Panel evaluates expert valuations

The Takeovers Panel has ordered a takeover target to commission a new expert’s report, after questioning the facts and methodology of the original report. In declaring unacceptable circumstances, the Panel required Bowen Energy Limited to seek a second opinion from an ASIC-approved expert.

Bowen Energy is a coal and minerals exploration company, focused on Australia and the Asia-Pacific region. On 10 July 2009 Bhushan Steel (Australia) Pty Ltd (Bhushan), Bowen’s joint venture partner and part of the Delhi-based Bhushan Steel Group, announced an unconditional on-market takeover bid for Bowen at 14 cents per share.

On 24 July 2009, Bowen issued a target’s statement recommending the takeover and attaching an independent expert’s report prepared by WHK Howarth. The expert’s report included a “Revised Independent Valuation of the Coal Tenements held by Bowen” dated 23 July 2009 from Minnelex Pty Ltd.

Minnelex’s report valued Bowen’s shares at 3.53 to 5.51 cents per share. Earlier in 2009, Minnelex had valued Bowen shares (for a previous uncompleted transaction) at a substantially higher value. Based on the later Minnelex report, Howarth concluded that the Bhushan offer was fair and reasonable to shareholders. Bhushan’s bid closed on 26 August 2009 with Bhushan’s voting power in Bowen having increased to 58.81 per cent.

Panel proceedings were initiated by Bowen shareholder Macrae Holdings (WA) Pty Ltd, who questioned the value attributed to Bowen’s coal tenements. ASIC also made submissions. The issue was considered by an Initial Panel and then a Review Panel on appeal.

Minnelex’s report valued the coal tenements on two bases—the appraised value method and the comparable transaction method. Both Panels noted that the technical report contained little detail regarding the application of these methods and, in applying the comparable transaction method, relied on only one other transaction. That transaction, ASIC submitted, was outdated and could not reasonably be considered to have been conducted at arm’s length.

In reviewing the report, the Initial Panel was not satisfied that the expert’s report was incorrect, or that the expert reached a conclusion that no reasonable expert could reasonably arrive at. The Initial Panel concluded that:

‘…it is up to the expert to decide which valuation methodology it uses … a different view as to the appropriate valuation methodology does not demonstrate that the expert’s judgment was wrong.’

The Review Panel had a different view. The Review Panel examined in detail the methodology adopted by the technical expert, the application of that methodology and the quality of the information ultimately provided to shareholders.

The Review Panel made the following observations:

• it was unclear why market trading of between 10.9 and 17.2 cents supported the share valuation of between 3.53 and 5.51 cents per share
• it was difficult to understand why the expert concluded that Bowen’s joint venture agreements could not be valued—given that the report valued underlying coal tenements
• the expert should have drawn to shareholders’ attention the differences from the earlier report and the reason for the change in value, and
• the expert should have considered a broader range of valuation methods and comparable transactions and should have justified the valuation method ultimately preferred.

The Review Panel concluded that there were material deficiencies in the expert’s report, regarding values, logic and compliance with ASIC Regulatory Guide 111. ASIC Regulatory Guide 111 requires an expert to justify its choice of methodology and disclose its assumptions with sufficient specificity.

The Review Panel ordered Bowen to procure a report by a new independent expert to be approved by ASIC.

The new expert provided its report on 11 November 2009 and concluded that Bhushan’s offer of 14 cents per share was fair and reasonable to Bowen shareholders. Had the new expert concluded that the Bhushan offer was not fair and reasonable, Bhushan would have been required to divest up to approximately 35 per cent of Bowen shares, being the shares acquired under the takeover bid. The Panel’s decision had the potential to unwind Bhushan’s completed takeover bid.

The Review Panel expressly commented that an independent expert’s report is for the protection of target shareholders.

An expert’s report is clearly regarded as necessary to enable shareholders to properly assess the merits of a takeover bid.

The approach taken by the Panel is likely to increase regulatory scrutiny of expert’s reports, a position reiterated by ASIC at the November Corporate Finance Liaison Committee Meeting in Sydney. Looking forward, it will be important for companies to strike the balance between assessing the content and methodology of the expert’s report without compromising the independence of the expert.

This article was written by Nicola Yeomans, Partner and Melissa Swain, Solicitor, Sydney.

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