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Unwired shareholders plan Seven takeover rebellion

A small group of investors in Unwired are calling on their peers to reject the AU$127 million takeover offer made by Seven, claiming that the offer undervalues the potential that WiMax spectrum offers.
Written by Brett Winterford, Contributor

A small group of investors in Unwired are calling on their peers to reject the AU$127 million takeover offer made by Seven, claiming that the offer undervalues the potential that WiMax spectrum offers.

The band of investors, which began discussing the abnormal trading of Unwired shares on user community site Whirlpool in the lead-up to Seven's offer, are angry that some of Unwired's directors are set to reap significant windfalls from the acquisition at the expense of small shareholders.

"We small and medium shareholders are banding together by Web, e-mail and even mail to block the potential 45c take over attempt by Seven," a posting by the group on the site reads.

Other posters consider the offer "an opportunistic strike at mum and dad shareholders and daytraders."

The group has set up an online database where shareholders opposed to the acquisition can list their holdings, in an attempt to derail the takeover through collective action.

So far, the complainants account for just 5.3 million of the 254 million Unwired shares on offer -- or only 21 percent of the 25.4 million shares required to guarantee that Seven's stake in the company cannot exceed its desired 90 percent.

The group expects to expand via a campaign levelled at other like-minded investors at the company's annual general meeting on 25 October.

Among other conspiracies, posters on the Whirlpool forum claim that just six days prior to Seven's bid, Unwired CEO David Spence was offered additional remuneration options which favour a change of control of the company.

Spence has some 8.4 million options in Unwired -- most of which can only be exercised in relation to the company achieving certain performance targets. All of these options, however, will vest in the event of a change of control in the company.

A deed of option with Bishopswood Holdings Pty Ltd, the investment vehicle for Unwired founders Steve Cosser and Chris North, represents over 16 million options at US$0.54c. These options expire on 7 December 2007.

Chris North is both a director of Unwired, and a consultant with Wattle Park Partners, which provides advisory services to Seven.

Unwired CFO: Investors "split down the middle"
There are two distinct groups of Unwired investors that will feel very differently about the offer, according to Unwired CFO Ian McGregor.

There are those that bought into the company upon its float in late 2003. At the time, 116 million of the 254 million shares available were purchased at 90 cents each.

Then there are those that have purchased shares at the far lower prices of around 25 to 40 cents since.

The offer thus represents a significant gain for half the company's shareholders and a cutting of losses for the other half.

BBY analyst Mark McDonnell, however, believes a 50/50 split is a little naive. McDonnell estimates that many of the company's original shareholders would have either carried the value of their shares to the market price or engaged in "tax-loss selling" -- a practice of selling and buying back shares at a lower price to crystallise a loss for tax purposes.

"It would be incongruous to be holding shares at book value of 90 cents if the market price hasn't seen 90 cents for so long," he said.

"Unwired has been an underperformer," McDonnell said. "Frankly, it might be at 48 or 49 cents now, but that is a 22 month high. Unwired shares fell below the 49 cent mark in November 2005 and have stayed below ever since. A lot of shares have turned over in 22 months. Everyone who has bought in during that 22 month period would be making a profit on the offer."

"The burning question is how much Seven can get. Seven effectively has 20 percent already. Their prospect of getting 50 percent is pretty good. But 100 percent is more difficult to say with confidence. At least some people that own shares at a price above AU50 cents would see them come out of the stock at a loss."

The bidder's statement
In its bidder's statement, Seven apparently went to some lengths to create uncertainty around Unwired's business model.

"If entitled to do so, Seven intends to compulsorily acquire your Unwired shares and, if that occurs, there may be considerable delay in receiving your cash consideration if you do not accept now," the broadcaster stated.

Seven detailed the amount of investment that has been poured into Unwired to date. Unwired raised AU$128.8 million on start-up to acquire spectrum, a further AU$100 million to build out its initial network, and a further AU$5 million upon listing on the stock exchange.

Seven noted that Unwired has only AU$13 million in cash and lost AU$33.9 million and AU$25.2 million respectively in the last two financial years.

Seven estimates that building a new WiMax network requires around AU$200 million of funding -- which the broadcaster could easily supply, having AU$2.6 billion in cash and having turned AU$1.6 billion profit in the last financial year.

In addition, Unwired may be required to refinance AU$37 million in convertible notes by 28 December 2009 if their holders do not elect to convert them or pay up to AU$60.5 million if the Convertible Notes are redeemed," the broadcaster said in its statement. "It is unlikely this capital requirement could be supplied by debt funding. In the absence of the Offer, Unwired shareholders may face requirements to contribute further capital to the company or face dilution of their holdings."

McGregor said Unwired has little say in what a bidder reports in their statement.

"It's [Seven's] pitch to the world, not ours," he said. "We get our chance with the target statement, but I am not anticipating that our target statement will say anything materially different."

"From our perspective, if we don't put the offer out there, half the shareholders would be unhappy not to know about it. In light of there not being a more substantial offer, we are giving it to our shareholders to decide -- here it is, you're in or you're out. You make the decision."

McGregor said Unwired's target statement is due within two weeks, but will probably come sooner rather than later.

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