Rubicon Responds To GPG Letters
Auckland, Friday 25 October 2002 - Rubicon advised today that it intends responding to a letter sent this week by GPG
Forests (“GPG”) to Rubicon shareholders, where GPG commented on the independent valuation of Rubicon. The Chairman of
Rubicon, Mr Michael Andrews said today, “We believe it is in the best interests of Rubicon shareholders that they are
aware of the Independent Directors’ view of GPG’s claims – we will be responding to shareholders next week. The
Independent Committee reiterates that its recommendation to shareholders is not to accept the GPG partial offer of 75
cents per Rubicon share. GPG’s offer price would need to be increased by 50%, or 38 cents, for it to equal the midpoint
of the Grant Samuel & Associates independent valuation range for Rubicon shares. To even fall into the bottom of the Grant Samuel valuation
range, the offer would need to increase 31%, or 23 cents per share,” he said.
Mr Andrews said that Rubicon had responded to a letter from Mr Weiss of GPG in relation to Rubicon’s executive options
scheme, and that it had copied its letter to the Market Surveillance Panel of the New Zealand Stock Exchange.
“In replying to Mr Weiss, Rubicon has made it clear that it feels GPG is attempting to create intrigue on the issue of
executive remuneration where there is no intrigue, and in circumstances where GPG has a partial takeover offer on the
table in relation to control of Rubicon. Our response outlines our strong belief that it would be of far greater benefit
for Rubicon and its shareholders if, rather than focusing on issues that are not financially material to the Company or
shareholders, GPG were to engage into dialogue with Rubicon’s management and Board as to exactly what the GPG vision for
the New Zealand forestry industry is, how the vision will bring value to Rubicon’s shareholding in Fletcher Challenge
Forests, and how much value over what time-frame will be created for Rubicon’s shareholders. We have requested dialogue
on these issues many times but our requests have been declined”, Mr Andrews said.
“GPG was active in defeating the recent FCF-SEAWI transaction that would have increased Rubicon’s net asset backing by
19% to $1.06 per share. We have heard nothing from GPG about a clearly identified and more-favourable plan. If there is
such a plan, it does prompt the question as to why GPG is only offering 75 cents per share in its partial takeover
offer, having rejected a Forests transaction which would have delivered a net asset backing of $1.06 per share to
Rubicon’s shareholders?” he said.
In addressing Mr Weiss’ questions of the Company, Mr Andrew’s said Rubicon has replied as follows:
1. “Rubicon has not issued any options under the senior executive option scheme and has no current intention to issue
options under this scheme.
2. The reason for this is that the Board determined to base Rubicon’s senior executive incentive scheme on tracking
Units instead of options. Incentive schemes based on tracking Units have an important advantage over options in that
they do not dilute existing shareholders in terms of the number of additional shares that would otherwise be issued upon
exercise and conversion of options. For this reason they tend to be preferred by shareholders, and this is the reason
the Rubicon Board has adopted them. Tracking Units have been used in New Zealand for nearly 20 years now as a means of
incentivising senior management.
3. The tracking Units are simply a mechanism to pay out future bonuses to executives based on the performance of the
Rubicon share price. The cost of the incentive is accrued every six months in Rubicon’s Earnings Statement and was
included in the Company’s financial statements in its Annual Report under the heading “Accrued Employee Benefits”.
4. The incentive scheme is based squarely on the understanding that executives should only benefit if value has been
created for shareholders. In accordance with best practice, Rubicon’s incentive scheme incorporates the following
attributes to ensure that is the case:-
- The incentive Unit is set off a market price (at which every shareholder has the same opportunity to buy Rubicon
shares in the market);
- The individual is required to put money at risk – participation in the incentive scheme requires the payment of a unit
“fee” in cash by the executive;
- The fee is set by an independent expert using the commonly adopted Black Scholes option pricing methodology;
- The exercise price on which the incentive is based escalates quarterly at Rubicon’s cost of capital. This means that
unless Rubicon’s share price increases in accordance with shareholders’ required rate of return, the incentive will be
worthless to the executive and the fee paid to the Company by the executive will be lost; and
- Except in certain limited circumstances such as the current takeover offer by GPG Forests, there is a 2-3 year vesting
period before the incentive becomes exercisable and payable.
5. Based on a share price of 72 cents and the incentive being payable upon the original payment dates in 2003 and 2004,
the total pre-tax gain payable under the incentive scheme to Rubicon’s eight person management team would be
approximately $820,000 (or $500,000 net of tax). The Rubicon Board is satisfied this level of incentive is appropriate.
6. As is normal with schemes of this nature, Rubicon’s senior executives have the right to trigger the payment of the
incentive as a result of the partial takeover offer by GPG. This increases the $500,000 figure to $1.3 million if the
right to payment of the incentive was triggered by all of the eight executives to whom the scheme applies. None have
been triggered by any of the Company’s executives to date.
These numbers are not large when compared with the $150 million of value that has been created for Rubicon shareholders
who bought in when the Company first began trading in the “grey market” in March of last year. The numbers do not give
rise to any issue relating to the existence of an “informed market”. Based on today’s Rubicon share price and on the
accelerated payment dates brought about by the GPG partial offer, the net after-tax benefit payable to the management
team amounts to less than one half of one cent per Rubicon share. In any event, the cost to Rubicon is one which accrues
every six months and is therefore factored into the Company’s reported results, and the impact of the incentive scheme
outlined above was included in the Grant Samuel and Associates independent valuation of Rubicon of $0.98 - $1.28 per
share,” he said.
END