Metlifecare Ltd set the date yesterday for a virtual special shareholders’ meeting aimed at confirming the board’s intention to continue litigation to compel Swedish funds manager EQT to complete its buyout of the NZX-listed company.
It also released KordaMentha’s independent advisor’s report, prepared for the meeting.
The meeting has been set down for Friday 10 July at 11am. The resolution requires a 75% vote in favour to be carried.
Metlifecare’s share price rose from $4.34 on Friday to $4.62 on Monday, still well short of the $7/share EQT agreed to pay under the scheme implementation agreement entered into on 29 December.
However, Metlifecare the updated independent advisor’s report released yesterday showed a current share value range of $5.80-6.90, and a valuation range of $5.79-7.23 using the discounted cashflow method.
Metlifecare’s buyout agreement was with Asia Pacific Village Group Ltd, owned by Luxembourg fund EQT Infrastructure IV & managed by Swedish funds manager EQT Fund Management Sàrl.
The $7/share offer put a value of $1.493 billion on Metlifecare. On 8 April, the day after EQT announced it was pulling out, the on-market price got down to $3.16. At that price, Metlifecare’s value fell to $674 million.
In a High Court decision on 2 June, Justice Graham Lang said: “On 28 April, Asia Pacific served Metlifecare with a notice terminating the scheme implementation agreement. Asia Pacific relied on 2 grounds to terminate the agreement. First, it alleged that the emergence & spread of the Covid-19 virus in New Zealand constituted a material adverse change under the agreement because it had reduced, or was reasonably likely to reduce, Metlifecare’s consolidated net tangible assets & underlying net profit. Secondly, it alleged several acts by Metlifecare constituted prescribed occurrences under the agreement.”
Justice Lang turned down Metlifecare’s application for orders requiring Asia Pacific to proceed with the agreement, saying he couldn’t be satisfied an arrangement remained in existence to which the orders could apply.
At next month’s shareholder meeting, therefore, Metlifecare won’t be asking shareholders to vote on the scheme plan, but will seek shareholders’ endorsement to continue litigation on their behalf challenging the validity of the notice to terminate.
Among key issues KordaMentha mentions in its report:
- Metlifecare forecasts that its underlying earnings (unlevered) will be $96.2 million in the June 2020 financial year, which is broadly consistent with its earnings in the prior financial year. The earnings forecast includes negative impacts from the lockdown restrictions, partly offset by the Government’s wage subsidy programme & cost savings that Metlifecare has achieved while the lockdown was in place. Longer term, Metlifecare’s financial performance is highly dependent on growth in house prices in Auckland & Tauranga, as well as the performance of its development activities. It is currently unclear whether Covid-19 will have a long-term impact on the prices & demand for retirement village units
- Unlike many of the listed retirement village operators, Metlifecare earns a relatively low proportion of its underlying profit from development activities. Metlifecare plans to increase its development activities, which could improve its profitability. However, when compared to some other listed operators, it has relatively less recent experience at undertaking developments, has less development land and is targeting a lower growth rate in units relative to the size of its existing portfolio. Metlifecare having less exposure to development activities may be an advantage during a recession, as its earnings are likely to be more resilient, due to a lower reliance on development profits.
The role (or not) of revaluations
Revaluations play a major role in listed property company profit, customarily highlighted when they rise and used as an excuse when they fall.
Metlifecare recorded $132.7 million in revaluation gains in 2018, falling to $53.9 million in 2019. But KordaMentha hasn’t provided a forecast for revaluations for the year about to end, giving this reasoning: “The majority of Metlifecare’s underlying profit comes from the fair value movements on its properties. We have presented the financials [in table 5.1] based on realised gains from the sale of units. In comparison, Metlifecare’s statutory accounts show profits based on the accrued change in the value of units each year.”
It’s reasonable to assume Metlifecare’s valuations would have taken a hit through the Covid-19 lockdown period, as happened to companies reporting on earnings periods that ended in March, but also reasonable to assume that post-lockdown valuations to be written in July might be more positive.
While KordaMentha has understandably valued the business on actuals, the revaluations feed into actual performance through things like debt ratios & the after-tax profit, which support share prices.
Revaluations also feed into the perceptions on which investors will base share prices.
3 June 2020: Metlifecare gets nowhere in court, will call shareholder meeting on canned buyout
21 May 2020: Metlifecare names 5 big shareholders supporting buyout court action, 2 others get on with trading
8 May 2020: Metlifecare gets court timetable to consider EQT withdrawal from takeover
29 April 2020: Swedish fund gives notice of complete exit from Metlifecare as NZ company repeats “you can’t” bluster
8 April 2020: Metlifecare buyer sends pullout notice, Metlifecare says it can’t
25 March 2020: Metlifecare moves buyout scheme forward though market price way below offer
18 March 2020: Metlifecare clarifies takeover status
26 February 2020: Metlifecare performance modestly “solid” as it heads towards takeover
20 December 2019: Metlifecare attracts more takeover interest as board puts value well above first offer
26 November 2019: Metlifecare appoints offer advisor, sees share price rise 20% in 3 weeks
20 November 2019: Metlifecare gets buyout offer, suspends share buyback
28 August 2019: Lower revaluations slash Metlifecare profit
Attribution: Company release, KordaMentha report, High Court decision.