Rubicon releases documentation for Shareholders’ Meeting
To: NZX From: Pam Wardenburg
Telephone: 64-9-356 9800
Fax: 64-9-356 9801
Further information on Rubicon Limited can be viewed at the Rubicon web site, at
http://www.rubicon-nz.com.
14 December 2017 - Today, Rubicon released the attached Notice of Meeting material
(including Grant Samuel Independent Appraisal Report), which will be distributed to Rubicon
shareholders next week.
END
Rubicon releases documentation for
Shareholders’ Meeting
---
Rubicon Meeting
of Shareholders
Notice of Meeting
Notice is hereby given that a Meeting of
Rubicon Limited shareholders
will be held at the
Rydges Latimer, 30 Latimer Square, Christchurch
at 10.00am on 12 January 2018
14 December 2017
2
Rubicon Limited Meeting
IMPORTANT INFORMATION
This document includes the following information:
a letter from the Independent Directors of Rubicon Limited;
a summary of the Proposed Transaction: the proposed sale by Rubicon TC Holdings LP of its 44.88%
interest in the Tenon Clearwood Limited Partnership (TCLP), for which shareholder approval is being sought
at the Meeting;
a description of the business of the Meeting;
a detailed explanation of the Proposed Transaction; and
An independent report prepared by Grant Samuel & Associates Limited in relation to the Proposed
Transaction.
VOTING/PROXY FORM
Accompanying this document is the Voting/Proxy Form, to enable shareholders to vote on the resolution by:
attending the Meeting; or
lodging a postal vote; or
appointing a proxy to vote on their behalf at the Meeting.
IMPORTANT DATES
All times are given in New Zealand time.
5.00pm, 5 January 2018 Record date for determination of voting entitlements for the Meeting
10.00am, 10 January 2018 Latest time for receipt by Rubicon Limited of postal votes and proxies
5:00pm, 10 January 2018 Final Purchase Price Per Share advised, following calculation of TCLP net debt at 31
December 2017
10.00am, 12 January 2018 Meeting
10:00am, 31 January 2018 Closing of the Proposed Transaction
FORWARD-LOOKING STATEMENTS
There are forward-looking statements included in this document. As forward-looking statements are predictive in nature, they are subject to
a number of risks and uncertainties relating to Rubicon, its operations, the markets in which it competes and other factors (some of which
are beyond the control of Rubicon). As a result, actual results and conditions may differ materially from those expressed or implied by such
statements. In particular, TCLP's operations and results are significantly influenced by the level of activity in the various sectors of the
economies in which it competes, particularly in New Zealand, Europe and North America. Fluctuations in industrial output, commercial and
residential construction activity, capital availability, housing turnover and pricing, levels of repairs, remodelling and additions to existing
homes, new housing starts, relative exchange rates, interest rates and profitability of customers, can each have a substantial impact on
Rubicon's results of operations and financial condition. Other risks include competitor product development, product demand and pricing,
input cost and customer concentration risk. ArborGen’s risks and uncertainties include (in addition to the macro condition risks noted above)
- the global markets and geographies in which it operates, intellectual property protection, regulatory approvals, competitor performance,
public and customer acceptance of genetically engineered products, customer adoption of advanced seedling products, the success of
ArborGen’s research and development activities, weather conditions and biological matters. As a result of the foregoing, actual results and
conclusions may differ materially from those expressed or implied by such statements.
All references in this document to $ or “dollars” are references to US dollars unless otherwise stated.
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LETTER FROM INDEPENDENT DIRECTORS
Dear Shareholder
We are pleased to invite you to attend a Meeting of Shareholders of Rubicon Limited (Rubicon), which will be held
at the Rydges Latimer, 30 Latimer Square, Christchurch, commencing at 10.00am on 12 January 2018 (New Zealand
time). Enclosed is the Notice of Meeting which outlines the business to be conducted. If you are unable to attend the
Meeting, you are encouraged to complete and lodge your Voting/Proxy Form (either by post or by fax) so that it
reaches the registered office of the Company, or the office of the Share Registry, no later than 10.00am on 10 January
2018 (New Zealand time).
At the Meeting, the resolution shareholders will be given the opportunity to vote on relates to the proposed Sale of
Rubicon’s 44.88% shareholding interest in TCLP (the Proposed Transaction), the vehicle that now owns the
previous Tenon clearwood operation. This investment is owned by Rubicon’s wholly-owned subsidiary, Rubicon TC
Holdings LP (Vendor).
The proposed Purchasers of Rubicon’s TCLP interest are –
Dorset Management Corporation (an affiliate of Knott Partners LP) (Knott), as to 20.0%
Libra Partners NZ, LLC (an affiliate of Libra Fund LP) (Libra), as to 20.0%
Existing TCLP Limited Partners as to 4.88%
Under the governing TCLP Partnership Agreement (LPA), existing Limited Partners have pre-emptive rights should
Partners wish to sell down their ownership interests. All existing Partners have formally agreed to waive their pre-
emptive rights over the 40.0% (combined) that is to be sold to Knott and Libra, and will participate (or not) according
to their pre-emptive rights over the 4.88% balance of Rubicon’s shareholding interest. We believe the 4.88% will be
fully acquired by existing TCLP Partners.
The negotiated Purchase Price for the Sale is US$14.2 million (the cost of Rubicon’s investment in TCLP made
earlier this year) plus Rubicon’s share of the reduction in TCLP’s Net Debt in the period from 28 April 2017 (the date
of Rubicon’s investment into TCLP) through to 31 December 2017. As this latter amount will not be known until 10
January 2018, the final Purchase Price can only be estimated at this stage, but it is expected to be circa US$15.3
million (net of US$0.7 million dividend to be received by Rubicon prior to Closing). As we will need to wait until January
to finalise that number the exact Purchase Price will not be known until then, and as a result the Closing will not occur
until 31 January 2018.
The strategic rationale for the Proposed Transaction is three-fold, and can be summarised as follows –
Rubicon needs to make the final two deferred-settlement payments in relation to the recent acquisition of
ArborGen, totalling US$15 million. In addition, Rubicon also needs to repay US$6 million of subordinated debt
notes on 1 July 2018. Rubicon Limited had unrestricted cash of US$12.5 million as at 30 September 2017 (i.e.
as per our year-end Audited Financial Statements). Closing of the Proposed Transaction will ensure there are no
funding calls on Rubicon shareholders in order to be able to make these payments, which in turn should remove
any share-price ‘overhang’ that might exist today in relation to funding uncertainty;
Once our TCLP investment is sold, Rubicon will be 100% focused on ArborGen, as that will then be our only
investment. The Sale will then make Rubicon a ‘pure-play’ for investors on the ArborGen business upside, and
with Rubicon’s financials moving forward then only being ArborGen-based, investors will have greater
transparency of ArborGen’s financial results. These two factors should enhance the attractiveness of the stock
to a wider pool of investors; and
Although not yet finalised, we believe that once the Sale of our TCLP investment has been settled, we will then
be in a position to achieve significant cost-out / savings of up to US$2 million pa (pre restructuring costs),
depending on the final operating structure and model chosen.
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We believe that these three factors – the removal of any overhang in the stock price relating to uncertainty as to
funding source of the deferred ArborGen acquisition and subordinated debt payments, simplifying Rubicon to be a
pure-play on the ArborGen business, and the achievement of cost savings, will all be beneficial to building positive
momentum in the RBC share price.
Given David Knott and Ranjan Tandon are directors of Rubicon and also principals of Knott and Libra respectively
(which will each acquire 20.0% of TCLP under the Proposed Transaction), they are treated as related parties to the
Proposed Transaction. To ensure the Proposed Transaction is fair to other Rubicon shareholders, the Board of
Rubicon established an Independent Committee to manage the Proposed Transaction. The Independent Committee,
comprises independent directors George Karaplis and Steve Kasnet, and specifically excluded David Knott, Dave
Knott Jr and Ranjan Tandon as their funds and associates own 45.9% of Rubicon’s issued shares. To assist the
Committee, and in order to provide an independent assessment for shareholders, the Independent Directors
employed Grant Samuel to prepare an Independent Report to Rubicon’s shareholders (other than to Knott and Libra)
on the merits of the Proposed Transaction. Grant Samuel was selected because they understand the underlying TCLP
clearwood business very well, having valued the business twice in the past 12 months in relation to the two Tenon
business sale transactions (the last report was prepared earlier this year).
The Grant Samuel Independent Report is included in this documentation to Rubicon shareholders. In section 5.1 of
that Report, Evaluation and Summary of the Proposed Transaction, Grant Samuel concluded - –
“In Grant Samuel’s opinion, the full underlying enterprise value of TCLP is in the range of US$51.3 – US$61.5 million.
Rubicon’s pro rata share of the full underlying value is US$13.6 – US$18.2 million. The consideration for the
Proposed Transaction is forecast to be approximately US$15.3 million which is within Grant Samuel’s assessed
range of Rubicon’s 44.88% share of TCLP’s full underlying value.”
And in Section 5.8 of the Report, Fairness of the Proposed Transaction for the purposes of the NZX Listing Rules,
Grant Samuel concludes:
“In Grant Samuel’s opinion, based on the analysis of the merits outlined above, the terms of the Proposed Transaction
are fair and reasonable to the shareholders of Rubicon not associated with Knott and Libra. In Grant Samuel’s opinion,
the information to be provided by Rubicon to its shareholders is sufficient to enable holders of those shares to
understand all the relevant factors and make an informed decision as to the sale of Rubicon’s interest in TCLP.”
The Independent Committee did not deem it necessary to run a third party sales process in relation to Rubicon’s
interest in TCLP. The rationale for that decision was based on the fact that Tenon had earlier this year been through
an exhaustive 18-month sales process for the Clearwood business supported by an international investment banker,
and concluded that the TCLP consortium provided the best value outcome. Given that the consideration offered under
the Proposed Transaction is the same as that which Rubicon invested into TCLP on 28 April 2017 (i.e. US$14.2
million) adjusted upwards for Rubicon’s share of the reduction in TCLP’s Net Debt that has occurred since, the
estimated Purchase Price falls within the Grant Samuel value range, and the Rubicon stake is a non-strategic block
in a Limited Partnership structure, there was no benefit to Rubicon shareholders (only considerable cost and time
delay) to be derived from running another extended sales process.
There will only be one resolution on which shareholders will be asked to vote upon at the Meeting, but it has two
aspects to it. The first, is in relation to NZX Listing Rule 9.1, which Rule requires an Ordinary Resolution of
shareholders to approve a transaction that would change the essential nature of Rubicon’s business. Although this
may not be the case with the Sale of our TCLP investment, we have chosen to take the conservative path and seek
shareholder approval on this point. All shareholders are entitled to vote on this aspect of the resolution. The second
aspect, is in relation to Listing Rule 9.2, which requires an Ordinary Resolution to be passed in order to approve a
material transaction with related parties. As Knott, Libra, and their associates are related parties to the Proposed
Transaction, they are not entitled to vote on this Resolution.
As noted above, shareholder approval of the sale of Rubicon’s 44.88% interest in TCLP will result in ArborGen then
being Rubicon’s sole asset. We have great belief in the potential future upside in ArborGen. It is a global leader in
advanced forestry genetics, operating in the world’s major commercial tree species (pine and eucalyptus), in
geographies with high annual planting rates (Brazil, the US, and Australasia). It sells to major forestry players in those
countries, and has a leading market position in its largest commercial market, the US. It has a pre-eminent intellectual
property position, which includes an industry-leading germplasm repository (i.e. genetic library), a proprietary ‘tree
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machine’ platform, an extensive database of global trials, varietal and transgenic technology, and a genomics platform
- all protected by a patent portfolio and a ‘bank’ of trade secrets. It has a portfolio of advanced products that do not
require regulatory approval, which are currently being commercialised. In its last fiscal year, ArborGen turned EBITDA
positive, and its forecasts are for it to be cash-positive from now onwards. The considerable investment in research,
capability and customer preparation has been made. ArborGen is now all about commercialising that investment by
converting its customers to its advanced genetics products. We believe it is well positioned to do so, and that this will
be reflected in its future earnings, and hence in its value for Rubicon shareholders.
Your Independent Directors unanimously recommend that shareholders vote in favour of the Proposed
Transaction, and we look forward to meeting with you and discussing these matters at the Meeting on 12 January
2018.
Yours sincerely,
Steve Kasnet
On behalf of the Committee of Independent Directors
14 December 2017
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SUMMARY OF THE PROPOSED TRANSACTION
PROPOSED TRANSACTION
Rubicon TC Holdings has determined that it will sell its 44.88% ownership interest in TCLP.
On 11 December 2017, Rubicon TC Holdings reached an agreement with Knott and Libra to (subject to requisite
Rubicon shareholder approval at this Meeting) sell to each of those parties 20.0% of TCLP’s issued shares (i.e. in
the aggregate, 40.00% of its 44.88% ownership interest). Rubicon TC Holdings’ remaining 4.88% ownership interest
in TCLP will be offered to existing TCLP Partners under the pre-emptive provisions of the LPA, and Rubicon TC
Holdings expects the 4.88% to be fully acquired by some (or all) of the existing TCLP Partners.
Disposition of Rubicon TC Holdings’ 44.88% ownership interest would then leave Rubicon with no ownership
interest in TCLP.
The Proposed Transaction is subject to the approval by the Company’s shareholders as:
a major transaction for the purposes of the NZX Main Board Listing Rules; and
a material transaction with a related party for the purposes of the NZX Main Board Listing Rules.
The Purchase Price for Rubicon’s 44.88% ownership interest is estimated to be circa US$15.3 million, however the
exact Purchase Price will be dependent on TCLP’s Net Debt as at 31 December 2017, which number will not be
known until January 2018. Accordingly, if shareholders approve the Sale, Closing will not occur until 31 January
2018.
RECOMMENDATION
The Independent Directors unanimously recommend that shareholders vote in favour of the Proposed
Transaction.
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BUSINESS OF THE MEETING
Notice is hereby given that a meeting of shareholders (Meeting) of Rubicon Limited (the Company) will be held at
10.00am on 12 January 2018, at Rydges Latimer, 30 Latimer Square, Christchurch.
