For Alan Gibbs and friends, the 1990 Telecom privatisation was the deal of a lifetime. A new book* out today tells how fortunes were made, reports Chris Barton.
"And there it was: the greatest coup of my business career, the chance to make serious money," crows Alan Gibbs as he pulls off the sale of the century, taking state-owned enterprise Telecom off the government's hands in 1990. Three years later he and business partner Trevor Farmer get their big payday when they stump up about $200 million for 112 million Telecom shares. They immediately sell 67.5 million shares for $256 million, making a cool $56 million profit. Plus, having bought at $1.81 and sold at $3.80 per share, the balance of their shares is worth about $170 million. An asset sale deal close to heaven.
It's all gleefully recounted in Serious Fun: The Life and Times of Alan Gibbs, in which author Paul Goldsmith casts Gibbs as the deal broker extraordinaire. Gibbs celebrates the $4.25 billion sale of Telecom to a consortium made up of US companies Bell Atlantic and Ameritech, merchant bankers Michael Fay and David Richwhite, plus Gibbs and Farmer, by taking his new boat, Laissez Faire, on its maiden voyage circumnavigating New Zealand.
The "powerful beast", which can cruise at 30 knots, leaves Auckland at 2pm on a Thursday and enters Wellington Harbour at 5pm Friday, flying the skull and crossbones. Gibbs can't resist firing a triumphant shot (a blank) from the brass cannon he had mounted on the bow.
Serious money, serious fun, with guns, fast boats, tanks, art and absolute faith in the free market to guide him along the way. Gibbs is so enamoured of Austrian neoliberal economist Friedrich Hayek that he has HAYEK as his personalised number plate. "He was a horseman of the Apocalypse, but a cultured one," writes Goldsmith. "Minimalism appealed to him, both in art and when it came to the role of the state. At the same time, it was Gibbs' habit to turn up at fancy dress parties dressed as a cowboy, gleefully twirling his six-shooter."
Goldsmith doesn't tell us exactly how much Gibbs and Farmer made out of their remaining Telecom shares, but we can guess. Gibbs was confident the share price would go up, so unlike his partners in the 10 per cent stake - Fay and Richwhite, who sold relatively early in the game and walked away with $274 million - Gibbs and Farmer waited it out. Like predators poised for the kill.
"Predators seek to incur the least possible risk while hunting," writes Goldsmith, comparing the law of the jungle with the behaviour of successful, risk-averse businessmen. On a 1987 trip to Zimbabwe and Kenya, Gibbs found the great African plains a revelation. He was fascinated by the way gazelle accommodated to living in constant peril. "The competition for survival in nature was absolute and unsentimental: the strong survived; the weak were eaten." Goldsmith extends the metaphor to the New Zealand business ecosystem of the 70s - predator-free, with the natural process disrupted by government regulation and protection, allowing "plenty of fundamentally unsound businesses to limp along." Until, according to Goldsmith, Gibbs restored the balance. "Gibbs had emerged since 1979 as one of the larger local predators, at a time when old protections were starting to lose their power."
In truth, Gibbs could confidently wait for Telecom's shares to rise because he had already done considerable culling. In 1991 there was talk that Ameritech and Bell Atlantic, which paid $4.25 billion for 100 per cent of Telecom, but were required to reduce their combined holding to 49.9 per cent in three years, had paid far too much. The initial float didn't go well - getting just $2 a share for the first tranche. "The idea we couldn't get more than peanuts above what we'd paid the government was pathetic," says Gibbs.
To make matters worse, Clear Communications had entered the market and was eating Telecom's lunch - making inroads into its lucrative toll call business.
Telecom's chief executive at the time was Peter Troughton, who had reduced staff numbers from 23,000 in 1988 to 12,500. Gibbs, who as chief executive of Forestry Corporation in 1986 had chainsawed staff numbers from 7070 to 2770, wanted Telecom staff cut to 6500. Troughton resigned somewhat abruptly in February 1992, shortly after proposing an advertising campaign to deal with Clear. The way Gibbs tells it, the campaign featured "a big Goliath figure" grunting as he climbed a hill with a huge rock called Clear on his shoulders. "I said you must be crazy; the country would laugh itself stupid to think that Telecom is a poor giant carrying a terrible burden."
