Newhall Land, a Partnership With Takeover Jitters, Seeks Defense

Newhall Land & Farming wants to adopt tough provisions aimed at deterring a hostile takeover. Hundreds of other corporations have done the same. Except Newhall, a Valencia-based land developer, is not a corporation. It’s a master limited partnership, and one of the first such partnerships to seek extra help against potential raiders.

Ordinarily, a partnership wouldn’t be concerned about an unwanted merger because most partnerships are private. But master limited partnerships, such as Newhall, have units that are publicly traded like shares of stock and therefore MLPs are vulnerable to a hostile suitor.

Newhall, then, could be a harbinger of other MLPs, which became popular within the past few years. If its proposals pass, “you are going to see more” MLPs propose extra takeover defenses, said William Turchyn, executive vice president in charge of limited partnerships for Shearson Lehman Hutton in New York.

Newhall, whose unit holders must vote by mail by April 22 on the anti-takeover proposals, doesn’t currently face a takeover threat. Also, “there has not yet been, to my knowledge, a hostile takeover of an MLP,” Turchyn said.

But that could change. Many MLP units are now trading at prices “below their offering prices in many instances, and below, in some cases, their ultimate breakup value,” he said. Last year’s tax reform law, which pared the tax benefits of some MLPs, and the stock market crash have pushed prices of some MLPs below what their underlying assets are worth--a trend not unnoticed by potential raiders, analysts said. “Frankly, I think many companies pursued the MLP route without carefully thinking whether the attraction of the liquidity (for the units) carried with it negatives,” namely the “threat of an unwanted takeover,” said Christopher L. Davis, president of the Investment Partnership Assn., a trade group in Washington.

An MLP is a hybrid enterprise and about 130 now exist. Like a standard partnership, an MLP’s earnings flow directly to its investors, or limited partners, without first being taxed at the company level. But unlike a standard partnership, an MLP’s units are publicly traded in the stock market. That gives the partnership a source of fresh capital and the partners an arena to trade their units.

The prospect of avoiding corporate taxes and still having a public market for their units prompted several companies in recent years to convert from a corporation to an MLP, or to spin off part of their assets into an MLP. Newhall converted in 1984.

To get its takeover defenses, Newhall must overcome the same problem that dogs most corporations trying to adopt such plans: charges from stockholders that management wants the changes merely to protect their jobs and that the measures prevent stockholders from getting a higher price for their shares from a would-be acquirer.

Indeed, the investment firm O’Connor Securities in Chicago, which owns 537,100 Newhall units, or 2.7% of Newhall’s 19.8 million total units outstanding, is launching a fight to defeat Newhall’s proposals. Newhall “is attempting to do something to really hurt our investment,” said Herbert E. Seif, O’Connor’s managing partner.

Kyle Krueger, portfolio manager for Eagle Asset Management, a money manager in St. Petersburg, Fla., that owns 120,000 of Newhall’s units, called Newhall’s proposals “absurd, outlandish and a blatant attempt to entrench existing management.”

Krueger also said Newhall’s assets are worth “well in excess of the current trading price” of Newhall’s units and that the anti-takeover proposals would only exacerbate that difference. Newhall closed Wednesday at $38.125 per unit, up 37.5 cents, in New York Stock Exchange composite trading.

Proxy Material

The 105-year-old Newhall is developing the community of Valencia, 35 miles northwest of downtown Los Angeles, and it owns 123,000 acres of land overall. The company, which also has interests in commercial real estate and agriculture, earned $39.6 million last year on revenue of $183.3 million. Newhall also has agreed to buy Newhall Resources, an energy concern it spun off four years ago, for $30.7 million.

Robert D. Wilke, Newhall Land’s executive vice president, declined to respond to the unit-holders’ complaints. He also said Newhall was not commenting beyond its proxy material, in which the company said the provisions would “deter certain coercive takeover tactics” and give management “sufficient time” to weigh any offer.

Some MLPs are controlled by their managing general partners, which would make a hostile bid virtually futile. But most others, including Newhall, are not controlled by management, making those MLPs more vulnerable to an unwelcome merger, Davis said.

Additional Shares

At Newhall, the managing general partner--called Newhall Management, which consists of Newhall’s executives and other insiders--owns 20.7% of the units.

Among other things, the five proposals sought by Newhall Management would require 75% of Newhall’s units to be voted in favor of a hostile takeover or to remove the managing general partner, up from the 50.1% majority vote now in place.

If the proposal is adopted, Newhall Management, which now needs 29.4% of Newhall’s units in addition to its own 20.7% stake to defeat a hostile grab for control, would have to garner only 4.4% of the additional shares.

The proposals also gives Newhall Management the authority, without prior approval by unit-holders, to issue new classes of units that could be used to thwart a raider. But Newhall also acknowledged that the new stock would dilute the ownership of its current unit-holders, which is particularly annoying to O’Connor Securities, Eagle Management and other disgruntled Newhall investors.