A. INTRODUCTION AND ADDRESS
B. SHAREHOLDER DISCUSSION
C. RESOLUTION
Resolution 1 – Proposed Transaction – Ordinary Resolution
There is only one resolution to be put to the Meeting, and that is:
To consider and, if thought fit, pass the following as an ordinary resolution under NZX Main Board Listing Rules 9.1
and 9.2:
That the Sale of Rubicon TC Holdings LP’s 44.88% ownership interest in TCLP, on the terms described in
the Notice of Meeting, be approved.
DISCUSSION OF THE SHAREHOLDER RESOLUTION
Explanatory Note to Resolution 1 – Proposed Transaction – Ordinary Resolution
NZX Main Board Listing Rules
NZX Main Board Listing Rule 9.1 provides that the Company and its subsidiaries must not enter into a transaction,
or series of linked or related transactions, to sell assets: (a) which would change the essential nature of the
business of the Company; or (b) in respect of which the gross value is in excess of 50% of the “average market
capitalisation” of the Company and its subsidiaries, in each case except with the prior approval of an ordinary
resolution of the Company (or a special resolution if section 129 of the Companies Act also applies). As the
Proposed Transaction may change the essential nature of Rubicon’s business, approval is being sought for the
Proposed Transaction under the first limb of NZX Main Board Listing Rule 9.1. The Proposed Transaction falls
beneath the 50% threshold of the second limb of Listing Rule 9.1, and approval is not required under that limb.
The Proposed Transaction does not require approval as a “major transaction” for the Company under section 129 of
the Companies Act.
NZX Main Board Listing Rule 9.2 provides that the Company and its subsidiaries must not enter into a “material
transaction” if a “related party” is a party to that transaction unless it is approved by shareholders by way of an
ordinary resolution. For these purposes a “material transaction” includes a disposal of assets having an “aggregate
net value” in excess of 10% of the “average market capitalisation” of the Company and its subsidiaries. The
Purchasers are “related parties” of the Company, as Knott and Libra each hold a relevant interest in 10% or more of
Rubicon’s issued share capital (and, in the aggregate, own 45.9% of Rubicon’s issued share capital with Knott
owning 28.2% and Libra 17.7%). As related parties, neither Knott nor Libra (and their associates) will be able to
vote on this resolution for these purposes.
Procedural Notes
(i) Resolution 1 is required to be approved as an ordinary resolution, required to be passed by a simple
majority of the votes of those shareholders entitled to vote and voting on that resolution.
Votes cast on Resolution 1 will be counted first to determine whether or not it has been passed for the
purposes of NZX Main Board Listing Rule 9.1, and secondly to determine whether or not it has been
passed for the purposes of NZX Main Board Listing Rule 9.2. Resolution 1 will only take effect if
Resolution 1 is approved by the required votes (as outlined above) and the Proposed Transaction is
completed.
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As to the first count, all shareholders are entitled to vote on Resolution 1 for the purposes of the approval
required under NZX Main Board Listing Rule 9.1. As to the second count, any persons who are related
parties or beneficiaries to the Proposed Transaction (including Knott, Libra, and their associates) are
disqualified persons under Listing Rule 9.3.1, and their votes will be disregarded for the purposes of the
approval required under NZX Main Board Listing Rule 9.2.
(ii) The persons who will be entitled to vote on the resolutions at this Meeting are those persons who are
shareholders at 5.00pm, 5 January 2018 (New Zealand time), and only the shares registered in those
shareholders’ names on that date may be voted at the Meeting.
(iii) The accompanying Voting/Proxy Form should be used to vote on the resolutions. Shareholders can
participate by postal vote, by proxy or by casting their vote in person at the Meeting.
(iv) Shareholders may cast a postal vote on the resolutions to be voted on at the Meeting by indicating their
voting directions on the enclosed Voting/Proxy Form, signing the form and sending it either by post to the
registered office of the Company or by post or by fax to the office of the Share Registrar. The completed
Voting/Proxy Form must be received no later than 10.00am, 10 January 2018 (New Zealand time). The
Company Secretary has been authorised by the Board to receive and count postal votes at the Meeting.
(v) Any shareholder who is entitled to attend and vote at the Meeting may appoint a proxy to attend and vote
in their place. When appointing a proxy, a shareholder can choose to either direct the proxy how to vote
or leave the decision on how to vote up to the proxy’s discretion. If a shareholder appoints a person who
is not entitled to vote on a particular resolution as their proxy, that proxy will not be able to cast that
shareholder’s votes on that resolution unless they have been directed how to vote (i.e., the proxy cannot
exercise their discretion). A shareholder wishing to appoint a proxy should complete the enclosed
Voting/Proxy Form and send it either by post to the registered office of the Company or by post or by fax
to the office of the Share Registrar. The completed Voting/Proxy Form must be received no later than
10.00am, 10 January 2018 (New Zealand time). A proxy does not have to be a shareholder in the
Company. For example, shareholders may appoint the chairman of the Meeting to act as their proxy, or
another person. The chairman of the Meeting, in that capacity, will vote discretionary proxies held by the
“chairman of the meeting” in favour of the resolution.
(vi) Rubicon directors Hugh Fletcher, William Hasler, and Luke Moriarty, and management,(and/or parties
associated with them), hold shares in TCLP. While they are not contractually required or committed to
acquire any of the shares Rubicon is proposing to sell, they do have pro-rata pre-emptive rights (common
to all TCLP shareholders) under the LPA which would enable them to do so in respect to some of the
4.88% not being acquired by Knott and Libra. All have indicated that they, and their associates, will not
vote Rubicon shares held by them (if any) on the Resolution. The three directors were not members of
Rubicon’s Independent Committee. Please also refer the table of shares held by Rubicon Directors
and/or associated persons shown on page 11.
(vii) This Notice of Meeting has been approved by NZX Limited in accordance with NZX Main Board Listing
Rule 6.1.1, however, NZX does not take responsibility for any statement contained in this Notice of
Meeting.
(viii) Shareholders may revoke their proxies by giving written notice of revocation to the registered office of the
Company or the office of the Share Registrar no later than 10.00am, 10 January 2018 (New Zealand
time).
(ix) Address details for the Share Registrar are set out in the Voting/Proxy Form.
By Order of the Board
Auckland
New Zealand
14 December 2017
Mark Taylor
Company Secretary
Rubicon Limited
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THE PROPOSED TRANSACTION
Investment being sold
Rubicon TC Holdings’ 44.88% ownership interest in TCLP (i.e. 14,226,000 TCLP shares). TCLP is the owner of the
Clearwood business and operations formerly owned by Tenon. Rubicon has agreed to guarantee Rubicon TC
Holdings’ obligations under the Agreement.
Consideration
The Purchase Price is US$14,226,000, plus the reduction in Net Debt between 28 April 2017 (being the day Rubicon
TC Holdings acquired its interest in TCLP) and 31 December 2017 multiplied by 44.88%. As the reduction in Net Debt
will not be known until January 2018, the exact Purchase Price is unknown today, however it is currently estimated to
be circa US$15.3 million (net of a US$0.7 million dividend to be received by Rubicon prior to Closing). The Purchase
Price will be advised to shareholders on 10 January 2018, following calculation of the 31 December 2017 TCLP Net
Debt position. If Rubicon shareholders approve the Proposed Transaction, the Purchase Price is payable in cash, on
31 January 2018.
Purchasers
The Purchasers of Rubicon TC Holding’s 44.88% ownership interest in TCLP are Knott and Libra as to 40.0% (i.e.
12,680,000 TCLP shares, or 6,340,000 TCLP shares to each of Knott and Libra), and the purchasers of the
remaining 4.88% (i.e. 1,546,000 TCLP shares) will be some (or all) of the existing TCLP Partners under the Partner
pre-emptive provisions of the LPA.
Key conditions
The Proposed Transaction is subject to the satisfaction of certain conditions, including:
the approval of the Company’s shareholders;
No injunctions or restraints having been enacted or enforced by any governmental authority or any other
legal restraint or prohibition preventing the consummation of the transactions contemplated under the
Agreement;
The BNZ, as lender to the TCLP, unconditionally approving the Proposed Transaction and continuing to
make available its current bank facilities to TCLP on existing terms; and
There having been no material adverse change in the Clearwood business between signing and Closing.
The Sale Agreement will terminate if any of the conditions have not been fulfilled by 15 February 2018.
Exclusivity arrangements
Rubicon has agreed not to actively pursue any proposals with any person in relation to a potential Sale of its TCLP
investment unless the Sale Agreement has been terminated in accordance with its terms. If Rubicon receives an
unsolicited approach from a third party to acquire Rubicon TC Holdings’ 44.88% interest in TCLP (an Alternative
Proposal), it must advise that third party of the existence of the Sale Agreement and notify the Purchasers of the
approach received (including its terms). However, Rubicon may engage with a third party in respect of an
Alternative Proposal if it is received before shareholders approve the Proposed Transaction, the Board considers
that it is superior to the Proposed Transaction and believes the TCLP Partners would waive their pre-emptive rights
to allow the Alternative Proposal to proceed and the BNZ would approve the Alternative Proposal, and the Board
has received legal advice that failure to act on such a proposal (a Superior Proposal) would be likely to violate their
fiduciary duties. Rubicon must give the Purchasers the opportunity to match any such Superior Proposal.
Key representations, warranties and undertakings
Rubicon TC Holdings and Rubicon warrant to Knott, Libra, and the existing Partner purchasers of its TCLP interest,
that:
The Company has full legal title to the Shares; and
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The Company is duly authorised to enter into the Proposed Transaction.
Other warranties given are limited in nature, have a life of only six months, and a maximum aggregate claim amount
of US$0.4 million, with the main warranty being that the Company did not make any claim (and did not elect not to
pursue a claim) under the warranties given by Tenon in the Tenon Purchase Agreement, and no circumstance
existed that would have allowed TCLP to make such a claim, and there is no fact, circumstance or matter now
existing that would allow a claim to proceed under the Tenon Purchase Agreement had that warranty period not
already expired.
Knott, Libra, and the existing Partner purchasers of Rubicon TC Holdings’ TCLP interest, acknowledge that apart
from the above warranties made by TC Holdings and Rubicon, that no other warranties or representations are being
given, and that they are relying solely on their own judgement, investigations, and professional advice, and that they
are not relying on any statement, undertaking, representation or warranty of any kind, other than the warranties
noted above.
Knott and Libra have undertaken to sign a deed of adherence to TCLP in the form required by the LPA.
Closing
If the Company’s shareholders approve the Proposed Transaction at the Meeting and all other conditions are
satisfied, Closing of the Proposed Transaction will take place on 31 January 2018.
Use of Sale proceeds
The net proceeds of the Proposed Transaction (together with existing cash resources) will be used to meet the
outstanding US$15 million in deferred settlement payments relating to the ArborGen acquisition made by Rubicon
earlier this year, and the repayment of the outstanding US$6 million subordinated note on 1 July 2018. Rubicon’s
residual cash balance (net of restructuring costs) will then be used to advance ArborGen’s business and operations.
Guarantee and other covenants provided by the Company
Rubicon has guaranteed Rubicon TC Holdings’ performance of its obligations under the Sale Agreement.
Summary of Independent Advisers’ Report to shareholders
Grant Samuel & Associates Limited was commissioned by the Independent Directors to undertake an independent
review of the Proposed Transaction. Section 5.8 of Grant Samuel’s report, Fairness of the Proposed Transaction
for the purposes of the NZX Listing Rules, concludes:
“In Grant Samuel’s opinion, based on the analysis of the merits outlined above, the terms of the Proposed
Transaction are fair and reasonable to the shareholders of Rubicon not associated with Knott and Libra. In Grant
Samuel’s opinion, the information to be provided by Rubicon to its shareholders is sufficient to enable holders of
those shares to understand all the relevant factors and make an informed decision as to the sale of Rubicon’s
interest in TCLP.”
A full copy of the Grant Samuel report is appended to this Notice of Meeting, and the above extract should not be
read in isolation from the full Grant Samuel report. Please also make reference to page 8 of the Grant Samuel
report, where a schematic of Rubicon’s investment ownership position is shown.
If the Proposed Transaction does not proceed
As described above, the Proposed Transaction is subject to the Company’s shareholders approving it at the
Meeting. The Proposed Transaction will not complete in the event that shareholders do not approve it or one of the
other conditions is not satisfied or waived. There are no break fees or termination fees should the Proposed
Transaction not be approved by shareholders.
Rubicon would then continue to own 44.88% of TCLP, and it would continue to be subject to the risks and
influences to which it is currently exposed. Those influences include the level of activity in the various sectors of the
economies in which it competes, particularly in New Zealand, Europe, and North America, fluctuations in industrial
output, commercial and residential construction activity, capital availability, housing turnover and pricing, levels of
repairs, remodelling and additions to existing homes, new housing starts, fibre availability, relative exchange rates
(particularly Euro and US$), interest rates and profitability of customers. Other risks include competitor product
development, product demand and pricing, input costs, and customer concentration risk.
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In addition, Rubicon would need to find another source of funding in order to meet the outstanding US$15 million in
deferred settlement payments relating to the ArborGen acquisition made earlier this year, and the repayment of the
outstanding US$6 million subordinated notes, all by 1 July 2018.
If the Proposed Transaction does not proceed, Rubicon would not be able to remove all of the estimated (up to)
US$2 million per annum in overhead savings.
Whilst Rubicon believes the 4.88% proposed to be sold to existing TCLP Partners will be fully acquired by those
Partners, if it were not then Rubicon would look to sell any remaining balance to other parties.
Alternatives to the Proposed Transaction
The main alternative to the Proposed Transaction that was considered was the issuance of new Rubicon equity.
The Independent Committee rejected this alternative, given its belief that the Rubicon share price is materially
undervalued at the current level, that any share placement would be dilutive to non-participating shareholders, and
that a rights issue would be expensive and time-consuming to complete and with unknown certainty of outcome in
the absence of a full underwrite.
Recommendation
The Independent Directors consider that the Closing of the Proposed Transaction is in the Company’s best
interests and of benefit to all shareholders and, as a result, unanimously recommend that shareholders
vote in favour of the Proposed Transaction.
Directors
Directors of the Company, and associated persons of those Directors, who own Rubicon shares are shown in the
table below.
Shares held by Directors and/or associated persons
Director How held Number of Ordinary
Shares
% of Rubicon
issued shares
David Knott, Dave Knott
Jr, and Associates
Beneficial 137,663,111 28.2%
Libra Funds LP, Ranjan
Tandon, and Associates
Beneficial 86,108,419 17.7%
H.A. Fletcher Non-Beneficial 5,775,286 1.2%
W.A. Hasler Beneficial 823,804 0.2%
S.G. Kasnet Beneficial and
Non - Beneficial
613,220 0.1%
S.L. Moriarty Beneficial 3,495,476 0.7%
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Glossary
The following terms have the following meanings when used in this Notice of Meeting.
