Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Mainzeal collapse needs investigation

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Receivership of firm highlights inadequate corporate disclosure.

PwC have been appointed receivers of Mainzeal Property & Construction, one of New Zealand's biggest building firms. Photo / Natalie Slade
PwC have been appointed receivers of Mainzeal Property & Construction, one of New Zealand's biggest building firms. Photo / Natalie Slade

The Mainzeal receivership highlights once again the poor governance of the Richina Pacific group of companies, inadequate corporate disclosure and the vulnerability of unsecured creditors and subcontractors when a construction company goes bust.

It also shows that former politicians continue to make poor decisions when it comes to accepting board seats with former Prime Minister Dame Jenny Shipley now joining that infamous list.

It is a further blow to Richina Pacific's Richard Yan, who promised so much but has failed to deliver on most of his promises.

Yan, who was born in China but educated at Auckland Grammar and the University of Auckland, first hit the headlines in March 1995 when he acquired a 51 per stake in Mainzeal Group from NZI and former chief executive Peter Menzies.

Mainzeal first listed in 1973 but the company was delisted in 1983 following a management buyout by Menzies and John Roy.

It relisted again in December 1987, one of the few companies to come to the market immediately following the October 1987 crash.

Yan's investment in Mainzeal was through the Richina consortium which included a number of wealthy American investors.

Richina's main objective was to invest in China.

Mainzeal fitted the bill because it owned 50 per cent of Mair Astley, which controlled a number of New Zealand leather operations and was planning to invest in a new tannery in Shanghai.

In May 1996, Mainzeal acquired the remaining 50 per cent of Mair Astley and changed its name to Richina Pacific.

Richina Pacific was a strange combination of a New Zealand construction company, a New Zealand leather producer and a Shanghai tannery.

Its second Chinese investment was a new saltwater aquarium next to the Beijing Workers Stadium, the city's main sports stadium before the 2008 Olympic Games.

Yan has had a way with politicians and Prime Minister Jim Bolger opened the new aquarium on November 29, 1997.

The aquarium cost significantly more than the $26 million budget.

Richina made its third Chinese investment in December 2004 when it purchased 90 per cent of Shanghai Leather, its joint venture partner in the Shanghai tannery.

The new acquisition was an old fashioned Chinese state-owned enterprise with a huge range of interests, including industrial water supply, chemicals, shoe manufacturing, leather products, parking services, taxis, plant leasing, real estate, a hotel and a department store.

Shipley was appointed to the Richina Pacific board in April 2004, eight months before the Shanghai Leather acquisition, on the basis that this would give the New Zealand company credibility in the eyes of Chinese government officials.

She was also appointed chairwoman of Mainzeal.

Richina Pacific has been an extremely disappointing company under the stewardship of Yan, who was appointed chief executive in 1999.

Yan used to speak with great enthusiasm at every annual meeting about Chinese prospects, yet the company consistently failed to deliver.

Between 1995 and 2007 the company's value fell from $115 million, including a capital raising, to just $68 million during a period of enormous prosperity in China.

The board had a revolving door with 19 different directors and five chairmen during this 12-year period.

Yan lived in Shanghai when Richina Pacific was based in Auckland but he moved back to Auckland when the company moved its head office to Singapore and then to Kuala Lumpur.

He was paid in excess of $1 million a year, when the company was small and going backwards. Nevertheless he had the full support of a board with almost no industry expertise.

The three independent directors were Shipley, based in New Zealand, a Singapore lawyer and the chairman, who was a New York lawyer.

The 2007 annual meeting, held in Auckland, was a stormy affair, with the directors, particularly Shipley, strongly supporting Yan. She argued that the company had a positive outlook under his stewardship.

I wrote shortly afterwards: "The strong impression from the meeting was that Yan controlled the board rather than the board controlling him."

Meanwhile, Mainzeal was having big problems with its Vector Arena contract in Auckland.

The original tender price was $67 million but this was raised to a final contract price of $72.6 million after adjustments and enhancements.

However, the company reported a loss of $22.2 million on the contract as the arena cost $94.8 million to complete, mainly because of problems with the roof.

The company blamed "a new standard in the construction of the stadium's roof, imposed by the Heavy Engineering Association, which only emerged in 2006".

But Richina Pacific also stated in its 2006 annual report that the Vector Arena problems were also due to "inadequacies in Mainzeal's initial planning systems, which meant that Mainzeal wrongly estimated the cost of fully developing the design and the cost of materials, such as steel, at a time when there were significant inflationary pressures in the construction industry".

The following year, the 12 months ended December 2007, Mainzeal's revenue plunged from $451.1 million to $288.7 million.

In 2008 PwC, which was appointed receiver to the company this week, prepared an information document for a Richina Pacific shareholders meeting that would approve separation of the group into four and its delisting from the NZX.

PwC stated: "The New Zealand division will essentially comprise Mainzeal. Mainzeal's balance sheet is in a deficit position (excluding its intercompany advance) and it requires the support of the Richina Pacific Group to operate in the short-term.

"Consequently, to enable it to operate as a stand-alone division, it requires a cash injection from the group.

"We are advised that this will be affected through the issue of preference shares by the Investment Division (Richina Pacific's Chinese fund management business) to the New Zealand Division which are intended to qualify for treatment as equity of the New Zealand Division."

Mainzeal had low profit margins but construction companies can be cash cows, if they are properly governed, because they always get paid first and then pay their subcontractors at a later date.

Thus, subcontractors effectively fund the construction group until they get paid.

However, the subcontractors are in a terrible position if the company goes bust because they are unsecured creditors and are unlikely to be paid until all obligations to secured creditors have been met.

Consequently, it is vitally important that PwC and the regulators carry out a wide-ranging investigation of the Mainzeal collapse because the Richina Pacific group of companies has had a huge number of related party transactions in the past.

What happened to the preference shares deal with the group's Chinese fund management business?

Has any dividend been paid, or other payment been made, by Mainzeal to its parent company in recent months?

Is the New Zealand construction company owed any money by other Richina Pacific entities?

Why hasn't Mainzeal lodged recent financial accounts at the Companies Office, which is a requirement of overseas-controlled companies?

At the very least unpaid subcontractors and unsecured creditors deserve a thorough investigation into Mainzeal and its collapse.

Dame Jenny Shipley joins a long list of prominent politicians who have joined the boards of troubled or unsuccessful companies.

These include: Wyatt Creech and John Luxton at Blue Chip; Sir Roger Douglas, Fran Wilde and Philip Burdon at Brierley Investments; Don Brash and John Banks at Huljich Wealth Management; Sir Douglas Graham and Bill Jeffries at Lombard; Sir William Birch at Viking Pacific (now Vetilot) and Ruth Richardson at Dairy Brands and Syft Technologies.

The list goes on and on and the Mainzeal collapse is a timely reminder that retired politicians should be extremely careful about accepting board positions because most of them have little business experience and their appointment can temporarily embellish the reputation of a poorly run company.

Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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