Brian Gaynor: Decline and fall of Kiwi private enterprise

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Theresa Gattung. Photo / Greg Bowker
Theresa Gattung. Photo / Greg Bowker

As well as the remaining June year results, several other items are expected to occupy investors' minds next week.

These include the battle between Fletcher Building and Telecom for the NZX's largest company spot, and Argosy Property Trust's annual meeting, which will be held in Auckland on Tuesday.

Monday was a milestone day for the NZX as Telecom had a greater sharemarket value than Fletcher Building at the close of trading, the first time this has happened for years.

When the market closed on Monday, Telecom's total value was $5274 million at its closing price of $2.74 a share, while Fletcher Building was worth $5245 million at $7.73 a share.

Fletcher Building regained the top position later in the week, but the gap between the largest two is closer than it has been for some time.

Huge changes have occurred at the top of the NZX over the past 20 years.

In December 1986, all of the 10 largest companies had private sector origins, and most were named after their creators. Top 10 company founders included Ron Brierley, James Fletcher, James Wattie, Bob Jones and Frank Renouf.

Chase and Equiticorp were also dominated by individuals, Colin Reynolds and Allan Hawkins respectively.

Thirteen years later only Carter Holt Harvey and Brierley Investments remained in the top 10, and Brierley's value is down from $5481 million to $1097 million.

At the end of 1999, three of the top 10 companies - Telecom, Contact Energy and Auckland International Airport - had public sector origins.

Telecom's share price closed in 1999 at $9 - having reached $10 during the year - and the company had a market value of $15,775 million. This was more than 3.6 times the share market value of Carter Holt Harvey, the NZX's second largest company.

Long-time Telecom shareholders will have been stunned by the interview with Theresa Gattung, Telecom's chief executive from 1999 to 2007, in the Australian this week.

It appeared under the heading "Defensive strategy turns to gold for Gattung".

Gattung boasted that she sold her Telecom shares after leaving the company in mid-2007, when its share price was around $4.50, and bought gold bullion, which has risen 140 per cent since then.

She told the Australian "I am a conservative investor. I look to property, cash and precious metals." She went on to add, "I ran a $10 billion company for nearly eight years" - but did not mention that Telecom was a $16 billion company when she started as chief executive but had a sharemarket value of only $9 billion when she left.

The latest top 10 list, based on Wednesday's closing prices, includes six former publicly-owned companies; Telecom, Contact Energy, Auckland International Airport, Vector, Port of Tauranga and Air New Zealand.

It could be argued that only Fletcher Building and Ryman Healthcare operate in a truly competitive environment as SkyCity owns a monopoly casino in Auckland and SkyTV has created its own monopoly because of weak competition.

These top 10 sharemarket value figures show that New Zealand businessmen and women have lost the ability to create great companies and the domestic sharemarket is now heavily reliant on former publicly owned organisations.

The National Government's partial privatisation proposals will be a huge boost to the NZX, but these are one-offs. After the float of Mighty River Power, Meridian Energy, Genesis Energy and Solid Energy, it is conceivable that eight or nine of the NZX's 10 largest companies will have their origins in the public sector.

The NZX badly needs more private enterprise established companies because these usually have better international growth prospects than privatised organisations.

Unfortunately our private sector originated businesses participation in the top 10 largest company list has declined:

* In December 1986, all of the top 10 companies originated in the private sector and had a total sharemarket value of $20,712 million.

* Thirteen years later seven of the 10 companies started in the private sector and had a market value of $13,044 million.

* Today, only four of the top 10 have a private sector background and their sharemarket capitalisation is just $10,866 million.

Where have New Zealand's private sector entrepreneurs disappeared to?

Ironically, the conflict over Argosy Property Trust has its origins with Colin Reynolds, who ran Chase Corporation, the NZX's third largest company at the end of 1986.

Argosy was first listed as Paramount Property Trust in December 2002 under the external management of Reynolds' Symphony Group.

These external management arrangements are totally unsatisfactory.

There is a potential conflict of interest between the trust and the manager, huge value can be created for the owners of the management company, and the corporate governance structure is unsatisfactory because trusts have no directors to represent unit holders as directors listed in annual reports sit on the boards of the management companies.

The full details of the management company contract are rarely disclosed to unit holders, and the ownership of the management company can change hands with unit holders having no say.

In 2003, ING bought 50 per cent of Paramount's management company, and five years later ING bought the remaining 50 per cent.

ING has subsequently changed its name to OnePath, which is 100 per cent owned by ANZ Bank.

Meanwhile Paramount changed its name to ING Property Trust and is now called Argosy.

Argosy's meeting next week is incredibly complex with twelve resolutions to be voted on. But it can be boiled down to three choices:

* Unit holders can vote for the internalisation of the management contract. The original proposal was for the Trust to pay OnePath $32.5 million, but this has been negotiated down to $20 million.

* DNZ has indicated that it wishes to make a takeover offer for Argosy, but no formal offer has been made. DNZ would internalise the management structure after a takeover but it has not disclosed how much it expects to pay to OnePath to accomplish this.

* Several large institutions are proposing that the trustee removes the manager at "zero cost".

There are downsides to this. Another manager would have to be appointed, it does not immediately achieve the internalisation objective, the trust would be open to litigation by OnePath, the resolution is not binding on the trustee and at this stage the trustee does not believe there is sufficient reason for the manager to be removed.

The management company's independent directors, Peter Brook and Trevor Scott, support the internalisation proposal as does Grant Samuel's independent report and the New Zealand Shareholders Association.

The major dissenting voice is ISS Proxy Advisory Services, which advises international fund managers how to vote.

ISS, which has produced a 19-page report on Argosy, has recommended that unit holders vote against the internalisation proposal because Argosy will have to take on over $20 million of additional debt to fund it.

It recommends that shareholders vote against the resolution that would require the trustee to remove the manager because this could create some uncertainties amongst the banking syndicate, which is led by ANZ Bank, owner of OnePath.

It notes the potential of the DNZ proposal but notes that "this should not be construed as support for the DNZ proposal".

In other words, ISS does not have a clear and decisive recommendation.

There should be a very interesting debate at the Ellerslie Events Centre on Tuesday afternoon, but the most likely outcome is that unit holders will vote for internalisation and payment of $20 million to OnePath.

* Disclosure of interest; Brian Gaynor is an Executive Director of Milford Asset Management, which holds Argosy Property Trust units on behalf of clients.

- bgaynor@milfordasset.com

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