Associates means, in respect of a person, that person’s “Associated Persons” for the purposes of the NZX Main
Board Listing Rules. In broad terms, a person (the “first person”) is an Associated Person of another person (the
“second person”) if, in making a decision or exercising a power affecting the Company, the first person could be
influenced as a consequence of an arrangement or relationship existing between, or involving, the first person and
the second person.
Board means the board of directors of the Company.
Closing means 31 January 2018.
Companies Act means the Companies Act 1993 (New Zealand).
Company means Rubicon Limited and/or Rubicon TC Holdings LP as the context may require.
Directors mean the directors of the Company.
Group means Rubicon Limited and its subsidiaries.
Guarantor means Rubicon Limited, who is guaranteeing the performance by Rubicon TC Holdings of its obligations
under the Sale Agreement
Independent Committee means a Committee of Independent Directors.
Independent Directors means George Karaplis and Steve Kasnet.
Knott means Dorset Management Corporation, and Knott Partners LP (who together with Associates own 28.2% of
Rubicon’s issued shares).
Libra means Libra Partners NZ, LLC, and Libra Fund LP (who together with Associates own 17.7% of Rubicon’s
issued shares).
LPA means the Limited Partnership Agreement that governs TCLP.
Meeting means the meeting of shareholders of the Company, to be held on 12 January 2018, and any adjournments
or postponements thereof.
Net Debt means TCLP’s outstanding bank debt (inclusive of accrued and unpaid interest) less cash at bank and liquid
deposits (including accrued and unpaid interest receivable)
Notice of Meeting means this notice of meeting by the Company for the purpose of calling the Meeting.
NZ$ means New Zealand dollars.
NZX Main Board means the main board equity securities market operated by NZX.
Partner(s) means a Limited Partner owning shares issued by TCLP.
Purchase Price refers to the Purchase price for all Rubicon TC Holdings’ ownership interest in TCLP, and means
US$14,226,000, plus the US$ amount by which Net Debt has reduced (in the period from 28 April 2017 through to 31
December 2017) multiplied by 44.88%.
Purchase Price Per Share means Purchase Price divided by 14,226,000.
Proposed Transaction means the Sale of Rubicon TC Holdings’ ownership interest in TCLP.
Purchaser(s) means Knott, Libra, and the existing TCLP shareholders who purchase 4.88% of TCLP.
13
Rubicon means Rubicon Limited or, where the context requires, the group comprising Rubicon Limited and its
subsidiaries.
Rubicon TC Holdings means Rubicon TC Holdings LP, the direct owner of Rubicon’s 44.88% TCLP shares
Sale means the sale of Rubicon TC Holdings’ 44.88% ownership interest in TCLP.
Sale Agreement means the sale and purchase agreement relating to Rubicon TC Holdings’ ownership interest in
TCLP, between Rubicon TC Holdings (and Rubicon Limited as Guarantor) and the Purchasers, over 40% of TCLP’s
issued shares.
Share Registrar means Computershare Investor Services Limited.
TCLP means the Tenon Clearwood Limited Partnership, which, on 28 April 2017, acquired the assets of the
Clearwood business formerly owned by Tenon Limited
Tenon means Tenon Limited or, where the context requires, the group comprising Tenon Limited and its subsidiaries.
Tenon Purchase Agreement means the sale and purchase agreement relating to the Clearwood business and
assets, dated 14 February 2017, between Tenon Manufacturing Limited, Tenon, and TCLP.
US$ means United States dollars.
Voting/Proxy Form means the voting / proxy form accompanying this Notice of Meeting.
---
1
RUBICON LIMITED
INDEPENDENT APPRAISAL REPORT ON THE PROPOSED SALE OF RUBICON
LIMITED’S INTEREST IN TENON CLEARWOOD LIMITED PARTNERSHIP
GRANT SAMUEL & ASSOCIATES LIMITED
DECEMBER 2017
2
TABLE OF CONTENTS
1 TERMS OF THE PROPOSED TRANSACTION ____________________________________________________ 3
1.1 Background _______________________________________________________________________ 3
1.2 Details of the Proposed Transaction ____________________________________________________ 3
2 SCOPE OF THE REPORT ___________________________________________________________________ 5
2.1 Purpose of the Report _______________________________________________________________ 5
2.2 Requirements of the NZX Listing Rules __________________________________________________ 5
2.3 Basis of Evaluation __________________________________________________________________ 6
3 PROFILE OF RUBICON ____________________________________________________________________ 7
3.1 History ___________________________________________________________________________ 7
3.2 Rubicon Forecast Financial Performance ________________________________________________ 8
3.3 Rubicon Financial Position ____________________________________________________________ 9
3.4 Cash Flows _______________________________________________________________________ 10
3.5 Tenon Clearwood Limited Partnership _________________________________________________ 10
3.6 Profile of ArborGen ________________________________________________________________ 14
3.7 Rubicon’s Ownership _______________________________________________________________ 17
3.8 Rubicon’s Share Price Performance ___________________________________________________ 17
4 VALUATION OF TENON CLEARWOOD LIMITED PARTNERSHIP ___________________________________ 18
4.1 Summary ________________________________________________________________________ 18
4.2 Earnings for Valuation ______________________________________________________________ 19
4.3 Preferred Methodology _____________________________________________________________ 19
4.4 Earnings Multiple Analysis ___________________________________________________________ 20
5 MERITS OF THE PROPOSED TRANSACTION __________________________________________________ 23
5.1 Evaluation and Summary of the Proposed Transaction ____________________________________ 23
5.2 Evaluation of the Sale Price and Terms of the Proposed Transaction _________________________ 23
5.3 Merits of the Proposed Transaction ___________________________________________________ 23
5.4 The likelihood of an alternative offer __________________________________________________ 24
5.5 Evaluation on the impact of Rubicon’s earnings and financial position ________________________ 25
5.6 Alternatives to the Proposed Transaction _______________________________________________ 26
5.7 The timing and circumstances surrounding the Proposed Transaction ________________________ 26
5.8 Fairness of the Proposed Transaction for the purposes of the NZX Listing Rules ________________ 26
5.9 Acceptance or Rejection of the Proposed Transaction _____________________________________ 26
APPENDIX 1 RECENT TRANSACTION EVIDENCE ___________________________________________________ 26
APPENDIX 2 COMPARABLE LISTED COMPANIES __________________________________________________ 28
APPENDIX 3 OVERVIEW OF THE NEW ZEALAND TIMBER PROCESSING INDUSTRY ________________________ 29
APPENDIX 4 VALUATION METHODOLOGY DESCRIPTIONS ___________________________________________ 30
APPENDIX 5 INTERPRETATION OF MULTIPLES ____________________________________________________ 32
APPENDIX 6 QUALIFICATIONS, DECLARATIONS AND CONSENTS ______________________________________ 34
3
1 Terms of the Proposed Transaction
1.1 Background
On 11 December 2017, Rubicon Limited (Rubicon) announced that it proposes to sell its 44.88%
shareholding
1
in Tenon Clearwood Limited Partnership (TCLP) to Dorset Management Corporation (an
affiliate of Knott Partners LP) (Knott), Libra Partners NZ, LLC (an affiliate of Libra Fund LP) (Libra) and the
other partners in TCLP (together the Proposed Purchasers) for consideration estimated to be US$15.3
million, representing the cost of Rubicon’s investment into TCLP in April 2017 (US$14.2 million) plus Rubicon’s
share of the net cash generated in TCLP in the period from 28 April 2017 through to 31 December 2017
(estimated to be US$1.1 million following the payment of an upcoming dividend of US$0.7 million in
December 2017)
2
(the Proposed Transaction).
A summary of the proportion of Rubicon’s TCLP shares that the Proposed Purchasers are acquiring is outlined
below:
PROPOSED PURCHASERS – PROPORTION OF SHARES ACQUIRED
% OF TCLP SHAREHOLDING ACQUIRED
Knott 20.00%
Libra 20.00%
Existing TCLP Limited Partners 4.88%
Share % to be acquired 44.88%
Under the TCLP Partnership Agreement, the Limited Partners have pre-emptive rights should partners wish
to sell their shareholding. All existing Partners have agreed to waive their pre-emptive rights over the 40%
interest in TCLP being sold to Knott and Libra. The residual 4.88% balance is to be taken up by existing TCLP
Limited Partners under the pre-emptive provisions of the TCLP Partnership Agreement.
In June 2017, Rubicon acquired the remaining 66.66% of the shares it did not own in US-based forestry
genetics company, ArborGen Inc. (ArborGen) for US$28.5 million. Rubicon needs to make two final deferred-
settlement payments totalling US$15 million to complete the purchase of ArborGen. In addition, Rubicon
also needs to repay US$6 million of subordinated debt notes on 30 June 2018.
The sale of the 44.88% interest in TCLP will result in ArborGen being Rubicon’s sole asset.
The completion of the Proposed Transaction will ensure funding calls on Rubicon Shareholders will not be
required in order for Rubicon to meet all of these payments.
1.2 Details of the Proposed Transaction
The proposed sale of Rubicon’s 44.88% shareholding in TCLP is subject to the satisfaction of certain conditions
which include:
§ the approval of the Proposed Transaction. There will be one resolution on which shareholders will be
asked to vote on:
• an ordinary resolution of shareholders to approve the Proposed Transaction as it may change
the essential nature of Rubicon’s business. This is required under Listing Rule 9.1; and
• an ordinary resolution to approve a material transaction with a related party. This is required
under Listing Rule 9.2.
§ the BNZ, as lender to TCLP, unconditionally approving the Proposed Transaction and continuing to make
available its current bank facilities to TCLP on existing terms;
_________________________________________________________________________________________________________________________________________________________
1
Shares are held by Rubicon TC Holdings, a 100% subsidiary of Rubicon Limited. For the purpose of this report company means Rubicon Limited or Rubicon TC
Holdings Limited as the case may be.
2
The net debt position will not be known until 10 January 2018.
4
§ TCLP’s business not having suffered a material adverse change (or an event having occurred that is
reasonably likely to result in that occurring); and
§ no law being enacted or enforced that prevents the consummation of the Proposed Transaction.
The fundamental warranties being provided to the Proposed Purchasers are that Rubicon:
§ has full legal title to the Shares; and
§ is duly authorised to enter into the Proposed Transaction.
Other warranties being given are limited in nature, have a life of only six months, and a maximum aggregate
claim amount of US$0.4 million.
Rubicon has entered into an exclusivity agreement with the Proposed Purchasers not to actively pursue any
proposals with any person in relation to a potential sale of its TCLP investment unless the Proposed
Transaction sale agreement (Sale Agreement) has been terminated in accordance with its terms. If Rubicon
receives an unsolicited approach from a third party to acquire Rubicon’s 44.88% interest in TCLP (an
Alternative Proposal), it must advise that third party of the existence of the Sale Agreement and notify the
Proposed Purchasers of the approach received (including its terms). However, Rubicon may engage with a
third party in respect of an Alternative Proposal if:
§ it is received before shareholders approve the Proposed Transaction; and
§ the Independent Committee:
• considers that it is superior to the Proposed Transaction; and
• believes the TCLP Partners would waive their pre-emptive rights to allow the Alternative Proposal
to proceed; and
• believes the BNZ would approve the Alternative Proposal; and
§ the Committee has received legal advice that failure to act on such a proposal would be likely to violate
their fiduciary duties.
Rubicon must give the Proposed Purchasers the opportunity to match any such superior proposal.
The Proposed Acquisition is conditional upon the resolution being passed by Rubicon shareholders. If the
resolution is passed by Rubicon shareholders, the transaction is expected to be completed on 31 January
2018.
5
2 Scope of the Report
2.1 Purpose of the Report
The Independent Directors of Rubicon have engaged Grant Samuel and Associates (Grant Samuel) to prepare
an Independent Appraisal Report to consider the Proposed Transaction. Grant Samuel is independent of
Rubicon, the Proposed Purchasers and the TCLP and has no involvement with, or interest in, the outcome of
the Proposed Transaction.
The Proposed Transaction is subject to both Rule 9.1 of the NZSX Listing Rules relating to the disposal of a
listed company’s assets and Rule 9.2 relating to transactions with related parties.
The Notice of Meeting to consider the Proposed Transaction must contain such information, reports,
valuations, and other material as are necessary to enable the holders of Rubicon shares to appraise the
implications of the Proposed Transaction.
A copy of this report will accompany the Notice of Meeting to be sent to all Rubicon shareholders. This report
is addressed to Rubicon’s Independent Directors, for the benefit of Rubicon shareholders not associated with
Knott and Libra and their associates.
The report should not be used for any purpose other than as an expression of Grant Samuel’s opinion as to
the fairness of the Proposed Transaction. This report should be read in conjunction with the Qualifications,
Declarations and Consents outlined at Appendix 6.
2.2 Requirements of the NZX Listing Rules
2.2.1 Major transaction under Listing Rule 9.1.
Listing Rule 9.1.1 provides that, except with the prior approval of an ordinary resolution, Rubicon may not
enter into any transaction or series of linked or related transactions to acquire, sell, exchange, or otherwise
dispose of assets in Rubicon:
a) which would change the essential nature of the business of the Company; or
b) in respect of which the gross value is in excess of 50% of the average market capitalisation of the
Company.
In accordance with 9.1.2, an Appraisal Report is required to accompany the Notice of Meeting to approve
the required ordinary resolution.
2.2.2 Transaction with Related Parties under Listing Rule 9.2.1.
Listing Rule 9.2.1 requires that where there is a material transaction with a Related Party, it must be approved
by the shareholders other than the related parties and its associates. The Notice of Meeting must be
accompanied by an Appraisal Report which contains such information as is necessary for Rubicon
shareholders to decide whether the terms of the proposed sale are fair.
Some of the Proposed Purchasers are considered to be Related Parties of Rubicon, as the beneficial
shareholders of Knott and Libra each hold a relevant interest in 10% or more of Rubicon’s issued share capital.
Knott and Libra together hold 45.9% of Rubicon’s shares. In relation to Rule 9.2, Knott and Libra and their
associates cannot vote on that part of the ordinary resolution.
