Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Briscoe and Refining NZ, a tale of two AGMs

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Briscoes boss Rod Duke. Photo / Paul Estcourt
Briscoes boss Rod Duke. Photo / Paul Estcourt

Two annual meetings on Thursday highlighted the contrasting fortunes of Briscoe and Refining NZ.

Briscoe, which has reported three annual profit increases, faced a happy group of shareholders on Level 27 of the Lumley Centre on Shortland Street. The mood was enhanced by the magnificent views over Auckland's sunlit harbour and the excellent pre-meeting coffee, tea and cakes.

Four hours later New Zealand Refining, which has had three successive annual profit decreases, faced a much less supportive audience - particularly activist shareholder Bryan Halliwell - at the company's head office at Marsden Point. The Marsden Point venue had a much more downbeat atmosphere than the Lumley Centre.

Chairman Dame Rosanne Meo opened the Briscoe meeting with a wide smile and a reiteration that the retailer had reported yet another record year. She said that Rebel Sports had performed particularly well and the company was continuing to assess further capital repayments to shareholders.

Managing director Rod Duke, who owns 78.3 per cent of the company, said that the economy was improving although this upturn was not evenly spread throughout the country.

He said that the company had experienced a very strong start to the current year even though the warm weather in March and April had impacted the sale of winter products. In addition, the shortened Easter/ Anzac Day week had disrupted spending patterns as families took a long break during this period.

Duke also told shareholders that the company had developed a very strong and highly motivated management team.

Former Shareholders' Association chairman Bruce Sheppard raised the only issue during the formal proceedings when he asked Mary Devine, who was seeking election to the board as an independent director, whether she believed independent directors should own shares. Devine answered that she did and would acquire a shareholding when the next "safe period" for director share trading occurred.

A number of issues were raised during general business including the optimum number of stores. Duke said the company had 78 stores at present and would probably establish a further eight to ten new outlets. Although online sales were becoming increasingly important, Briscoe wanted to establish a presence in a number of growing catchments including Newmarket and Westgate in Auckland and Queenstown.

The Briscoe meeting was done and dusted in just 72 minutes. The 40 or so shareholders departed with contented smiles as Meo and Duke gave a clear impression that the company was firing on all cylinders.

Duke is to New Zealand retailing what Sir Alex Ferguson was to English football. However, the big difference is that Duke seems to have a far better succession plan at Briscoe than Sir Alex had at Manchester United.

The atmosphere at Refining NZ was completely different with lawyers confiscating copies of Halliwell's speech which he had planned to distribute to shareholders and chairman David Jackson opening the proceedings with the comment that the company was facing an "extremely challenging situation".

He said that the refinery was being adversely affected by the high NZ dollar - because refinery margins are based on the US dollar - and by extremely low refinery margins.

The picture painted by Jackson and chief executive Sjoerd Post was that all of Refining NZ's problems were caused by external factors and the company was not responsible for its difficult situation.

This is not the full picture, as the company's history shows.

In the late 1950's the government gave the go ahead for the construction of a refinery at Marsden Point with the major oil companies owning about two-thirds of the shares and domestic investors the remainder.

The company listed on the NZX in September 1962, received its first tanker of Kuwait feedstock in February 1964 and was officially opened by Prime Minister Keith Holyoake three months later. Refinery margins were government controlled.

The original refinery was built as a simple hydroskimming refinery, which is a crude distiller unit with limited secondary upgrading.

Prime Minister Robert Muldoon included the expansion of the Marsden Point refinery as one of his "Think Big" projects in the early 1980s.

This expansion was based around a hydrocracker, which produces much higher value products than the hydroskimming process.

The 1980s expansion, which was beset with labour problems, cost overruns and delays, was completed two years late at a final cost of $1.84 billion.

As part of the deregulation of the refining sector in 1988 Refining NZ was "gifted" the hydrocracker expansion and given an additional $85 million cash grant. In other words Refining NZ was given a brand new hydrocracker, which had cost $1.84 billion, while the borrowings associated with this expansion remained with taxpayers.

The company's poor governance structure has contributed to its current problems. The board is dominated by oil company executives who are constantly changing. For example Refining NZ has had 44 different directors over the past decade whereas Briscoe has had only seven. In addition the refinery's chief executive or general manager has often been seconded from one of the major oil companies. These oil companies, which have a combined 72.7 per cent shareholding, have maximised value from their shareholding through unrealistically high dividends and a favourable processing fee arrangement.

This processing fee, which was covered in last week's column, was put under the spotlight once again by shareholder Bryan Halliwell.

The controversial fee, which was changed to a market-related formula in 1995, is based on Singapore refinery processing fees. Refining NZ received 70 per cent of this with the remaining 30 per cent rebated back to the oil companies.

Halliwell has been a constant critic of this 70/30 split but this year he went a step further by claiming that the major oil producers were given an additional rebate that could take their total rebate from 30 per cent to 65 per cent.

Post totally rejected Halliwell's claim although the issue is complicated by annual negotiations that adjusts the processing fee downward for a number of oil company costs, including the transportation of crude to Marsden Point. These additional cost reductions could be the basis of Halliwell's latest claims.

But the big lesson from the Marsden Point meeting is that it is tough going for minority shareholders in New Zealand, particularly if a company is dominated by big multi-nationals.

Halliwell spoke for 24 minutes, compared with Post's 29-minute reply, yet Jackson asked the shareholder to hurry up with the comment that "shareholders must have other lives". No pressure was placed on Post to hurry up.

In addition, Halliwell was not allowed to distribute his address, nor has it been released to the stock exchange, while the chief executive's PowerPoint presentation was released to the NZX.

The 100 or so shareholders in attendance were fairly sombre with their questions focused on the dividend cut, the high fees for directors and a clear bias towards institutional shareholders in the recent capital raising.

The meeting ended after 131 minutes and shareholders were provided a modest offering of tea, coffee and traditional cakes and savouries as befitting the company's poor performance.

At the close of trade on Thursday Refining NZ had a sharemarket value of $572 million even though it had been gifted a $1.84 billion hydrocracker expansion, received an $85 million cash grant from the Crown and has $267.1 million of subscribed capital.

Meanwhile, Briscoe finished the same day with a sharemarket value of $531 million compared with only $44.8 million of subscribed capital and no Government hand-outs.

It is a shame that Rod Duke has no interest in running an oil refinery.

Brian Gaynor is an executive director of Milford Asset management which holds shares in Briscoe and Refining NZ on behalf of clients.

- 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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