Is there an alternative to feeling short-changed at Millennium Copthorne?

NZSA Disclaimer

Last week, Millennium Copthorne (NZX: MCK) received a takeover offer of $2.25 per share from its 75.9% shareholder, CDL Hotels Holdings NZ Limited (linked to Singapore-based CDL Investments).

Shareholders could be forgiven for mixed feelings. Recent trading in MCK shares has been around $1.80, but has never been above $2.60 within the last five years. MCK traded as high as $3.35 in the halcyon era of low interest rates and bullish sentiment of mid-2018.

These days, following a change in accounting policy in 2021, the company values its buildings at ‘historic cost’, seeing itself as a hotel operator rather than deriving any benefit from owning the buildings themselves. That accounting change caused an approximate $318m decrease in the company’s asset value back in 2021.

That has three key implications.

Firstly, a blind focus on hotel operations does not encourage company executives (and shareholders) to consider the alternate value of a building as a different form of operation. For example, it may be that a central Wellington hotel property holds greater value through redevelopment into apartments, rather than continuing to operate as a hotel.

That links to the company’s cashflows. As a hotel operation, those cashflows are reflected in the current share price – but don’t support the underlying historic cost value reflected in the company’s accounts (the company has a net tangible asset value of around $3.46 per share (when non-controlling interests are removed), compared with the offer price of $2.25).

It’s worth noting that back in 2020, when the company was still valuing its property assets on their realisable value (the same process as that used by other property-related companies), the NTA was around $4.70 per share. The impact of rising interest rates will have taken its toll on that realisable value also – but nonetheless points to an underlying asset value higher than the book value, and well higher than the takeover offer price.

This all implies that MCK’s building assets are likely to offer greater value for shareholders if they are sold, or developed as a non-hotel operation.

Secondly, the accounting policy adopted in 2021 means that company accounts are required to reflect further impairments should the historic cost of any individual hotel not be supported by hotel-related cashflow. Again, this offers potential for a further ‘disconnect’ between the hotel operation and the potential value of the building as a different operation.

Thirdly, the lack of any updated net realisable value since December 2023 for MCK’s property and land assets means that shareholders can’t assess the offer in terms of the alternative – an orderly break-up of the company and the sale of its assets. No audited property revaluations have been completed since the Dec 31st 2020 financial statements, although the company has provided an estiamte of $5.84 / share in the 2023 accounts.

Preference Shares

Of MCK’s 158m shares on issue, just under a third of these (52m) are redeemable preference shares, currently trading at around $1.70. They participate fully in dividend payments and are redeemable at the option of the company.

Tellingly, however, they do not participate in any “distributions made in the context of a liquidation of the company”, nor do they participate in any shareholder vote.

On this basis, they are not regarded as equity securities under the Takeovers Code. The Offeror has indicated that they are happy to buy on-market at the price of $1.70. If the takeover offer is successful, this may be considered a good outcome for holders of the redeemable preference shares – there is no recourse for them to be repaid.

If an alternative outcome prevails, such as a breakup of the company, that is likely to pit the interests of redeemable preference shareholders against those of ordinary shareholders. A moral dilemma indeed.

Independent Chair

When there’s a majority shareholder involved, as there is in this case, the role of the independent Chair, Colin Sim, becomes even more critical. NZSA will want see evidence through actions that Sim stands up to pressure from the major shareholder, and acts in a manner that demonstrates his independence.

Of course, this is ever more difficult when a Chair (or any independent director) effectively serves under the benevolent patronage of a majority shareholder, such as CDL Investments.

But nonetheless, we live in hope.

So – let us see not only the independent report that will no doubt justify the takeover offer price, but let shareholders also see an independent appraisal of the REAL value of the company’s property assets, together with an estimate of the realisable value (less costs) if they were sold to third parties as individual properties over a defined timeframe (say, 24 months).

Minority Interests Regime

Here we go again.

Yet again in New Zealand, minority shareholders are learning a valuable lesson. When you hold shares as a minority investor, be VERY sure that your interests are aligned with those of the majority holder.

Arguably, there was a clear signal offered to the market way back in 2021 through a seemingly simple change in accounting policy that the interests of the majority holder, CDL Investments, had shifted – and that minorities would be well-advised to consider their position.

The change in accounting policy in 2021 forms a backdrop to the current takeover offer mounted by CDL Investments, the majority owner of MCK. In the absence of any updated, audited, property valuations that might underpin the offer, what choice do minority shareholders have? And what incentive is there for CDL Investments to provide greater transparency to minority shareholders?

Arguably, there is even an unconscious incentive for the majority shareholder to give some rope to MCK execs to not optimise their cashflows…after all, if you think it might be worth making an offer for the shares you don’t own, why would you want to encourage a high-performing business or even consider an alternate strategy to optimise returns from the asset base?

We’re not saying that this has occurred in the case of MCK – merely that there is an incentive for the majority owner to allow this unconscious bias to develop.

NZSA continues to believe that when it comes to voting on independent directors, voting should be subject to the application of a minority shareholders vote, with a major shareholder (>30%) unable to participate. That would act as a strong counter-balance to the unconscious bias that can be applied by any major shareholder.

Had it existed, such a regime would likely have resulted in a very different board composition at MCK. In its absence, MCK minorities will be looking for the Independent Chair, Colin Sim, of MCK to show some steel.

So go for it Colin – you’ll love the feeling of doing the right thing.

NZSA will be keeping a close eye.

Oliver Mander

Note – this article was amended on Jan 30th to update the shareholding by CDL Investments, to reflect the impact of MCK’s equity-accounted investment in CDL New Zealand and to note that while MCK has provided updated market value per share, these have not been subjected to an audit.