In addition, Rubicon directors Hugh Fletcher, William Hasler and Luke Moriarty, and management, (and/or
parties associated with them) hold shares in TCLP and will not vote their Rubicon shares on the resolution.
While they are not contractually required or committed to acquire any of the TCLP shares Rubicon is
proposing to sell, they have pro rata pre-emptive rights (common to all TCLP shareholders) under the TCLP
Partnership Agreement, which will enable them to acquire shares in respect to some of the 4.88% not being
acquired by Knott and Libra.
6
2.2.3 Appraisal Report Requirements
Pursuant to Listing Rule 1.7.2, the Appraisal Report is required to:
§ be addressed to the Independent Directors of Rubicon;
§ be expressed to be for the benefit of the shareholders of Rubicon not associated with Knott and Libra
and their associates;
§ state whether or not in the opinion of Grant Samuel the consideration and the terms and condition of
the proposed sale of the 44.88% interest in TCLP are “fair” to Rubicon’s shareholders (other than those
associated with Knott and Libra and their associates);
§ state whether or not in Grant Samuel’s opinion the information to be provided by Rubicon to its
shareholders is sufficient to enable holders of those shares to understand all the relevant factors and
make an informed decision as to the “fairness” of the proposed sale and the grounds for that opinion;
§ state whether Grant Samuel has obtained all information which it believes desirable for the purposes
of preparing the report, including all relevant information which is or should have been known by any
director of Rubicon and made available to the directors;
§ state any material assumptions on which Grant Samuel’s opinion is based; and
§ state any term of reference which may have materially restricted the scope of the report.
The term “fair” has no legal definition in New Zealand either in the NZX Listing Rules or in any other statutes
dealing with securities or commercial law. However, guidance in interpreting and applying the rule can be
gained both from regulatory interpretation in other jurisdictions and rulings made by the NZX.
The decision of each Rubicon shareholder as to whether or not to vote in favour of the Proposed Transaction
is a matter for individual shareholders, having considered all relevant factors and their own preference either
in favour of or against the Proposed Transaction.
2.3 Basis of Evaluation
Grant Samuel has evaluated the Proposed Transaction by reviewing the following factors:
§ the estimated value range of the 44.88% interest in TCLP and the value of the Proposed Transaction
when compared to the estimated value range;
§ the likelihood of an alternative offer and alternative transactions that could realise fair value;
§ any advantages or disadvantages for Rubicon shareholders of accepting or rejecting the Proposed
Transaction;
§ the potential alternatives to the Proposed Transaction and the process followed to yield these
outcomes; and
§ reviewing the current trading conditions for TCLP and the timing and circumstances surrounding the
Proposed Transaction.
7
3 Profile of Rubicon
3.1 History
Rubicon was formed as a new company to assist in the separation of the Fletcher Challenge Group, and also
in the capitalisation of Fletcher Forests Limited (Fletcher Forests) to allow that company to become a stand-
alone entity. Tenon Limited (Tenon) subsequently emerged from the restructuring of Fletcher Forests, which
itself was originally part of the Fletcher Challenge Limited (Fletcher Challenge) group of companies. As part
of the Fletcher Challenge separation transactions Fletcher Forests received NZ$90 million from a placement
of Fletcher Forests shares to newly formed Rubicon and NZ$80 million from the sale of its South American
and biotechnology assets to Rubicon. The Fletcher Challenge separation was implemented in March 2001,
following which Rubicon and Fletcher Forests traded as separate publicly listed entities.
In late 2002, Fletcher Forests transitioned from a forestry growth strategy to refocus its business on the
higher yielding wood processing, marketing and in-market distribution activities. In 2003 Fletcher Forests
sold all of its forest estates and contemporaneously with the sale, changed its name to Tenon. Sale proceeds
from the forest estate sale were distributed to shareholders. In March 2004, Rubicon successfully launched
a takeover bid to acquire 50.01% of Tenon, and it has since increased its ownership interest to 59.78%.
In December 2016, Tenon sold the company’s North American business to Blue Wolf Capital for
approximately US$113 million (the Tenon USA Transaction).
In April 2017, Tenon sold its last remaining asset, the Clearwood business (Clearwood) to TCLP. As a result
of this transaction:
§ Rubicon became a 44.88% shareholder in TCLP, at a cost of US$14.2 million; and
§ Tenon delisted from the NZX Main Board on 31 July 2017 and Tenon shareholders have voted to place
Tenon into voluntary liquidation given it no longer has any operating assets. The proportion of the
Tenon cash surplus upon completion of the liquidation payable to Rubicon is estimated to be around
US$2.6 million, and the payment should be able to be made in the first quarter of 2018.
Today, Rubicon is comprised of:
§ a 100% interest in US-based forestry genetics company, ArborGen;
§ a 44.88% interest in TCLP; and
§ a 59.78% interest in Tenon.
RUBICON – SUMMARISED COMPANY STRUCTURE
Entering voluntary liquidation
59.78%
shareholder
100.00%
shareholder
44.88%
shareholder
Rubicon
100.00%
shareholder
Clearwood
AborGen
Tenon
TCLP
8
The sale of Rubicon’s interest in TCLP and the liquidation of Tenon will result in ArborGen being Rubicon’s
sole asset. Rubicon has a 100% voting interest and ownership in ArborGen, and a 95% economic interest due
to outstanding warrants relating to ArborGen’s acquisition of Cellfor in 2012. The warrants are automatically
exercised upon an IPO of ArborGen or alternatively at any time if 66.7% of the warrant holders elect to do
so. The warrants can also be exercised by ArborGen if substantially all of ArborGen’s assets are sold or if
50.01% or more of ArborGen’s shares are sold. The warrants do not provide the holders with access to
dividends. In addition, ArborGen’s senior management team hold options in respect of 5.3% of ArborGen’s
issued capital. The options are fully vested and are exercisable at the same price per share paid by Rubicon
(when it moved to 100% ownership of ArborGen in June 2017) by the option holders upon an IPO of
ArborGen, the sale of all or substantially all of ArborGen’s assets or shares, or the issue of new shares
resulting in a change in majority control of ArborGen.
3.2 Rubicon Forecast Financial Performance
The pro forma forecast financial performance of Rubicon for the 12 months ending 31 March 2018 (FY18)
(prior to the Proposed Transaction) is summarised below:
RUBICON PRO FORMA FINANCIAL PERFORMANCE (US$MILLIONS)
YEAR ENDED 31 MARCH 2018F
Revenue
128.8
Cost of sales (98.6)
Gross profit
30.2
Gross margin %
23%
Overhead expenses
(13.8)
EBITDA
16.4
EBITDA margin %
13%
Depreciation and amortisation
(10.3)
EBIT 6.1
Net Interest (4.0)
Net profit before tax
2.1
Tax
-
Net profit after tax
2.1
The following points should be taken into consideration when reviewing the table above:
§ over the last 12 months Rubicon has changed its balance date from 30 June to 30 September, Tenon
(which is consolidated into Rubicon’s accounts) sold its US distribution business to Blue Wolf, and
Clearwood to TCLP, and Rubicon acquired the remaining 66.66% of the shares in ArborGen that it did
not already own. The transaction activity and balance date change makes it challenging to compare
Rubicon’s financial performance prior periods;
§ the pro forma forecast presented above combines the FY18 forecast for TCLP and ArborGen (detailed
below). It is important to note that, although TCLP is consolidated into Rubicon’s financial statements
(because it has a 50.01% voting control by virtue of voting control agreements over 5.13% of the TCLP
shares), it only owns 44.88% of TCLP and Rubicon shareholders are, subject to meeting various bank
covenants, only entitled to its proportion of net profit before taxation from the business;
§ the pro forma position before the Proposed Transaction is outlined above as it is used to assess the
merits of the Proposed Transaction (see section 5.5); and
§ analysis of the underlying financial performance of TCLP and ArborGen are provided in sections 3.5 and
3.6 of this report.
9
3.3 Rubicon Financial Position
The financial position of Rubicon as at 30 September 2017, as reported in Rubicon’s 2017 audited financial
statements and the pro forma financial position after the liquidation of Tenon, payment of the deferred-
settlement payments in relation to the acquisition of ArborGen and the repayment of the subordinated debt
is summarised below:
RUBICON – FINANCIAL POSITION (US$ MILLIONS)
AS AT 30 SEPTEMBER 2017 AS REPORTED
PRO FORMA
ADJUSTMENTS
PRO FORMA POSITION
BEFORE THE
PROPOSED
TRANSACTION
Receivables
9.1 - 9.1
Inventory 41.0 - 41.0
Creditors (23.6) 1.1 (22.5)
Current lease obligation (0.7) - (0.7)
Working capital
25.8 1.1 26.9
Fixed assets 62.0 - 62.0
Goodwill 18.0 - 18.0
Intellectual property 106.9 - 106.9
Deferred tax liability (6.0) - (6.0)
Net operating assets
206.7 1.1 207.8
Cash and liquid deposits 31.2 (23.8) 7.4
Deferred settlement (15.0) 15.0 -
Current Debt (17.9) 6.0 (11.9)
Term debt (33.3) - (33.3)
Net bank debt
(35.0) (2.8) (37.8)
Lease obligation (11.9) - (11.9)
Net debt
(46.9) (2.8) (49.7)
Net assets 159.8 (1.7) 158.1
The following points should be taken into consideration when reviewing the table above:
§ the pro forma position before the Proposed Transaction is outlined above as it is used to assess the
merit of the Proposed Transaction (see section 5.5);
§ the pro forma financial position assumes a US$2.6 million capital return from the liquidation of Tenon;
and
§ analysis of the underlying balance sheets of TCLP and ArborGen are provided in sections 3.5 and 3.6.
10
3.4 Cash Flows
The pro forma forecast cash flows for Rubicon for FY18F are summarised below:
RUBICON – PRO FORMA FREE CASH FLOW (US$ MILLIONS)
YEAR END 31 MARCH
3
2018F
EBITDA less finance costs 12.4
Less: Capital expenditure (3.2)
Less: R&D (5.8)
Free cash flow before movements in working capital 3.4
3.5 Tenon Clearwood Limited Partnership
3.5.1 Business operations
TCLP (i.e. Clearwood) is the leading New Zealand manufacturer of radiata clear wood products for sale into
the high-value global markets in Europe and the US. The business comprises a large grade cutting mill in
Taupo, New Zealand with an associated remanufacturing plant, and integrated global sales and marketing
activities. The company is responsible for exporting approximately 30% of the total manufactured pine
products from New Zealand to the US, and is the fifth largest containerised exporter out of New Zealand.
Clearwood employs approximately 275 full time equivalent staff and operates in the New Zealand Timber
Processing industry. An overview of the New Zealand Timber Processing industry is provided in Appendix 3.
The US is Clearwood’s primary export market, being the destination for approximately 85% of all its high-
value products, with Europe being Clearwood’s second major fast-developing market. Clearwood’s key
export markets are described below:
§ United States - supplying into the new home construction market (via its own sales and distribution
arm (Taupo Wood Solutions selling to pro-dealers and wholesalers) and to the remodelling & renovation
market both directly and indirectly (through Empire, under a 5-year exclusive arrangement);
§ Europe - supplying the high-value, high-growth wood modification market; and
§ Other markets - these primarily comprise China and New Zealand for lower-grade ‘shop’ and industrial
product.
New Zealand’s pruned radiata pine resource is unique globally as the harvested log at maturity contains
approximately 5.0-5.5 metres in length of clear (no knots) high quality fibre – this is the genesis of Tenon’s
‘Clearwood’ business name. Although clear wood represents only 30% of the volume of a pruned log, it
typically represents more than 50% of the log’s total value.
The Clearwood operation procures approximately 300,000 m
3
annually of high quality pruned logs from
Central North Island forest owners. At its operations in Taupo, it converts the logs into long length, clear
boards, moulding and related products. Initially, Clearwood converted these logs solely into clear commodity
lumber and sold that to US-based remanufacturers, however over the past decade Clearwood has developed
its own portfolio of customers and markets for finished processed clear products, to such an extent that
today 85% of Clearwood’s high-value clear product is sold by it in remanufactured form, with only 15% being
sold as clear lumber.
_________________________________________________________________________________________________________________________________________________________
3
Includes 100% of TCLP’s cash flow.
11
3.5.2 Procurement
Clearwood is the largest consumer of pruned logs in New Zealand, and sources the vast majority of its
requirements from the Central North Island forest estate. The projected supply from this market is shown
below:
PROJECTED CENTRAL NORTH ISLAND PRUNED LOG RESOURCE
4
Clearwood benefits from having in-depth knowledge of the forestry market, as it was the previous owner of
significant forest resources in the Central North Island. This gives the company insights into log quality,
demand and supply requirements, industry volume and price metrics, assisting Clearwood in its objective of
acquiring the highest quality logs at the lowest average delivered price.
3.5.3 Sawmill and remanufacturing operations
Clearwood operates the largest pruned log sawmill in New Zealand. Based in Taupo, the 377,000 square foot
sawmill and warehouse facility is situated on a combined site of 34.4 hectares (including 12.5 hectares of
surplus land). The sawmill currently operates at 75% of capacity, consuming approximately 300,000m
3
of
logs per annum. This throughput can be increased to 3.5-4.0 shifts a day, consuming up to approximately
400,000 m
3
of logs per annum. Clearwood has consistently and successfully run on four shifts previously to
meet market demand. There are nine kilns operating on the site, which are powered by geothermal energy.
Clearwood has recently installed new technology including an optimising edger in September 2015 at a cost
US$4.7 million, and an upgrade to the ripline in the remanufacturing plant in the final quarter of FY16 at a
cost of US$2.3 million. The commissioning of the edger and ripline projects completed all major programmed
capital expenditure at the Taupo site, other than the installation of additional drying kilns (estimated at
approximately US$2 million) which would be required if the site was to move to a four-shift basis, if and when
market demand warranted this investment.
_________________________________________________________________________________________________________________________________________________________
4
Tenon (from National Exotic Forest Description Report and Ministry of Primary Industries)
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
2015 -20192020 -20242025 -2029
Tonnes per annum
12
3.5.4 Clearwood Financial Performance
The financial performance of Clearwood (excluding corporate and public company overhead costs) for the
financial years ended 30 June 2015 (FY15), 2016 (FY16) and 2017 (FY17) together with the forecast for
Clearwood for the year ending 31 March 2018 (FY18) is summarised below.
