Friday the 13th showdown

TIM HUNTER
Last updated 05:00 08/06/2014

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OPINION: Most business gets done discreetly, if not necessarily politely. Any tough stuff gets done behind closed doors, allowing everyone to grip and grin when in the public eye.

The banality may be only skin deep but it's widespread, so it's startling to see the open warfare at listed dental specialist Abano Healthcare.

In the blue corner is the Abano board led by chairman Trevor Janes.

In the red corner are shareholders Peter Hutson and James Reeves, who have decided they want some changes, starting with the chairman.

The two sides have been trading blows for weeks as their dispute heads for a showdown shareholder vote in Auckland this Friday, June 13. Or possibly later, because Hutson and Reeves have a High Court hearing on Tuesday seeking a postponement.

The legal challenge is perhaps an obvious move in the context of an increasingly bitter battle, but in my view it would be a surprise if the court granted their request.

Hutson and Reeves are entitled to challenge the chairmanship of Janes. They own a collective 18.6 per cent of Abano and have more than enough votes to request a special meeting of shareholders for an important decision.

Their problem is that they are struggling to articulate an argument to axe the chairman.

Institutional shareholders can make up their own minds on these issues, but some also subscribe to recommendations from Institutional Shareholder Services, a global provider of advice targeted at helping big funds decide how to vote in proxy battles.

On May 29 ISS produced a report on the Abano vote recommending shareholders vote against the motion to fire Janes.

After talking to both sides, ISS said there were no compelling reasons to remove Janes as a director and noted "the lack of a clearly defined strategy from the dissident shareholders in respect of their intentions for the company should they be successful in their attempt to remove Mr Janes as director".

ISS is a potentially important influencer and clearly Hutson and Reeves have failed to persuade it of the merits of their case.

In my view that's a sign of a poor argument.

Their underlying case appears to be that Abano's strategy of buying up dental practices in New Zealand and Australia is not bearing fruit. The company should call a halt to the expansion and focus on building the profitability of the practices it has already acquired, they say.

This is an arguable point, although the company contends it remains some way short of the critical mass it needs in Australia to start reaping the benefits of scale.

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However, the strategy has the public support of the whole Abano board, so Hutson and Reeves have found it tough to show why toppling the chairman would make a difference.

One of their difficulties relates to their involvement in a failed takeover proposal by private equity firm Archer Capital last year.

At the time the proposal was made last July, Hutson was an Abano director. However it is clear that in advocating Archer's scheme he would continue to have a financial interest in Abano after the takeover. His interests were therefore in conflict with those of other shareholders and he was forced to resign.

Reeves was also invited to participate in the business post takeover.

Given that Archer was initially pitching its potential takeover at $7.30 to $7.50 a share - and subsequently $7.80 a share - it is obvious that the bid partners saw value in the business at levels well above the current share price of around $6.60.

Another way to see it is that Abano is an attractive business whose value is yet to be reflected in its share price.

As a result, Abano's other shareholders may not be convinced that Hutson and Reeves are focused only on removing Janes and tweaking the company's management for the benefit of all investors - ie, there may be an agenda to soften the company for another takeover attempt.

The court challenge will do little to quell that view.

Hutson and Reeves publicly called for Janes to quit on April 10 and on April 24 formally began the process for a special meeting to vote on his future.

By May 7 the paperwork was filed and the pair suggested a date of June 26 would be appropriate.

Although the meeting was ultimately called for June 13, it is difficult to believe Hutson and Reeves were unprepared to put their case to shareholders having already been lobbying for two months.

With their court filing seeking to postpone the meeting for three to four weeks, what could be an exercise in shareholder activism is beginning to look like mere gamesmanship.

It is also apparent that they declined the usual opportunity to include their argument in the Notice of Meeting sent to shareholders, preferring to send out their own material separately. This paperwork closely resembles the sort of voting forms a company would itself mail to shareholders.

I can see why Hutson and Reeves would want their documentation on an equal footing with that of the board, but having two sets of similar papers could lead to shareholders accidentally voting "no" when they meant "yes", or vice-versa.

Judging from their comments, it seems institutional shareholders will vote with the board, so the retail shareholder vote could make the difference on the day.

It's great that small investors will get a meaningful say on this vote, if they want it, but in my view Hutson and Reeves should have explained by now what their big plan is beyond who sits in the chair.

If it's so important they are willing to go to court over a meeting date, the plan had better be good.

It's time they got it out in the open.

Tim Hunter is deputy editor of the Fairfax Business Bureau

- Sunday Star Times

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