important that the corrective disclosure be sent to WMC shareholders (in addition to being announced) within sufficient time for them to make a decision whether to accept Xstrata's offer, because the misleading material which is required to be corrected is already in the physical possession of those shareholders.

WMC offered to give an undertaking which met the Panel's requirements, and to prepare a draft supplementary target's statement for the Panel's review. Based on the undertaking given by WMC, the Panel concluded its proceedings in relation to both applications on the basis that it was not in the public interest to make a declaration of unacceptable circumstances.

The Panel will publish its reasons for its decision in these proceedings on its website in due course.

The sitting Panel comprised Nerolie Withnall (sitting President), David Gonski and Simon Withers.

Nigel Morris
Director,
Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501

1 The Panel notes that the Grant Samuel report refers to a share price of $5.13 immediately prior to announcement, and a weighted average share price of $5.06 for the three months preceding the announcement.

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