CLEARWOOD FINANCIAL PERFORMANCE (US$ MILLIONS)
30 JUNE 31 MARCH
YEAR END 2015 2016 2017 2018F
5
Sales 76.7 81.2 87.9 80.8
Cost of sales (68.5) (66.6) (76.0) (68.8)
Gross profit 8.2 14.6 11.9 12.0
Gross margin % 11% 18% 14% 15%
Overhead expenses (2.8) (2.8) (1.8) (2.7)
EBITDA 5.4 11.8 10.1 9.3
EBITDA margin % 7% 14% 11% 12%
Depreciation and amortisation (1.0) (1.4) (1.6) (1.6)
EBIT 4.4 10.4 8.5 7.7
The following points should be taken into consideration when reviewing the table above:
§ when Clearwood was acquired by TCLP the balance date was changed from 30 June to 31 March;
§ Clearwood’s gross margin increased in FY16 due to a change in product mix towards higher value
products, the impact of the edger and ripline upgrades, and the weaker New Zealand dollar;
§ the gross margin decline in FY17 was largely due:
• to the average exchange rates increasing from NZ$0.67 to over NZ$0.71 per US$, and from
NZ$0.60 to over NZ$0.66 per EURO; and
• log prices remaining relatively constant in US dollar terms for the past 12 months;
§ Clearwood is a US functional currency operation, and the strength of the New Zealand dollar is a key
driver of earnings. A 1 cent movement in the US dollar against the weighted basket of currencies
Clearwood trades with would equate to an approximate US$0.5 million EBITDA impact, ceteris paribus
(assuming no compensating change in New Zealand dollar log prices). A 1 cent movement in the US
dollar against the EURO would equate to an approximate US$0.2 million EBITDA impact, ceteris paribus.
A 1 cent movement in the US dollar against the NZ dollar would equate to an approximate US$0.7
million EBITDA impact ceteris paribus. NZ dollar log prices have historically tended to move with
changes in the US dollar. If this was assumed in the US dollar sensitivity against TCLP’s weighted basket
of currencies, the 1 cent sensitivity would reduce from $0.5 million to $nil;
§ Clearwood has exited its Australian activities and therefore the results shown above exclude the
Australian activities over the past three financial years; and
§ the forecast for the year ending 31 March 2018 is based on the following material assumptions:
• USD: NZD average over the year of 0.710;
• EURO: NZD average over the year of 0.614;
• log purchases of 290,500 tonnes; and
• sawmill production of 168,000 tonnes.
_________________________________________________________________________________________________________________________________________________________
5
Net of General Partner fees of US$0.25m pa and US$0.2m pa of costs previously borne by Tenon corporate.
13
3.5.5 Clearwood Financial Position
The financial position of Clearwood as at 30 September 2017 is summarised below:
CLEARWOOD – FINANCIAL POSITION (US$ MILLIONS)
AS AT 30 SEPTEMBER 2017
Receivables
6.3
Inventory 12.2
Creditors (9.3)
Working capital 9.2
Fixed assets 17.4
Goodwill 18.0
Net operating assets
44.6
Cash and liquid deposits 3.7
Current debt (4.2)
Term debt (19.3)
Net bank debt
(19.8)
Net assets 24.8
The following points should be taken into consideration when reviewing the table above:
§ the TCLP financial position reflects the acquisition of Clearwood for US$55 million in April 2017; and
§ TCLP is required to reduce its 5-year bank acquisition facility by US$4.3 million per annum, until the
principal is reduced to US$15 million. Rubicon believes that these payments will be made and that TCLP
will continue to operate within its financial covenants even if the Proposed Transaction is not approved.
3.5.6 Cash Flows
The cash flows for Clearwood for FY15, FY16, FY17 and FY18F are summarised below:
CLEARWOOD - FREE CASH FLOW (US$ MILLIONS)
30 JUNE 31 MARCH
YEAR END 2015 2016 2017 2018F
EBITDA less finance costs
6
5.4 11.8 10.1 8.2
Less: Capital expenditure (5.9) (3.7) (1.1) (1.3)
Free cash flow (excluding movements in working capital)
(0.5) 8.1 9.0
6.9
_________________________________________________________________________________________________________________________________________________________
6
Financing costs were not attributed to Clearwood in the years 2015-2017.
14
3.6 Profile of ArborGen
3.6.1 Background
ArborGen was established in 2000 and is considered to be a global leader in the commercialisation of
advanced forestry genetics. Through the application of a proprietary technology platform to its extensive
forestry germplasm base (i.e. genetic library), ArborGen develops and produces high-value plantation tree
seedlings that generate an improvement in forestry productivity.
ArborGen has a strong and growing market position, with over 6,000 active customers, including many of the
largest forest land owners and managers in the United States, New Zealand, Brazil and Australia.
ArborGen is the largest global provider of tree seedlings to the commercial forestry industry, currently
producing more than 350 million seedlings per annum. Its products are specifically developed for land owners
and managers supplying the sawtimber, plywood and other structural wood products, pulp and paper, and
industrial markets. ArborGen’s current focus is on loblolly pine, radiata pine and eucalyptus, which are
among the most widely-planted commercial species in the world.
ArborGen has 160 employees and owns or leases 15 nurseries, 16 seed orchards, 32 distribution centres and
three research and development facilities located throughout the Southern United States, New Zealand,
Australia and Brazil.
3.6.2 Intellectual Property
ArborGen’s proprietary ‘tree machine’ technology platform enables it to be the only commercial seedling
company with products spanning a broad technology spectrum. It sells conventional seedling products
developed using traditional plant breeding methods, as well as proprietary next-generation seedling
products developed using plant breeding technologies (including genomics) and clonal propagation. Its next-
generation products are designed to enhance customers’ financial returns by, for example, improving the
growth rates, yields, log quality, uniformity and processing efficiency of trees, and enable it to create and
capture greater value than with conventional products.
ArborGen’s product development pipeline includes improved versions of these next-generation seedling
products as well as transgenic seedling products, which are seedling products with specific genes introduced
to enhance targeted traits. Other than certain eucalyptus products in Brazil, which will utilise transgenic
technology, none of its products on the market or under development require any regulatory review or
approval.
ArborGen believes it has the broadest portfolio of intellectual property in its industry, as well as the largest
and most diverse repositories of germplasm, encompassing more than 40 commercial tree species and
hybrids. It operates an extensive field trial system, with trials (both commercial and field) in multiple
geographic and site specific locations in each of the US, Brazil, New Zealand, Australia, and China. It is using
genomics technology in pine, and its biotechnology capabilities in eucalyptus, to further accelerate and
enhance its tree improvement programs.
15
3.6.3 ArborGen Financial Performance
The financial performance of ArborGen (excluding Rubicon corporate and public company overhead costs)
for the financial years ended 31 March 2017 (FY17) together with the forecast for the year ending 31 March
2018 (FY18) is summarised below:
ARBORGEN FINANCIAL PERFORMANCE (US$ MILLIONS)
7
YEAR END 31 MARCH 2017 2018F
Revenue
44.5 48.0
Cost of sales (29.5) (29.8)
Gross profit
15.0 18.2
Gross margin %
34% 38%
Overhead expenses
(7.8) (8.4)
EBITDA
7.2 9.8
EBITDA margin %
16% 20%
Depreciation and amortisation
(8.7) (8.7)
EBIT
(1.5) 1.1
The following points should be taken into consideration when reviewing the table above:
§ ArborGen is applying a business model similar to that which has been successfully applied in agriculture,
where seed companies have introduced advanced genetics crops that have dramatically improved the
economic per acre as compared to their conventional seed competitors. Through increased pricing,
these seed companies are sharing in the higher value their advanced products create for their
customers;
§ in FY17, ArborGen achieved revenue growth of 21%, due to market growth and the average selling price
increasing in the United States by 7% on volumes of 270 million seedlings;
§ ArborGen’s revenue is forecast to increase by 8% in FY18 and gross margin % is forecast to increase to
38% due to ArborGen focusing on transitioning its customers from conventional seedling products to
its next-generation advanced genetics products, resulting in a higher average sales price;
§ the forecast financial performance for FY18 will be impacted by Hurricanes Irma and Harvey in the
United States. While the full extent of the impact is not known at this stage, ArborGen is currently
forecasting that its EBITDA will improve significantly relative to the prior period. The business
anticipates EBITDA to increase by US$2.6 million due to the improvement in gross margin % and the
increase in revenue;
§ ArborGen plans to increase its market-share in those geographies and markets in which it is already
established – i.e. the US, Brazil, NZ and Australia. It is also investigating expanding into new markets
and geographies, where its products, technology and partners position it for rapid growth; and
§ the recent change in the New Zealand Government has resulted in the announcement of new polices
favourable towards the New Zealand forestry industry and climate change. The details have not been
finalised, but there is potential for the change in policy to have a positive impact on ArborGen’s future
earnings.
_________________________________________________________________________________________________________________________________________________________
7
Numbers shown in this table are as prepared under NZ-IFRS and are pre-restructuring costs. Rubicon advises that the comparable EBITDA numbers under US-
GAAP are US$1.7 million (2017) and US$4.0 million (2018F).
16
3.6.4 ArborGen Financial Position
The financial position of ArborGen as at 30 September 2017 is summarised below:
ARBORGEN FINANCIAL POSITION (US$ MILLIONS)
AS AT 30 SEPTEMBER 2017
Receivables
2.8
Inventory 28.8
Creditors (11.6)
Current lease obligation (0.7)
Working capital
19.3
Fixed assets 44.6
Intellectual property 106.9
Deferred tax liability (6.0)
Net operating assets
164.8
Cash and liquid deposits 8.9
Current Debt (7.7)
Term debt (14.0)
Net bank debt
(12.8)
Lease obligation (11.9)
Net debt
(24.7)
Net assets 140.1
The following points should be taken into consideration when reviewing the table above:
§ ArborGen has a lease agreement for its research, development and headquarters facility at its head
office in South Carolina, United States. The 20 year lease commenced in early 2012 and has 14.5 years
remaining. The lease cash costs are US$1.4 million per annum. This lease is treated as a finance lease
under NZ-IFRS, which results in the property and the lease liability being capitalised on the balance
sheet. The net assets do not change as the accounting policy results in a neutral outcome (i.e. the assets
are offset by the liability);
§ all of ArborGen’s existing financers have continued to provide funding lines post Rubicon’s acquisition
of the 66.66% of ArborGen that it did not already own. Cash and liquid deposits includes a US$6.0 million
deposit with Synovus Bank to secure ArborGen’s working capital facility; and
§ ArborGen’s intellectual property (US$107 million) reflects the value of its:
• industry-leading germplasm, which is the output of more than (in aggregate) 100 years of tree
improvement activity undertaken by ArborGen’s predecessor partner companies (Fletcher
Challenge, International Paper, and WestRock);
• ArborGen’s proprietary ‘tree machine’ platform;
• extensive database of loblolly, radiata, and eucalyptus trials;
• varietal and transgenic technology;
• genomics platform; and
• patent portfolio.
17
3.6.5 ArborGen Cash Flows
The cash flows for ArborGen for FY18F is summarised below:
ARBORGEN - FREE CASH FLOW (US$ MILLIONS)
YEAR END 31 MARCH 2018F
EBITDA less finance costs
7.6
Less: capital expenditure (1.9)
Less: research and development (5.8)
Free cash flow (excluding movements in working capital) (0.1)
3.7 Rubicon’s Ownership
As of the date of this report, Rubicon had 487,908,343 shares on issue, held by approximately 6,190
shareholders. Rubicon’s top shareholders are shown below:
RUBICON – TOP SHAREHOLDERS AS AT 14 DECEMBER 2017
SHAREHOLDER SHARES (MILLIONS) % TOTAL
Knott Partners LP (David Knott and associates) 137.7 28.2%
Libra Fund LP (Ranjan Tandon) 86.1 17.7%
Perry Corporation 39.3 8.0%
Third Avenue Management LLC 38.2 7.8%
Sandell Asset Management 22.0 4.5%
Top 5 Shareholders 323.3 66.3%
Other Shareholders 164.6 33.7%
Total 487.9 100.0%
On 29 June 2017, in order to strengthen its balance sheet and to assist with the funding of ArborGen, Rubicon
issued 78.9 shares via share placement to raise US$12.5 million (NZ$17.2 million). The participants in the
share placement were Libra and Knott, which acquired 56.78 and 22.08 million shares respectively. The top
5 shareholders own 66% of the shares on issue.
3.8 Rubicon’s Share Price Performance
The share price and trading volume history of Rubicon shares since the share placement on 29 June 2017 is
shown below:
SHARE PRICE PERFORMANCE OF RUBICON SHARES AND VOLUME TRADED SINCE 30 JUNE 2017
Rubicon is a thinly traded share. As at 13 December 2017 Rubicon had a market capitalisation of $95.1
million.
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
Jul-2017 Aug-2017 Sep-2017
Oct-2017
Nov-2017 Dec-2017
Volume (000s)
Price
Volume Price
18
4 Valuation of Tenon Clearwood Limited Partnership
4.1 Summary
Grant Samuel’s valuation of TCLP is outlined below:
VALUATION SUMMARY TCLP (US$ MILLIONS)
LOW HIGH
TCLP Enterprise value 51.3 61.5
Less estimated net debt as at 31 December 2017 (21.0) (21.0)
Value Equity (US$) 30.3 40.5
Rubicon’s shareholding in TCLP 44.88% 44.88%
Value of Rubicon’s shareholding 13.6 18.2
Grant Samuel makes the following observations regarding the valuation of TCLP:
§ Grant Samuel has valued Rubicon’s share of TCLP by estimating the full underlying value and multiplying
the result by Rubicon’s shareholding of 44.88%;
§ the TCLP valuation has been estimated on the basis of fair market value as a going concern, defined as
the estimated price that could be realised in an open market over a reasonable period of time, assuming
that potential buyers have full information. The valuation of TCLP is appropriate for the acquisition of
the company as a whole and accordingly incorporates a premium for control;
§ the TCLP partnership structure contains standard pre-emptive provisions, which restricts the
marketability of partner shareholdings;
§ the valuation is based on TCLP management’s latest EBITDA forecast for FY18 adjusted to current
exchange rates as outlined in section 4.2 below;
§ the New Zealand dollar has weakened recently against the US dollar and the Euro and this is the area
where TCLP’s greatest sensitivity lies. A weakening New Zealand dollar (all other things held constant)
results in higher earnings for TCLP due to a large proportion of the cost base being denominated in New
Zealand dollars and the majority of the revenue is denominated in foreign currencies;
§ TCLP exhibited improved performance in FY16 and FY17 when compared with prior years, in part due
to the recovery in US housing sector activity, the development of the European market for Clearwood’s
products, the benefit from the capital programme completed at the Taupo mill in 2016, and a lower
$NZ:US exchange rate in part offset by higher log prices in NZ dollars. Although some orders from both
the US and Europe have softened recently, this is believed to be temporary;
§ Clearwood has a broad and balanced customer portfolio with limited reliance on any single customer;
§ maintenance capital expenditure will be at or below depreciation for a number of years following the
completion of the recent capital expenditure programme at the Taupo mill; and
§ TCLP’s unique long length wide clear products are currently in healthy demand globally.
