Orica Rejects Grant Samuel's Conclusions, and Extends Offer
21st January, 1999
Orica today expressed concerns regarding Incitec's Part B Statement containing the report prepared by Grant Samuel & Associates ("Grant Samuel"). Orica disagrees with the conclusions reached in the Grant Samuel report for the reasons set out below.
Optimistic Valuation of Fertilizers
The multiples adopted in Grant Samuel's valuation of the Incitec Fertilizer business are, by their own admission, "high by comparison with those for broadly comparable international fertilizer companies". Grant Samuel has argued for 1998 EBIT and EBITDA multiples of 38 times and 19 times respectively. These multiples are substantially in excess of the average multiples quoted in Grant Samuel's report and are not justifiable.
The 1999 EBIT and EBITDA multiples exceed the average multiples for the comparable fertilizer companies listed in the Grant Samuel report by over 66%. In Orica's view, premiums of this size are excessive.
Orica agrees with Grant Samuel's view that Incitec Fertilizer's profits are sensitive to movements in the international urea prices and that these prices are currently depressed (with Former Soviet Union prices around US$63 per tonne). However, independent fertilizer industry forecasters, including Fertecon, agree that urea prices will not recover as quickly as Grant Samuel has assumed in its report.
Optimistic Valuation of Industrial Chemicals
Grant Samuel's valuation of Industrial Chemicals appears to take into account multiples of only two other companies (Mitsubishi Gas Chemical Co and Dow Chemical Company), both of which are significantly larger than Incitec's Industrial Chemicals business with greater product and customer diversity.
Notwithstanding this, the mid-point multiples used to value Incitec's Industrial Chemicals business are 47% to 81% above the average 1998 multiples quoted in the Grant Samuel report. In Orica's view, such premiums are excessive.
In order to justify such high values, Incitec would need to achieve rates of growth in both volumes and prices which Orica considers unlikely in today's competitive markets.
Orica should not be expected to pay for something it already owns
Grant Samuel notes that the premium which is normally paid to obtain control through a takeover offer is typically in the range of 20-40%. It is not reasonable to apply a premium of this quantum as Orica already has control of Incitec through its 73.3% shareholding.
If the mid-point of Grant Samuel's range of takeover premiums (i.e. 30%) is removed, the Grant Samuel valuation falls from $6.08-$6.88 to $4.68-$5.29 per share, with a midpoint of $4.99. This is well below Orica's offer price of $5.50.
Grant Samuel has overvalued the potential cost savings
The $5-7m of additional administrative cost savings referred to in Grant Samuel's report relate to preliminary estimates of cost savings that may be generated through an Orica group-wide cost reduction program. Incitec is reliant upon Orica to achieve these cost savings. In addition, the majority of these cost savings are not expected to translate directly into additional profits but rather merely assist Incitec to remain competitive in an increasingly competitive market.
Comments by Orica Managing Director and CEO
In commenting on Incitec's Part B Statement, Orica's Managing Director and CEO Philip Weickhardt said:
"Orica has a detailed understanding of Incitec's business through both its 73% controlling interest and the long and close association between the two companies. We have a clear view regarding the value of Incitec which is not influenced by a report that contains a number of optimistic assumptions. We will not overpay for the shares which we do not currently own."
"The financial media has recently highlighted the fact that a number of independent expert valuations have significantly overvalued shares in companies under takeover relative to the final prices paid by offerors. In the four most recent successful takeovers in Australia containing expert's reports, the mid-point of the expert's valuation has been on average 26% above the successful offer price."
"We note that international urea prices have continued to fall since the date of our takeover announcement, highlighting the optimistic assumptions made by Grant Samuel in its valuation, and the attractiveness of our offer."
"It also should be noted that Incitec's forecast 1999 results contained in the Grant Samuel report are around 10% below market consensus forecasts prior to the announcement of Orica's offer. This reflects the downward pressure on profits from lower urea prices."
"Incitec shareholders should very carefully consider the price at which Incitec shares are likely to trade in the absence of Orica's offer. We remind shareholders that Incitec's weighted average share price in the three months prior to our bid announcement was $4.51, during which period international urea prices were higher than they are today. Our offer price of $5.50 is a generous 22% above that average trading price of $4.51."
"Incitec shareholders also need to be aware that trading in Incitec shares has been driven by speculation that Orica would increase its offer price. Orica expects that many investors who have bought on such speculation will seek to sell their shares if the bid lapses. This would place additional downward pressure on the Incitec share price."
"Orica reiterates its statement in its offer document that the cash offer of $5.50 is full and fair, and we encourage Incitec shareholders to accept."
Extension of Offer Period to Tuesday, 2 March
Orica also announced that it intends to extend its offer for a further three weeks to Tuesday, 2March. This extension will provide Incitec shareholders with sufficient time to consider the Part B Statement and the Grant Samuel report, together with Orica's arguments as to the reasonableness of its cash offer of $5.50.