Gibbs, who was on the Telecom board, was worried enough about the company's stagnant share price to confront top Ameritech and Bell Atlantic executives with his concerns. The message delivered with Richwhite and former treasury official Rob Cameron was typically blunt: "You're an embarrassment to yourselves and the world; you're going to lose your shirt which is ridiculous because this company is worth megabucks." It wasn't long before Gibbs' restructuring plan was in place, including "some financial engineering to gear the business up a little" - returning $400 million of capital to shareholders. In 1993 Telecom announced staff numbers would be reduced to 7500 over four years - a thousand short of Gibbs' target, but still enough to push the share price past $3.
Responding to critics about the staff cuts, Gibbs gave his usual free market justification. "It's not me that's tough on Telecom, it's the consumers; they want and demand cheap calls. If we hope to remain a profitable business we have to give them what they want." But what Gibbs really wanted was a high share price. Which he duly got.
In 1995 Telecom's after-tax profit passed $600 million - helped by an advertising campaign featuring 'Spot' the Jack Russell terrier. As Goldsmith notes, toll calls were still incredibly lucrative since there was virtually no additional cost for calls once the infrastructure was in place. "With cheap calling weekends, they gained two dollars in revenue for every dollar they gave away on price."
Telecom's toll call competitor Clear was bogged down in court battles to establish rights to interconnect with Telecom's network to allow it to properly compete in a market heavily tilted in favour of the incumbent. The imbalance was a situation Gibbs wanted to last as long as possible - so he wasn't backward in telling National Party ministers that, since the state had just taken $4.25 billion for the business, any change to the light-handed regulatory regime would be "tantamount to theft."
Nineteen ninety five was also the year Telecom's share price broke the $6 mark. That's when Gibbs started to sell his remaining shares - exiting in early 1997 and getting $7.40 a share for his last significant parcel. In other words, a gain of well over $300 million for Gibbs and Farmer. Gibbs' timing wasn't quite as good as Ameritech and Bell Atlantic, which exited in 1998 at $8.85 a share. But for sheer chutzpah and bulldozer will, Gibbs' greatest coup is hard to beat.
Especially when you learn that Gibbs and friends also got a merchant banking fee of $52 million and had engineered the deal so there was virtually no risk.
The sticking point in the negotiations with the American partners had been how Gibbs and his friends were to get a slice of the action. The breakthrough came when the New Zealand gang of four agreed to buy 10 per cent of the shares at the purchase price - with $20 million paid on settlement day and the remainder, which turned out to be around $400 million, three years later.
As Gibbs describes it in Serious Fun, it was a dream deal: "We'd own the shares, but didn't have to pay for three years; we'd put down $20 million, but that would represent only part of our merchant banking fee; we'd have to pay interest, but dividends would probably cover that, and unless something went badly wrong, in three years time the shares would be worth a hell of a lot more than the original purchase price."
There was, of course, a chance things could go wrong. Despite Gibbs' best efforts to ensure otherwise, the share price might go down during the three years of deferred payment. Gibbs had that covered too. Freightways (Gibbs and Farmer) and Midavia Holdings (Fay and Richwhite) would buy their shares through Carla Nominees, a company with only $100,000 capital - and the four would give no personal guarantees. Gibbs also secured the $20 million down payment against the shares. Bizarrely, Bell Atlantic and Ameritech's lawyers forgot to do the same for the balance - the $400 million. In effect the deal was an option and the only risk for the gang of four was Carla's $100,000 capital.
That was the way Gibbs liked his deals - low risk, with little of his own money up front, and with a slice of the action assuring maximum returns. Investment analyst and Herald columnist Brian Gaynor worked briefly for Gibbs in 1987, managing his portfolio - a period he describes as the most boring of his career because of Gibbs' extreme conservatism. At the time, as well as his investments in Freightways and Ceramco, Gibbs' portfolio comprised a $100 million cash pile and just $1.2 million in shares which he worried about incessantly. His goal was to never be in a position where he couldn't write a cheque for $20 million which could be cashed the next day.
While it's difficult not to see Serious Fun's retelling of the Telecom deal as serious avarice, Gibbs insists that's not what drives him. In a public stoush with Jim Anderton in 1993 he explained that greed - the insatiable desire for something - was quite different to "the pursuit of one's own long-run self interest". Invoking libertarian free market ideology, Gibbs says the key to running a successful business is to provide the things people want. "That's how I do my bit for my fellow man. I don't pretend to do my bit out of the goodness of my heart. That would insult people's intelligence. I do my bit out of my own self-interest."