19
4.2 Earnings for Valuation
The forecast EBITDA for the year ending 31 March 2018 is US$9.3 million. For the purposes of the valuation
Grant Samuel has applied current exchange rates to the forecast. Although the current FX rates are lower
than the average for the past 12 months, they have been very volatile over the last quarter in particular.
However, the overall trend has been a weakening NZ dollar against Clearwood’s key currencies. These
changes to the underlying assumptions increases the forecast EBITDA for the year ending 31 March 2018 to
US$10.25 million. The earnings for valuation is shown below:
TCLP EARNINGS FOR VALUATION (US$000)
YEAR ENDED 30 JUNE 2017 31 MARCH 2018F
Sales 87.9 81.5
Cost of sales (76.0) (68.7)
Gross profit 11.9 12.8
Gross margin % 14% 16%
Overhead expenses (1.8) (2.5)
EBITDA 10.1 10.3
Depreciation and amortisation (1.6) (1.6)
EBIT 8.5 8.7
The earnings for valuation for the year ending 31 March 2018 is based on the following material assumptions:
§ USD: NZD exchange rate average over the year of 0.685;
§ EURO: NZD exchange rate average over the year of 0.585;
§ log purchases of 290,500 tonnes; and
§ sawmill production of 168,000 tonnes.
4.3 Preferred Methodology
Grant Samuel’s valuation of TCLP has been estimated on the basis of fair market value as a going concern,
defined as the estimated price that could be realised in an open market over a reasonable period of time
assuming that potential buyers have full information.
The most reliable evidence as to the value of a business is the price at which the business or a comparable
business has been bought and sold in an arm’s length transaction. In the absence of direct market evidence
of value, estimates of value are made using methodologies that infer value from other available evidence.
There are four primary valuation methodologies commonly used for valuing businesses:
§ capitalisation of earnings or cash flows;
§ discounting of projected cash flows;
§ industry rules of thumb; and
§ estimation of the aggregate proceeds from an orderly realisation of assets.
Each of these valuation methodologies has application in different circumstances. The primary criterion for
determining which methodology is appropriate is the actual practice adopted by purchasers of the type of
business involved. A detailed description of each of these methodologies is outlined at Appendix 4.
20
Preferred Approach
Grant Samuel has adopted the capitalisation of earnings methodology to determine a value range for TCLP.
The primary reasons why the capitalisation of earnings method has been chosen are:
§ multiples of earnings for comparable transactions are centred around a reasonably tight band; and
§ discounted cash flow analysis relies on a detailed forecast of future earnings and cash flows. TCLP’s
management do not prepare long term forecasts. A discounted cash flow valuation is often used to cross
check against the capitalisation of earnings methodology. As there were no long-term forecasts this was
not possible.
4.4 Earnings Multiple Analysis
4.4.1 Sharemarket Evidence
The valuation of Clearwood has been considered in the context of the multiples implied by the share market
ratings of listed companies with operations in the timber processing industry:
SHARE MARKET RATINGS OF SELECTED LISTED COMPANIES
8
COMPANY
MARKET
CAP
(MILLIONS)
EBITDA MULTIPLE
9
(TIMES)
EBIT MULTIPLE
10
(TIMES)
HISTORIC
FORECAST
(1)
FORECAST
(2)
HISTORIC
FORECAST
(1)
FORECAST
(2)
Canfor Corporation CA$3,237
6.8 5.2 5.6 12.6 8.6 8.4
Conifex Timber Inc. CA$140
8.5 6.7 5.3 15.7 10.8 9.1
Interfor Corporation CA$1,422
8.0 6.1 6.1 18.0 12.2 12.1
Lousiana Pacific Corporation US$3,922
10.0 5.5 6.1 16.9 6.9 7.7
West Fraser Timber Co Ltd CA$5,967
9.6 6.6 6.6 13.4 8.8 8.4
Western Forest Products Inc. CA$994
6.3 6.3 5.7 8.4 9.6 7.4
Average
8.2 6.1 5.9 14.2 9.5 8.8
Median
8.2 6.2 5.9 14.5 9.2 8.4
Source: Grant Samuel analysis
11
The following points are relevant when considering the table above:
§ all of the companies have a 31 December financial year end. Forecast (1) therefore represents the
financial year ending 31 December 2017 and Forecast (2) represents the financial year ending 31
December 2018;
§ detailed descriptions of each company are provided in Appendix 2. There are key differences between
the operations and scale of the comparable companies when compared with Clearwood. With the
exception of Conifex all of the listed timber processing companies are significantly larger than Tenon’s
Clearwood activities. Clearwood is smaller than any of the companies shown in the table, with market
capitalisations of West Fraser and Canfor being approximately 30 and 60 times larger respectively of
Clearwood’s implied trading value and revenues are also materially larger than Clearwood;
§ the implied multiples have been calculated based on closing share prices as at 8 December 2017. The
share prices do not include a premium for control;
_________________________________________________________________________________________________________________________________________________________
8
The companies selected have a variety of year ends. The financial information presented in the Historic column corresponds to the most recent actual
annual result. The forecast column corresponds to the forecast for the subsequent year.
9
Represents gross capitalisation (that is, the sum of the market capitalisation adjusted for minorities, plus borrowings less cash as at the latest balance
date) divided by EBIT.
10
Represents gross capitalisation (that is, the sum of the market capitalisation adjusted for minorities, plus borrowings less cash as at the latest balance
date) divided by EBITDA.
11
Grant Samuel analysis based on company announcements and, in the absence of company published financial forecasts, brokers’ reports. Where
company financial forecasts are not available, the median of the financial forecasts prepared by a range of brokers has generally been used to derive
relevant forecast value parameters. The source, date and number of broker reports utilised for each company depends on analyst coverage, availability
and recent corporate activity.
21
§ none of the listed timber processing companies operate primarily in the conversion and marketing of
clear pruned resource, and none has the European focus that Clearwood has. Also, none of the
companies have the same exposure to movements in the NZD: USD that Clearwood does. However,
the multiples implied by the share prices of listed timber processing companies does provide a
framework within which to assess the value of Clearwood; and
§ listed timber processing companies are trading within a band of 5.2 to 6.7 times forecast EBITDA for the
year ending 31 December 2017, with an average of 6.1 times. The implied multiples of forecast EBITDA
are depicted below:
IMPLIED MULTIPLES OF FORECAST EBITDA OF LISTED TIMBER PROCESSING COMPANIES
4.4.2 Transaction Evidence – Timber Processing Businesses
The valuation of TCLP has been considered having regard to the earnings multiples implied by the prices at
which broadly comparable companies and businesses have changed hands. The table below contains analysis
of the earnings multiples implied by the prices of recent acquisitions of timber processing businesses:
RECENT TIMBER PROCESSING TRANSACTIONS – MULTIPLES (TIMES)
DATE TARGET ACQUIRER IMPLIED EV ($M)
HISTROICAL IMPLIED
EV/EBITDA
MULTIPLES
Sep-15 Anthony Forest Products Canfor US$94 5.8
Mar-15 Simpson Lumber Company Interfor US$125 5.2
Apr-17 Tenon Clearwood TCLP US$55 5.3
Average 5.3
Source: Grant Samuel analysis, Capital IQ.
Larger businesses generally, but not always, tend to transact at higher multiples reflecting more robust and
diversified earnings, stronger market positions and often enhanced financial and management disciplines,
management team depth and systems. Brief descriptions of the transactions are set out below in Appendix
1.
5.2
5.5
5.5
6.1
6.6 6.6
6.7
0
1
2
3
4
5
6
7
8
Canfor
Corporation
Lousiana
Pacific
Corporation
TCLP
Valuation
-
Midpoint
Interfor
Corporation
Western
Forest
Products Inc.
West Fraser
Timber Co
Ltd
Conifex
Timber Inc.
Forecast EBITDA Multiples
22
4.4.3 Implied Multiples – TCLP
Grant Samuel’s valuation of TCLP implies the following multiples:
TCLP - IMPLIED MULTIPLES
VALUATION RANGE
EARNINGS (US$M) LOW HIGH
Multiple of FY17 EBITDA (Year to 30 June 2017)
10.1 5.1 6.1
Multiple of FY18F EBITDA (Year to 31 March 2018) 10.3 5.0 6.0
Multiple of FY17 EBIT (Year to 30 June 2017) 8.5 6.0 7.2
Multiple of FY18F EBIT (Year to 31 March 2018) 8.7 5.9 7.1
The evidence from the share prices of comparable listed companies and the prices of transaction involving
comparable business or assets is consistent with the multiples implied by Grant Samuel’s valuation of TCLP.
23
5 Merits of the Proposed Transaction
5.1 Evaluation and Summary of the Proposed Transaction
In Grant Samuel’s opinion, the full underlying enterprise value of TCLP is in the range of US$51.3 – US$61.5
million. Rubicon’s pro rata share of the full underlying value is US$13.6 – US$18.2 million. The
consideration for the Proposed Transaction is forecast to be approximately US$15.3 million which is within
Grant Samuel’s assessed range of Rubicon’s 44.88% share of TCLP’s full underlying value.
5.2 Evaluation of the Sale Price and Terms of the Proposed Transaction
Grant Samuel has been requested to provide an opinion in accordance with Listing Rule 1.7.2 of the NZX
Listing Rules as to whether the price and terms of the Proposed Sale of TCLP to the Prospective Purchasers
are “fair” to Rubicon shareholders other than the purchasers of Rubicon’s shares of TCLP who are also
shareholders in Rubicon.
The Prospective Acquirers have offered to acquire Rubicon’s share of equity for an estimated US$15.3 million,
representing the cost of Rubicon’s investment in TCLP in April 2017, plus Rubicon’s share of the net cash
generated by TCLP in the period from 28 April 2017 through to 31 December 2017, less Rubicon’s share of a
dividend to be paid in December 2017
12
. The Prospective Acquirers’ offer is within Grant Samuel’s valuation
of Rubicon’s share of the equity of US$13.6 – US$18.2 million.
COMPARISON OF THE PROPOSED TRANSACTION PRICE WITH GRANT SAMUEL’S VALUATION RANGE
Rubicon is being offered its pro rata share of the full underlying value. No discount is being applied to the
offer price, for the Rubicon shareholding, which in these circumstances Grant Samuel believes is appropriate
given all of the shareholders, including Rubicon paid that price in April 2017.
Accordingly, in Grant Samuel’s opinion, for the purpose of Listing Rule 1.7.2 of the NZX Listing Rules the price
and terms of the Sale of Rubicon’s interest in TCLP are “fair” to Rubicon shareholders (other than Knott
Partners LP and Libra Funds LP). This opinion is expressed only for the benefit of the shareholders of Rubicon
shareholders not associated with TCLP.
5.3 Merits of the Proposed Transaction
§ the sale of the minority interest in TCLP will result in Rubicon being a pure play forestry genetics
company. With Rubicon now owning 100% of ArborGen and it being the only investment of Rubicon, it
will provide investors with a high degree of transparency. These two factors may enhance the
attractiveness of the shares to new investors. This observation is tempered by the fact that the five
_________________________________________________________________________________________________________________________________________________________
12
The net debt position will not be known until 10 January 2018, however Rubicon’s share of the reduction in debt through to 31 December is currently estimated
to be US$1.1 million.
13.6
15.3
18.2
0
2
4
6
8
10
12
14
16
18
20
Grant
Samuel
-
Low
Valuation
Value of the
Proposed
Transaction
Grant
Samuel
-
High
Valuation
Equity Value ($millons)
24
largest shareholders, collectively hold 66% of the shares on issue, severely limiting liquidity and limiting
the attractiveness to otherwise likely institutional investors;
§ if the Proposed Transaction is approved, annual cost savings are estimated to be up to US$2.0 million.
If the Proposed Transaction is not approved cost savings of this magnitude will not be able to be
realised;
§ Rubicon needs to make two final deferred-settlement payments that total US$15 million to complete
the purchase of ArborGen. In addition, it also needs to repay US$6 million of subordinated debt notes.
The cash on hand combined with the proceeds of the sale of TCLP will enable Rubicon to meet all of
these payments. If the Proposed Transaction is not approved then Rubicon will need to find another
source of funding in order to meet these payments;
§ the sale of TCLP will remove exposure to the more volatile earnings of Clearwood which suffers from
the vagaries of both fluctuating demand in the United States, movements in exchange rates and log
prices;
§ ArborGen and Clearwood operate independently from one another and there is no benefit to either
from having a common shareholder;
§ if the Proposed Transaction is not approved it is likely that Rubicon will need to find another source of
funding in order to meet the outstanding US$15 million in deferred settlement payments (US$5 million
on 31 December 2017, and US$10 million on 30 June 2018) relating to the ArborGen acquisition made
earlier this year, and the repayment of the outstanding US$6 million subordinated note on 1 July 2018;
§ as at 13 December 2017 Rubicon had a market capitalisation of NZ$95.1 million. The combined value
of the Proposed Transaction and the price paid for the remaining 66.66% of the shares it did not own in
ArborGen implies a market capitalisation that is broadly in line with its current market value. The price
at which the shares will ultimately trade on-market, if the Proposed Transaction is approved, will
depend on a range of factors, including New Zealand and global equity market conditions;
§ Rubicon listed on 26 March 2001 and over the last 16 years it has not paid a dividend. The Proposed
Transaction is unlikely to impact dividends in the immediate future; and
§ Knott, Libra and their associates hold 45.9% of Rubicon’s shares and are entitled to vote on the part of
the resolution that requires the approval by 50% of those shareholders eligible to vote and voting as
the Proposed Transaction may change the essential nature of Rubicon’s business.
