Millennium & Copthorne shareholders have received two huge documents in recent days outlining their options under the First Sponsor Group IPO in Singapore. One is a 677-page prospectus, the other an 87-page scheme of arrangement booklet.

By contrast it is extremely difficult to obtain a timely prospectus from the wave of IPOs occurring in New Zealand. We have company site visits, non-deal management presentations, pathfinder documents but the registered prospectus is usually not available until after most of the management pitches have been completed. Many of the domestic IPOs give the impression that they are being rushed.

Millennium & Copthorne’s First Sponsor IPO offers far more information than our IPOs but that doesn’t mean that First Sponsor will perform any better than the New Zealand IPOs post listing.

Millennium & Copthorne’s roller-coaster ride began in 1985 when Euro-National, which was controlled by Rod Petricevic, listed through a reverse takeover of David Phillips’ Pacer Corporation.

The company’s share price surged from $1.90 to $8.20 in 1986 with one publication describing it as “an Auckland-based merchant bank possessing one of the best ‘brains trusts’ in New Zealand”.

Petricevic was later jailed for his role in the Bridgecorp collapse.

Euro-National’s share price tumbled to just 8c after the 1987 sharemarket crash because of its disastrous entanglement with Judge Corporation, Renouf Corporation and Kupe. Kupe, which subsequently changed its name to CDL Investments, was 47.5 per cent owned by Euro-National.

In the early 1990s Euro-National managed to extract cash of $32 million from the deconsolidation of the Judge/Renouf/Kupe consortium. This cash pile became particularly attractive in the post-1987 crash period and two new Euro-National controlling parties tried to extract this money through devious means.

The first was a proposal to purchase a $21.1 million option to invest in a proposed IPO on the Indonesian Stock Exchange. The $21.1 million was apprehended in Kuala Lumpur hours before it was due to be transferred to Jakarta. The Indonesian company never listed.

The second was a substantial investment in Eurobonds through a Hong Kong broker at a 30 per cent premium to the market price. The company suffered large losses from these investments although a large number of overseas owned Euro-National shares were cancelled following New Zealand court action by the Securities Commission.

In 1992 CDL Hotels International, which was listed on the Hong Kong and Amsterdam stock exchanges, made a successful partial takeover offer for Euro-National.

The Singaporean company backed its New Zealand hotels into Euro-National. Euro-National changed its name to CDL Hotels New Zealand and to Millennium & Copthorne Hotels New Zealand (MCK) in 2006.

The NZX-listed company, which operates 23 owned, leased and franchised hotels in New Zealand under the Millennium, Copthorne and Kingsgate brands, is now 70.2 per cent owned by London Stock Exchange-listed Millennium & Copthorne Hotels plc. MCK owns 67 per cent of CDL Investments New Zealand.

MCK flies under the radar as far as domestic investors are concerned.

Its shares consistently trade below 70c even though it had earnings per share of 13.2c for the December 2012 year, 7.8c for the latest year and had a net asset backing of $1.33 a share at the end of December 2013.

The low level of investor interest is the result of a number of factors including extremely frugal communications and a deadly boring annual meeting held in Auckland each May.

In September 2007 MCK announced it would invest in a joint venture with a Chinese property developer, Cheung Ping Kwong.

The structure was extremely complex with MCK owning 34 per cent of First Sponsor Capital, which owned 60 per cent of the joint venture with Cheung holding the remaining 40 per cent.

One of JV’s first investments was a resort hotel on Hainan Island. MCK’s 2008 and 2009 annual reports indicated difficulties with the project and the company dropped a bombshell on April 12, 2010 when it told the NZX that Cheung had sold the hotel, with other joint venture assets, and had pocketed all the money.

In other words Cheung had walked away with $26.1 million.

MCK’s annual meeting, which was held six weeks later in Auckland, was unusually animated as shareholders demanded to know how First Sponsor could allow assets to be sold from under its nose.

MCK directors stuttered and stumbled through the meeting and added fuel to the fire when they stated that they had invested in Chinese property because of the bleak outlook for New Zealand inbound tourism.

The First Sponsor/Cheung joint venture was terminated and First Sponsor has refocused its business on property development in Chengdu, Western China. These developments are massive by New Zealand standards with 27 apartment blocks under construction in the Chengdu Millennium project, comprising 4028 residential units, as well 187 commercial units and the Millennium Waterfront Chengdu Hotel.

This year, MCK had a preference share issue to fund an additional $60 million investment in First Sponsor. The issue received a very poor response from New Zealand investors with only 207 of the 1830 shareholders participating. Accordingly, MCK’s parent company owns 85.2 per cent of these new preference shares. MCK now has $222 million invested in First Sponsor for a 31.4 per cent stake.

The recent document drop is because First Sponsor is undertaking an IPO before listing on the Singapore Stock Exchange.

As part of this process MCK will be recapitalised with First Sponsor shares and new MCK shares distributed on the following basis:

• MCK shareholders will receive 327 free First Sponsor shares for every 1000 MCK shares.

• They will receive 302 new MCK shares for every existing 1000 MCK shares.

In other words MCK shareholders will receive First Sponsor shares and a 69.8 per cent reduction in the number of MCK shares held (these shares will be cancelled). The share reduction applies to all MCK shareholders in equal proportions.

Grant Samuel has restated MCK’s December 2013 earnings per share from 7.8 cents to 16.9 cents after taking into account the loss of First Sponsor earnings – following the distribution of its shares – and the reduction in MCK’s capital.

On the basis of a mid-point valuation of $1.45 for the First Sponsor IPO and on the assumption that MCK shares will continue to trade on an 8.3 P/E then the 327 First Sponsor shares will be worth $474 and the 302 new MCK shares will be worth $424, for a total value of $898.

This represents a 38 per cent uplift over the current value of $605 for 1000 MCK shares at 65c each.

However, given the history of Pacer, Euro-National, First Sponsor and MCK there is the possibility that something will go wrong.

MCK shareholders could end up with illiquid First Sponsor shares if the Singapore IPO does not proceed, First Sponsor could be a victim of any significant downturn in the Chinese property market and NZ investors may find it difficult to sell First Sponsor shares as they will only list in Singapore.

However, MCK has created a Block Trade Facility whereby NZ investors can sell their First Sponsor shares through Trustee Executors immediately after listing.

MCK shareholders meet in Auckland on Thursday next week to approve the First Sponsor share distribution and capital reduction.

It should be a far more positive meeting than MCK shareholders have had to endure in recent years.


Brian Gaynor

Portfolio Manager

Disclosure of interest: Milford Asset Management holds Millennium & Copthorne Hotels New Zealand shares on behalf of clients.