Insulting people's intelligence or not, Gibbs via Goldsmith devotes some effort to justifying the greater good of the Telecom sale - irked in particular by some Gaynor columns in the Herald arguing the government sold Telecom cheaply and should not have sold the entire company. In 1999 Gaynor pointed out that since privatisation Telecom had paid $5.5 billion in dividends and its total value had risen from $4.25 billion to $16.6 billion. "More than 80 per cent of this $12.3 billion increase in value has gone to overseas investors," wrote Gaynor. "The New Zealand government has allowed a small group of investors, mainly offshore, to make enormous profits. With just a little foresight these profits could have been kept for the benefit of domestic investors and taxpayers."
Goldsmith counters by pointing out that many of the gains came from vigorous cost cutting and restructuring "driven by determined men such as Gibbs and Roderick Deane," Telecom's chief executive from 1992 until 1999. "The profits that investors enjoyed had to be grasped; they didn't fall naturally like ripe peaches from a tree."
Gaynor later pointed out that the Ameritech/Bell Atlantic, Fay/Richwhite, Gibbs/Farmer syndicate had indeed grasped profits - walking away with a realised capital profit of $7.2 billion, and more than half of Telecom's $4.2 billion in dividends from 1991 to 1998.
More importantly, Gaynor shows during the syndicate's stewardship, the key policy of extracting funds through capital repayments and high dividends weakened Telecom's balance sheet. In 1990, before the privatisation, shareholder funds were $2.5 billion, representing 58.7 per cent of total assets, and total borrowings were only $1.2 billion. By March 1998 shareholder funds had dwindled to $1.1 billion, representing 20.7 per cent of total assets, and borrowings were $2 billion.
Gaynor's columns also noted that Telecom's capital expenditure during the mid-1990s was relatively low. "In the six years ended March 1998, dividend payments exceeded capital expenditure by $3.8 billion to $3.3 billion," he wrote. "These are extraordinary figures for a company that is supposed to be at the cutting edge of new technological developments."
Goldsmith takes a different view, citing total profit of $4.9 billion, dividends of $5.19 billion and capital investment of $5.13 billion over the nine years (1991-99) Gibbs was involved with Telecom. "No other New Zealand company reinvested on anything like that scale or [had] as high a percentage of profitability through the 90s." As a result, he says, New Zealand developed "one of the most advanced networks in the world." He cites a series of indicators to show how much telecommunications improved since privatisation. "By any measure, Telecom had been a highly successful company during the 1990s following its privatisation."
Not surprisingly, there is no mention of Clear Communications' bitter court battles with Telecom over interconnection agreements. Nor the Herald story in 2007 when ex-wife Jenny Gibbs found she couldn't get broadband to her mansion-cum-art gallery on Auckland's exclusive Paritai Drive. Nor that Telecom largely maintained its monoply status throughout the 90s. Goldsmith claims the company lost a lot of value in recent years for a host of reasons - "not the least of which was government intervention in the third term of Helen Clark's Labour government." No mention that shareholder value had been transferred to consumers' benefit. Or that competition had begun to operate as it should in a properly functioning free market.
Serious Fun's half-hearted rebuttal of Gaynor's criticisms is surprising - the book's only chink in its laissez faire ideological armour. But beneath the libertarian propaganda there is a more honest appraisal of recent history - how Gibbs' time at Forestry Corporation gave him an insider's view of state-owned enterprises, of how to unlock their hidden value and realise the super profits that "only occurred at times of discontinuity."
Gibbs spotted his opportunity early in 1990 when he did his hallmark one-page analysis of what Telecom might be worth. "It was a lovely, fat company, with huge margins and a lazy balance sheet. It was obvious if you could keep the margins it would be a fantastic business." Like an alpha predator, he went for the throat.
* 1987: Telecom split off from NZ Post Office as a state-owned enterprise
* 1990: Sold to US companies Bell Atlantic and Ameritech for $4.25 billion. The buyers agree to cut their shareholding to 49.9 per cent over three years and sell shares to the public. Fay, Richwhite and Freightways (Gibbs/Farmer) to buy 5 per cent each within three years
* 1991: 30.9 per cent of Telecom shares sold in share float
* 1993: Freightways and Fay, Richwhite lift their Telecom stake to 5 per cent each, paying $1.81 a share. Gibbs and Farmer sell part of their holding, making immediate $56m gain
* 1997: Gibbs sells last signicant Telecom stake at $7.40 a share
* Serious Fun: The Life and Times of Alan Gibbs by Paul Goldsmith (Random House NZ, $45). Out today.