5.4 The likelihood of an alternative offer
Rubicon’s Independent Committee did not deem it necessary to run a third party sales process in relation to
its interest in TCLP. The rationale for that decision was based on the fact that Tenon had only earlier this
year been through an exhaustive 18-month sales process for the Clearwood business supported by an
international investment bank, which concluded in the sale to TCLP provided the best value outcome.
The Independent Directors did not believe there was any benefit to Rubicon shareholders (only considerable
cost and time delay) to be derived from running a sales process for a 44.88% shareholding.
The pre-emptive rights contained in the TCLP Partnership Agreement also constrain the ability of Rubicon to
freely sell its shareholding in TCLP. Under the TCLP Partnership Agreement, if Rubicon wishes to sell its shares
to any other party other than the existing TCLP partners it must first offer its shares on the same terms to
the existing TCLP partners and this offer must remain open for a period of 60 days.
Rubicon has also entered into an exclusivity agreement with the Prospective Purchasers. The prospects of
an alternative offer are low when taking into account the sales process run earlier in the year, the existing
pre-emptive rights and the exclusivity agreement.
25
5.5 Evaluation on the impact of Rubicon’s earnings and financial position
Financial analysis comparing the status quo (i.e. the Proposed Transaction is not approved and Rubicon
continues to hold 44.88% of TCLP) with the pro forma financials if the Proposed Transaction is approved is
outlined below:
FINANCIAL EVALUATION OF THE IMPACT OF THE PROPOSED TRANSACTION (US$ MILLIONS)
STATUS QUO
IF THE PROPOSED
TRANSACTION IS
APPROVED
13
Forecast Financial Performance for 12 months to 31 March 2018
Revenue
128.8 48.0
EBITDA (adjusted for depreciation and interest related to property) 14.7 7.4
14
EBIT (adjusted for depreciation and interest related to property) 5.2 (0.5)
Net Interest (excluding property leases) (3.1) (0.3)
Net operating cash flow
3.4 0.2
Financial Position as at 30 September 2017
Net tangible operating assets
33.2 42.4
Net debt (excluding property lease)
(37.8) (2.0)
Financial leverage ratios
15
Leverage ratio (net debt / EBITDA)
3.9 0.3
Interest cover (EBITDA / net interest)
3.8 23.5
Interest cover (EBIT / net interest)
0.4 (1.6)
The following points should be taken into consideration when reviewing the table above:
§ the pro forma financial performance and financial position included in the table above is on a
consolidated basis and assumes Tenon has been liquidated, the two final ArborGen acquisition
deferred-settlement payments totalling US$15 million, and the US$6 million repayment of
subordinated debt notes have each been made;
§ if the Proposed Transaction is approved the net bank debt is forecast to decrease from US$37 million
to US$2 million. As at 30 September 2017 TCLP had net debt of US$20 million. If the investment in
TCLP is sold, Rubicon receives approximately US$15.3 million for its 44.88% shareholding, and the net
debt liability is left in TCLP;
§ EBIT
13
is assumed to increase by US$2.0 million if the Proposed Transaction proceeds, due to cost
savings assumed;
§ the EBTIDA, EBIT and net interest has been adjusted to remove the impact of the accounting treatment
of the ArborGen property lease as a finances lease; and
§ if the Proposed Transaction is approved Rubicon’s financial leverage ratios improve, with the exception
being its Interest cover ratio (EBIT/ Net interest). The requirement to raise further capital is largely
eliminated, given the Company’s expectation that ArborGen is forecasting positive net operating cash
flows (after interest payments) beginning the next financial year and onwards.
_________________________________________________________________________________________________________________________________________________________
13
Pre restructuring costs, which have not yet been determined, pending a Board decision on the final operating structure and model.
14
This includes head office costs of US$0.7 million.
15
Assumes 44.88% of TCLP’s debt and earnings
26
5.6 Alternatives to the Proposed Transaction
The only real alternative is to not sell the 44.88% shareholding in TCLP. TCLP is a good investment, despite it
being exposed to number of factors which causes volatility in its earnings. These include:
§ the level of activity in the various sectors of the economies in which it competes, particularly in New
Zealand, Europe, and North America;
§ fluctuations in industrial output;
§ commercial and residential construction activity;
§ capital availability and interest rates;
§ the housing markets (including additions to existing homes, repairs and new builds); and
§ relative exchange rates (particularly EURO and US$).
In Grant Samuel’s opinion, if Rubicon wanted to keep its shareholding in TCLP it is likely that it will need more
capital to deleverage the company.
Rubicon made a US$12.5 million shareholder placement in June 2017 to its two largest shareholders, Libra
and Knott, in connection with its move to 100% ownership of ArborGen. Without the support of two
shareholders who control 45.9% of the shares in Rubicon, any capital raising could prove to be problematic.
5.7 The timing and circumstances surrounding the Proposed Transaction
The Tenon Board ran two separate sales processes over the past 24 months to sell each of its US distribution
activities and its Clearwood operations. Following the US business’ sale to Blue Wolf, Tenon then sold
Clearwood to TCLP in April 2017. After the 18-month sales process for Clearwood, the best offer received
was from TCLP. Rubicon never intended to be a long term holder of its shares in Clearwood but it participated
as a limited partner in the consortium in order to allow the wind-down and liquidation of Tenon to occur.
The Proposed Transaction will enable Rubicon to sell its shares in TCLP, thereby achieving the outcome
Rubicon is seeking, which is to eliminate debt of Rubicon Limited, and become a listed entity that has a single
focused asset, ArborGen.
5.8 Fairness of the Proposed Transaction for the purposes of the NZX Listing Rules
In Grant Samuel’s opinion, based on the analysis of the merits outlined above, the terms of the Proposed
Transaction are fair and reasonable to the shareholders of Rubicon not associated with Knott and Libra. In
Grant Samuel’s opinion, the information to be provided by Rubicon to its shareholders is sufficient to enable
holders of those shares to understand all the relevant factors and make an informed decision as to the sale
of Rubicon’s interest in TCLP. The grounds for Grant Samuel’s opinion are set out in this Report. Grant
Samuel has obtained all information which it believes desirable for the purposes of preparing this report,
including all relevant information which is or should have been known by any Director of Rubicon and made
available to the Directors.
5.9 Acceptance or Rejection of the Proposed Transaction
Acceptance or rejection of the Proposed Transaction is a matter for individual shareholders based on their
own view as to value and future market conditions, risk profile, liquidity preference, portfolio strategy, tax
position and other factors. In particular, taxation consequences will vary widely across shareholders.
Shareholders will need to consider these consequences and, if appropriate, consult their own professional
adviser(s).
GRANT SAMUEL & ASSOCIATES LIMITED
14 December 2017
27
Appendix 1 Recent Transaction Evidence
Transactions involving Building Product Distributors:
Anthony Forest Products / Canfor
In October 2015, Canfor acquired Anthony Forest Products (AFP) for US$94 million. AFP is engaged in the
integrated forest products business offering its products through dealers in the United States and
internationally. The company operates six facilities producing lumber, engineered wood and wood chips in
Southern United States. Canfor identified AFP as a strategic acquisition, in particular to grow its presence in
the southern United Sates. The purchase price implied a multiple of 5.8 times EBITDA.
Simpson Lumber Company / Interfor
In March 2015, Interfor acquired four sawmills from Simpson Lumber Company for US$125 million. The
transaction increased Interfor’s annual lumber production capacity by 30% and was highlighted as important
to Interfor's growth strategy. As a result of the acquisition, two-thirds of Interfor's total annual capacity is
now spread throughout the North and South of the US. The purchase price implied a multiple of 5.2 times
EBITDA.
Tenon / TCLP
In April 2017, TCLP acquired 100.0% of Tenon Clearwood. The purchase price of US$55 million (debt free)
implied a multiple of 5.3 times EBITDA.
28
Appendix 2 Comparable Listed Companies
The following table provides a high level comparison of each of the companies to Clearwood:
COMPARISON OF LISTED TIMBER PROCESSING BUSINESSES (CA$ UNLESS SPECIFIED OTHERWISE)
CANFOR
CORPORATION
CONIFEX
TIMBER INC.
INTERFOR
CORPORATION
WEST FRASER
TIMBER CO
WESTERN
FOREST
PRODUCTS
INC.
CLEARWOOD
Processing
capacity (bbf)
5.8 0.525 3.0 6.3 1.1 220m3 (000)
# of mills 23 2 14 40 9 1
# of employees 6,260 600 2,860 7,800 2,080 275
Profitability
FY17F Revenue
(CA$b)
4.583 0.459 1.934 5.085 1.156 US$87.9m
FY17 EBITDA
(CA$b)
0.680 0.043 0.258 0.674 0.146 US$10.1m
EBITDA margin % 14.8% 9.3% 13.3% 19.2% 12.7% 11.5%
The following comments are relevant when considering the table above:
§ West Fraser Timber Company Limited (West Fraser) is the largest timber processing company in North
America, the largest plywood producer in Canada and the third largest pulp producer in Canada. The
company has 28 timber mills, 7 panel mills and 5 pulp & paper mills. Approximately two thirds of West
Fraser’s revenue are derived from lumber products with the remainder coming from pulp & paper and
wood panels. Approximately 80% of revenue is generated in North America and 20% from China and
other Asian countries;
§ Canfor Corporation Limited (Canfor) is the third largest timber processing company in North America
with 23 sawmills, four energy plants, three engineered product facilities and four pulp mills.
Approximately two thirds of its revenue are generated in North America with the remaining third of
revenue from Asia (primarily China and Japan). Canfor’s pulp and paper segment business is one of the
largest producers of softwood kraft pulp in Canada;
§ Interfor Corporation (Interfor) is the fourth largest timber processing company in North America with
14 sawmills (9 in the US and 5 in British Colombia). Two-thirds of the company’s processing capacity is
located in the US (predominantly in the Southern states). Approximately 80% of Interfor’s products are
commodity grade. 80% of Interfor’s sales are made in North America with key export markets for the
remaining 20% being Japan and China;
§ Western Forest Products Inc. (Western) is the eleventh largest timber processing company in North
America with nine sawmills. Approximately 65% of Western’s revenue is from the North American
market with Japan, China, other Asian countries and Europe making up the remaining 35%; and
§ Conifex Timber Inc. (Conifex) is much smaller than the other listed North American timber processing
companies with market capitalisation of CA$140 million.
29
Appendix 3 Overview of the New Zealand Timber Processing Industry
Introduction
The timber industry is an integral part of the New Zealand economy contributing an annual gross income of
around $5 billion (3% of New Zealand's GDP) and directly employing approximately 20,000 people. Wood
products are New Zealand's third largest export earner (behind dairy and meat) with New Zealand sawmills
exporting approximately 2 million cubic metres per annum. New Zealand’s largest export markets are China,
Australia and the US. New Zealand timber also has a strong presence throughout Asia, the Middle East,
Europe and the Pacific.
Radiata Pine
New Zealand timber primarily comes from renewable plantation forests that are managed on a sustainable
basis with the predominant species being Radiata Pine. Radiata is considered a globally unique product and
is one of the most versatile softwoods with superior machining and finishing qualities. Furthermore, its
uniform appearance means that it is an easy wood to paint and stain, adding to its popularity.
Due to New Zealand’s unique growing conditions and pruning regime, New Zealand Radiata produces wide,
long length clear fibre (i.e. knot free), which can be converted into high-value clear finished products, making
them highly desirable in the US NHC and Pro-dealer markets.
The pruning regime in New Zealand sees the trees pruned to 5-8 metres each year up to the age of 10. As a
result of this process, clear wood forms around the knots where the branches have been pruned and creates
a log consisting of straight-grained clear wood suitable for high-value appearance applications. Although the
pruned part of the tree consists of only approximately 15% of the height of the full-grown pine tree, it
typically equates to approximately 50% of the total value.
16
New Zealand Timber Supply
The Central North Island is the largest forest area in New Zealand.
NZ PLANTED FOREST AND STANDING VOLUME
PLANTED HECTARES (000) STANDING VOLUME (MILLION M
3
)
Northland 186 58
Central North Island 568 182
East Coast 156 54
Hawkes Bay 134 42
Southern North Island 160 54
Marlborough 167 42
West Coast 31 6
Canterbury 97 21
Otago Southland 206 41
Total NZ 1,705 500
_________________________________________________________________________________________________________________________________________________________
16
Source: NZ Ministry of Primary Industries
30
Appendix 4 Valuation Methodology Descriptions
Capitalisation of Earnings
Capitalisation of earnings or cash flows is most appropriate for businesses with a substantial operating history
and a consistent earnings trend that is sufficiently stable to be indicative of ongoing earnings potential. This
methodology is not particularly suitable for start-up businesses, businesses with an erratic earnings pattern
or businesses that have unusual expenditure requirements. This methodology involves capitalising the
earnings or cash flows of a business at a multiple that reflects the risks of the business and the stream of
income that it generates. These multiples can be applied to a number of different earnings or cash flow
measures including EBITDA, EBITA, EBIT or net profit after tax. These are referred to respectively as EBITDA
multiples, EBITA multiples, EBIT multiples and price earnings multiples. Price earnings multiples are
commonly used in the context of the share market. EBITDA, EBITA and EBIT multiples are more commonly
used in valuing whole businesses for acquisition purposes where gearing is in the control of the acquirer.
Where an ongoing business with relatively stable and predictable earnings is being valued Grant Samuel uses
capitalised earnings or operating cash flows as a primary reference point. Application of this valuation
methodology involves:
§ estimation of earnings or cash flow levels that a purchaser would utilise for valuation purposes having
regard to historical and forecast operating results, non-recurring items of income and expenditure and
known factors likely to impact on operating performance; and
§ consideration of an appropriate capitalisation multiple having regard to the market rating of comparable
businesses, the extent and nature of competition, the time period of earnings used, the quality of
earnings, growth prospects and relative business risk.
The choice between the parameters is usually not critical and should give a similar result. All are commonly
used in the valuation of industrial businesses. EBITDA can be preferable if depreciation or non-cash charges
distort earnings or make comparisons between companies difficult but care needs to be exercised to ensure
that proper account is taken of factors such as the level of capital expenditure needed for the business and
whether or not any amortisation costs also relate to ongoing cash costs. EBITA avoids the distortions of
goodwill amortisation. EBIT can better adjust for differences in relative capital intensity.
Determination of the appropriate earnings multiple is usually the most judgemental element of a valuation.
