Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Business break-ups can get very messy

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The problem with Abano and Hutson is that a happy relationship has fallen apart and there appears to be little hope of reconciliation.
There appears to be little hope of reconciliation in the dispute between Peter Hutson and Abano Healthcare chairman Trevor Janes. Photo / Getty Images
There appears to be little hope of reconciliation in the dispute between Peter Hutson and Abano Healthcare chairman Trevor Janes. Photo / Getty Images

It is amazing how often business resembles life.

A company's incorporation is its birth.

An IPO is university entrance.

A joint venture arrangement or a merger is a marriage and bankruptcy or liquidation is the demise.

However a divorce can be the most spectacular, particularly when it is acrimonious and both parties air their dirty linen in public.

The spat between Eric Watson and Sir Owen Glenn at the New Zealand Warriors is an example of a public split as is the dispute between Peter Hutson and Trevor Janes, Abano Healthcare's chairman.

The Abano conflict makes the high profile divorce between Sally Ridge and former husband Adam Parore look like a relative stroll in the park.

The Abano story begins with New Zealand Petroleum, an unsuccessful oil exploration company that listed on the NZX in 1962.

In mid 1998 the company raised $5.2 million through a six for one rights issue at 0.4 cents a share. This capital raising was controversial because Eric Watson underwrote the issue for a 4 per cent commission and 150 million free options to subscribe for ordinary shares at 0.4 cents each.

NZ Petroleum told shareholders that the money would be invested in oil and gas activities.

There was a substantial rights issue shortfall and Watson and associates ended up owning 62.6 per cent of the company.

Less than two months later NZ Petroleum announced it would buy a number of retirement villages from Watson and associates for $30 million. This was a backdoor listing as Watson's consideration would be in the form of NZ Petroleum shares.

However eight months went by before the full terms of the backdoor listing were revealed with huge volumes of NZ Petroleum shares trading on an uninformed market during this period. The paucity of information regarding the current TRS Investments/Mega deal clearly illustrates that the NZX hasn't made much progress as far as prompt disclosure of backdoor listing details are concerned over the past 16 years.

The final details revealed that Watson and associates would receive $15.3 million for their retirement village assets through the issue of 5.2 billion NZ Petroleum shares at 0.3 cents each and 1.6 billion free options exercisable at 0.45 cents per ordinary share.

However, as NZ Petroleum shares were worth in excess of 0.3 cents each at the time of the reverse listing, Watson effectively received more than the "official" $15.3 million acquisition price.

The backdoor listing was completed in mid-1999, NZ Petroleum shares were consolidated on a one for 50 basis and the company's name was changed to ElderCare.

Alan Clarke was appointed chief executive in April 2000 and a few months later the company ceased all property development and decided to sell its surplus property. At the same time it invested in the rehabilitation sector.

ElderCare purchased Geddes Dental Group in 2002 and ten months later changed its name to Abano Healthcare to reflect its decreasing reliance on retirement villages.

The 2005 year was an important milestone for Abano as the retirement villages were sold to Macquarie for $63.5 million and it purchased 70 per cent of Bay Audiology for $21 million. The audiology business was acquired from Peter Hutson, his wife Anya and Scott Wright who retained a 30 per cent interest.

The Abano/Hutson relationship was a marriage made in heaven as Bay Audiology took off in terms of revenue and profitability with Hutson joining the Abano board in November 2008.

Meanwhile Watson had sold his shareholding and Mark Stewart's Masthead procured a 19.9 per cent holding. Masthead made an unsuccessful offer to acquire 51 per cent of Abano and Crescent Capital Partners, an Australian private equity firm, made a bid for 100 per cent of the company, which was also unsuccessful.

However in September 2009 Abano shareholders approved the sale of the New Zealand audiology operations to National Hearing Care, a company operated by Crescent Capital Partners. The total proceeds were $157.8 million with Abano receiving $117 million with the remainder going to the Hutson interests.

The deal was complicated with Abano and Hutson continuing to own Bay International, comprising the audiology businesses in Australia and Asia, and a minority interest in National Hearing Care.

Bay International, which is now 50 per cent owned by Abano, 39 per cent by the Hutsons and 11 per cent by Scott Wright, has subsequently eaten through more than $60 million of equity without making a profit. The equity has been provided by shareholders on a pro rata basis and Abano has written down its $30 million plus investment to $12.9 million.

The happy Abano/Hutson marriage came to an abrupt end in mid-2013 when the Hutsons teamed up with Archer Capital, a Sydney based private equity firm, and the new partnership indicated it would like to make an offer for 100 per cent of Abano.

In other words Hutson jilted his longstanding New Zealand partner and jumped into bed with an Australian private equity firm.

The response was inevitable as it would be in any marriage where one of the parties enters a relationship with someone else. Abano Chairman Trevor Janes was annoyed because Archer wanted to conduct due diligence on Abano and was proposing a scheme of arrangement, which only required a 75 per cent majority of shareholders, compared with a takeover offer where full ownership could only be achieved when 90 per cent of the shares had accepted.

In addition Archer executives started talking down the management of Abano's dental division yet had agreed to sell the company's 50 per cent interest in Bay International to the Hutson interests for a nominal sum if the offer was successful.

This clearly indicated that Hutson's stewardship of the Australian and Asian audiology business had failed to create any shareholder value.

Late last week Hutson, who now owns 18.6 per cent of Abano with James Reeves, publicly called for Janes' resignation. Janes replied with an offer to purchase Hutson's 50 per cent stake in Bay International for $12.9 million but Hutson's blunt response was that "Abano has again sought to mislead shareholders" and "it represents a new low in Abano's ethics for which Mr Janes is accountable".

The problem with Abano and Hutson, as with Watson and Glenn at the Warriors, is that a happy relationship has fallen apart and there appears to be little hope of reconciliation. It is no different to a bitter marriage break up where the two parties are no longer communicating and air their grievances in public.

The obvious answer is to lock Janes and Hutson in a room until they reach a resolution but this won't happen because they refuse to meet.

The other solution is for one party to buy out the other but this will be easier to achieve at the Warriors than Abano.

Hutson shows no sign of wanting to sell his Abano stake and he probably doesn't have the capability to make a full takeover offer for the NZX listed company although Archer may be still hovering in the wings.

A total stalemate has been reached as Hutson won't acquire effective control of Abano - even if he gets rid of Janes - and his earlier agreement to acquire 50 per cent of Bay Audiology for a nominal sum is not in the best interests of Abano's shareholders.

The best interests of Abano shareholders will only be served if the Abano board and Hutson take a deep breath, have a long Easter break and try and achieve some sort of a resolution when they return.

Otherwise the only winners, as with most high profile divorce disputes, will be their lawyers and public relations advisers.

Disclosure of interests; Brian Gaynor is the portfolio manager of the Milford Active Growth and Milford Active Growth KiwiSaver funds which own Abano Healthcare shares.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a 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 FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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