Definitive or even indicative offers for a particular asset or business can provide the most reliable support for
selection of an appropriate earnings multiple. In the absence of meaningful offers, it is necessary to infer the
appropriate multiple from other evidence.
The usual approach is to determine the multiple that other buyers have been prepared to pay for similar
businesses in the recent past. However, each transaction will be the product of a unique combination of
factors. A pattern may emerge from transactions involving similar businesses with sales typically taking place
at prices corresponding to earnings multiples within a particular range. This range will generally reflect the
growth prospects and risks of those businesses. Mature, low growth businesses will, in the absence of other
factors, attract lower multiples than those businesses with potential for significant growth in earnings.
An alternative approach used in valuing businesses is to review the multiples at which shares in listed
companies in the same industry sector trade on the share market. This gives an indication of the price levels
at which portfolio investors are prepared to invest in these businesses. Share prices reflect trades in small
parcels of shares (portfolio interests) rather than whole companies and it is necessary to adjust for this factor.
The analysis of comparable transactions and share market prices for comparable companies will not always
lead to an obvious conclusion as to which multiple or range of multiples will apply. There will often be a wide
spread of multiples and the application of judgement becomes critical. Moreover, it is necessary to consider
the particular attributes of the business being valued and decide whether it warrants a higher or lower
multiple than the comparable companies. This assessment is essentially a judgement.
31
Discounted Cash Flow
Discounting of projected cash flows has a strong theoretical basis. It is the most commonly used method for
valuation in a number of industries, and for the valuation of start-up projects where earnings during the first
few years can be negative. DCF valuations involve calculating the net present value of projected cash flows.
This methodology is able to explicitly capture the effect of a turnaround in the business, the ramp up to
maturity or significant changes expected in capital expenditure patterns. The cash flows are discounted using
a discount rate, which reflects the risk associated with the cash flow stream. Considerable judgement is
required in estimating future cash flows and it is generally necessary to place great reliance on medium to
long-term projections prepared by management. The discount rate is also not an observable number and
must be inferred from other data (usually only historical). None of this data is particularly reliable so
estimates of the discount rate necessity involve a substantial element of judgment. In addition, even where
cash flow forecasts are available the terminal or continuing value is usually a high proportion of value.
Accordingly, the multiple used in assessing this terminal value becomes the critical determinant in the
valuation (i.e. it is a “de facto” cash flow capitalisation valuation). The net present value is typically extremely
sensitive to relatively small changes in underlying assumptions, few of which are capable of being predicted
with accuracy, particularly beyond the first two or three years. The arbitrary assumptions that need to be
made and the width of any value range mean the results are often not meaningful or reliable.
Notwithstanding these limitations, DCF valuations are commonly used and can at least play a role in providing
a check on alternative methodologies, not least because explicit and relatively detailed assumptions need to
be made as to the expected future performance of the business operations.
Realisation of Assets
Valuations based on an estimate of the aggregate proceeds from an orderly realisation of assets are
commonly applied to businesses that are not going concerns. They effectively reflect liquidation values and
typically attribute no value to any goodwill associated with ongoing trading. Such an approach is not
appropriate in Rubicon’s case.
Industry Rules of Thumb
Industry rules of thumb are commonly used in some industries. These are generally used by a valuer as a
“cross check” of the result determined by a capitalised earnings valuation or by discounting cash flows, but
in some industries rules of thumb can be the primary basis on which buyers determine prices. Grant Samuel
is not aware of any commonly used rules of thumb that would be appropriate to value TCLP. In any event, it
should be recognised that rules of thumb are usually relatively crude and prone to misinterpretation.
32
Appendix 5 Interpretation of Multiples
Earnings multiples are normally benchmarked against two primary sets of reference points:
§ the multiples implied by the share prices of listed peer group companies; and
§ the multiples implied by the prices paid in acquisitions of other companies in the same industry.
In interpreting and evaluating such data it is necessary to recognise that:
§ multiples based on listed company share prices do not include a premium for control and are therefore
often (but not always) less than multiples that would apply to acquisitions of controlling interests in
similar companies. However, while the premium paid to obtain control in takeovers is observable
(typically in the range 20-35%) it is inappropriate to simply add a premium to listed multiples. The
premium for control is an outcome of the valuation process, not a determinant of value. Premiums are
paid for reasons that vary from case to case and may be substantial due to synergy or other benefits
available to the acquirer. In other situations premiums may be minimal or even zero. There are
transactions where no corporate buyer is prepared to pay a price in excess of the prices paid by share
market investors;
§ acquisition multiples from comparable transactions are therefore usually seen as a better guide when
valuing 100% of a business but the data tends to be less transparent and information on forecast earnings
is often unavailable;
§ the analysis will give a range of outcomes from which averages or medians can be determined but it is
not appropriate to simply apply such measures to the company being valued. The most important part
of valuation is to evaluate the attributes of the specific company being valued and to distinguish it from
its peers so as to form a judgement as to where on the spectrum it belongs;
§ acquisition multiples are a product of the economic and other circumstances at the time of the
transaction. However, each transaction will be the product of a unique combination of factors, including:
• economic factors (e.g. economic growth, inflation, interest rates) affecting the markets in which the
company operates;
• strategic attractions of the business – its particular strengths and weaknesses, market position of
the business, strength of competition and barriers to entry;
• the company’s own performance and growth trajectory;
• rationalisation or synergy benefits available to the acquirer;
• the structural and regulatory framework;
• investment and share market conditions at the time, and
• the number of competing buyers for a business.
§ acquisitions and listed companies in different countries can be analysed for comparative purposes, but it
is necessary to give consideration to differences in overall share market levels and rating between
countries, economic factors (economic growth, inflation, interest rates), market structure (competition
etc.) and the regulatory framework. It is not appropriate to adjust multiples in a mechanistic way for
differences in interest rates or share market levels;
§ acquisition multiples are based on the target’s earnings but the price paid normally reflects the fact that
there were cost reduction opportunities or synergies available to the acquirer (at least if the acquirer is a
“trade buyer” with existing businesses in the same or a related industry). If the target’s earnings were
adjusted for these cost reductions and/or synergies the effective multiple paid by the acquirer would be
lower than that calculated on the target’s earnings;
§ while EBITDA multiples are commonly used benchmarks they are an incomplete measure of cash flow.
The appropriate multiple is affected by, among other things, the level of capital expenditure (and working
capital investment) relative to EBITDA. In this respect:
• EBIT multiples can in some circumstances be a better guide because (assuming depreciation is a
reasonable proxy for capital expenditure) they effectively adjust for relative capital intensity and
present a better approximation of free cash flow. However, capital expenditure is lumpy and
depreciation expense may not be a reliable guide. In addition, there can be differences between
companies in the basis of calculation of depreciation; and
33
• businesses that generate higher EBITDA margins than their peer group companies will, all other
things being equal, warrant higher EBITDA multiples because free cash flow will, in relative terms,
be higher (as capital expenditure is a smaller proportion of earnings).
34
Appendix 6 Qualifications, Declarations and Consents
Qualifications
The Grant Samuel group of companies provides corporate advisory services in relation to mergers and
acquisitions, capital raisings, corporate restructuring and financial matters generally. One of the primary
activities of Grant Samuel is the preparation of corporate and business valuations and the provision of
independent advice and expert’s reports in connection with mergers and acquisitions, takeovers and capital
reconstructions. Since inception in 1988, Grant Samuel and its related companies have prepared more than
450 public expert and appraisal reports.
The persons responsible for preparing this report on behalf of Grant Samuel are Michael Lorimer, BCA, Simon
Cotter, BCom, MAppFin, FFin, and Jake Sheehan, BCom (Hons). Each has a significant number of years of
experience in relevant corporate advisory matters.
Limitations and Reliance on Information
Grant Samuel’s opinion is based on economic, market and other conditions prevailing at the date of this
report. Such conditions can change significantly over relatively short periods of time. The report is based
upon financial and other information provided by the directors, management and advisers of Rubicon. Grant
Samuel has considered and relied upon this information. Grant Samuel believes that the information
provided was reliable, complete and not misleading and has no reason to believe that any material facts have
been withheld.
The information provided has been evaluated through analysis, enquiry, and review for the purposes of
forming an opinion as to the underlying value of TCLP. However, in such assignments time is limited and
Grant Samuel does not warrant that these inquiries have identified or verified all of the matters which an
audit, extensive examination or “due diligence” investigation might disclose. Grant Samuel has not
undertaken a due diligence investigation of Rubicon or TCLP. In addition, preparation of this report does not
imply that Grant Samuel has audited in any way the management accounts or other records of Rubicon. It is
understood that, where appropriate, the accounting information provided to Grant Samuel was prepared in
accordance with generally accepted accounting practice and in a manner consistent with methods of
accounting used in previous years.
An important part of the information base used in forming an opinion of the kind expressed in this report is
the opinions and judgement of the management of the relevant enterprise. That information was also
evaluated through analysis, enquiry and review to the extent practicable. However, it must be recognised
that such information is not always capable of external verification or validation.
The information provided to Grant Samuel included projections of future revenues, expenditures, profits and
cash flows of Rubicon prepared by the management of Rubicon. Grant Samuel has used these projections
for the purpose of its analysis. Grant Samuel has assumed that these projections were prepared accurately,
fairly and honestly based on information available to management at the time and within the practical
constraints and limitations of such projections. It is assumed that the projections do not reflect any material
bias, either positive or negative. Grant Samuel has no reason to believe otherwise.
However, Grant Samuel in no way guarantees or otherwise warrants the achievability of the projections of
future profits and cash flows for Rubicon. Projections are inherently uncertain. Projections are predictions
of future events that cannot be assured and are necessarily based on assumptions, many of which are beyond
the control of management. The actual future results may be significantly more or less favourable.
To the extent that there are legal issues relating to assets, properties, or business interests or issues relating
to compliance with applicable laws, regulations, and policies, Grant Samuel assumes no responsibility and
offers no legal opinion or interpretation on any issue. In forming its opinion, Grant Samuel has assumed,
except as specifically advised to it, that:
• the title to all such assets, properties, or business interests purportedly owned by Rubicon is good
and marketable in all material respects, and there are no material adverse interests, encumbrances,
engineering, environmental, zoning, planning or related issues associated with these interests, and
35
that the subject assets, properties, or business interests are free and clear of any and all material
liens, encumbrances or encroachments;
• there is compliance in all material respects with all applicable national and local regulations and
laws, as well as the policies of all applicable regulators other than as publicly disclosed, and that all
required licences, rights, consents, or legislative or administrative authorities from any government,
private entity, regulatory agency or organisation have been or can be obtained or renewed for the
operation of the business of Rubicon or TCLP, other than as publicly disclosed;
• various contracts in place and their respective contractual terms will continue and will not be
materially and adversely influenced by potential changes in control; and
• there are no material legal proceedings regarding the business, assets or affairs of TCLP.
Disclaimers
It is not intended that this report should be used or relied upon for any purpose other than as an expression
of Grant Samuel’s opinion as to the merits of the Proposed Transaction. Grant Samuel expressly disclaims
any liability to any Rubicon security holder who relies or purports to rely on the report for any other purpose
and to any other party who relies or purports to rely on the report for any purpose whatsoever.
This report has been prepared by Grant Samuel with care and diligence and the statements and opinions
given by Grant Samuel in this report are given in good faith and in the belief on reasonable grounds that such
statements and opinions are correct and not misleading. However, no responsibility is accepted by Grant
Samuel or any of its officers or employees for errors or omissions however arising in the preparation of this
report, provided that this shall not absolve Grant Samuel from liability arising from an opinion expressed
recklessly or in bad faith.
Grant Samuel has had no involvement in the preparation of the Notice of Meeting issued by Rubicon and has
not verified or approved any of the contents of the Notice of Meeting. Grant Samuel does not accept any
responsibility for the contents of the Notice of Meeting (except for this report).
Independence
Grant Samuel and its related entities do not have any shareholding in or other relationship or conflict of
interest with Rubicon that could affect its ability to provide an unbiased opinion in relation to the Proposed
Transaction. Grant Samuel had no part in the formulation of the Proposed Transaction. Its only role has
been the preparation of this report. Grant Samuel will receive a fixed fee for the preparation of this report.
This fee is not contingent on the outcome of the Proposed Transaction. Grant Samuel will receive no other
benefit for the preparation of this report.
Information
Grant Samuel has obtained all the information that it believes is desirable for the purposes of preparing this
report, including all relevant information which is or should have been known to any Director of Rubicon and
made available to the Directors. Grant Samuel confirms that in its opinion the information provided by
Rubicon and contained within this report is sufficient to enable Rubicon security holders to understand all
relevant factors and make an informed decision in respect of the Proposed Transaction. The following
information was used and relied upon in preparing this report:
§ Publicly Available Information
• Rubicon Annual Reports for FY14, FY15, FY16 and FY 17;
• Capital IQ website to identify comparable transactions;
• Substantial Product Holder notices issued by Rubicon’s major shareholders; and
• Rubicon’s recent Public Filings.
§ Non Public Information
• Tenon Clearwood Management Reports April-October 2017; and
• Management forecasts for Tenon Clearwood and Taupo Wood Solutions for year ending 31 March
2018.
Declarations
36
Rubicon has agreed that it will indemnify Grant Samuel and its employees and officers in respect of any
liability suffered or incurred as a result of or in connection with the preparation of the report. This indemnity
will not apply in respect of the proportion of any liability found by a Court to be primarily caused by any
conduct involving gross negligence or wilful misconduct by Grant Samuel. Rubicon has also agreed to
indemnify Grant Samuel and its employees and officers for time spent and reasonable legal costs and
expenses incurred in relation to any inquiry or proceeding initiated by any person. Where Grant Samuel or
its employees and officers are found to have been grossly negligent or engaged in wilful misconduct Grant
Samuel shall bear the proportion of such costs caused by its action. Any claims by Rubicon are limited to an
amount equal to the fees paid to Grant Samuel.
Advance drafts of this report were provided to the Independent Directors of Rubicon. Certain changes were
made to the drafting of the report as a result of the circulation of the draft report. There was no alteration
to the methodology, evaluation or conclusions as a result of issuing the drafts.
Consents
Grant Samuel consents to the issuing of this report in the form and context in which it is to be included in
Notice of Meeting to be sent to security holders of Rubicon. Neither the whole nor any part of this report
nor any reference thereto may be included in any other document without the prior written consent of Grant
Samuel as to the form and context in which it appears.
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.