BIL misses chance to bow out gracefully

By Brian Gaynor

Brierley Investments' decision to quit New Zealand is a timely reminder that the life cycle of a company can be similar to that of an All Black.

In the early years the up and coming young player struggles to catch the selectors' eye. Then there is a period at the top when he is feted by the media and fans.

As the years pass by, he loses his competitive edge and is replaced from the ranks of the next generation of young players. Finally he departs to the northern hemisphere in an effort to prolong his career.

This offers another challenge but the best years have been left behind in New Zealand. The preferred option would have been to accept reality and retire with a reputation intact.

Brierley Investments will continue to function when it moves offshore but its unique New Zealand character will be gone. Only one more annual general meeting will be held in this country and in a few years' time there will be no New Zealand directors.

The odd international wire service story will cover the company but the New Zealand media will gradually lose interest.

Unfortunately, this is probably the last column I will write about the company.

In its heyday Brierley Investments was like Jonah Lomu; it was exciting and had a huge following throughout the country. At its best it was aggressive and charismatic but it had too many flaws to be a great company.

It brought a new style of operation to the business community, it attacked the entrenched establishment. In return, the establishment was highly critical of Sir Ron and his methods. BIL was particularly disliked in Auckland where its raids on Dominion Breweries, NZI Corporation, NZ News and Winstone caused alarm.

The company's modus operandi was simple. BIL had a very close connection with the stockbroking community. Friendly brokers would encourage institutions to accumulate stock in a targeted company before Brierley made its move. When BIL jumped into the market for a 20 or 30 per cent shareholding these institutions were first to offer their shares and the target shareholding was quickly acquired. The establishment had no defence against these clever tactics.

The early acquisitions were extremely profitable. Many long established New Zealand companies had too many assets and were poorly managed.

Assets were sold and profits created through legitimate and creative accounting policies. Investors flocked to BIL; its annual cash and bonus share issues were particularly attractive.

But the seeds of the group's demise were sown at an early stage.

BIL was a collection of individuals with their own pet projects. Sir Ron Brierley, Bruce Judge, Bruce Hancox and Paul Collins all pursued their own investment interests. This worked well when the deals were small but became a major problem as the company grew.

The bigger deals, which involve bankers and lawyers, require a coordinated team effort. BIL's executives socialised together but they lacked a professional, team-orientated approach to decision making. They were more of a collection of barristers sharing chambers than a company with a clear governance structure and strong corporate objectives.

A booming sharemarket can conceal poor corporate governance and BIL was no exception. Between 1983 and 1987 the group's net profit increased from $25 million to $342 million and the number of shareholders from 12,800 to 195,800.

After the October 1987 sharemarket crash BIL's immediate object was to sell assets and repay debt. When this was achieved the directors had to face another structural problem. Because of its annual cash and bonus share issues, BIL had too many shares on issue.

The board had two options - it could reduce capital or expand again in an effort to raise earnings and asset backing per share.

The management-dominated board chose the latter.

BIL had been accumulating shares in the British hotel group Mount Charlotte Investments and by the end of 1989 it had a 27.25 per cent shareholding.

In September 1990 a further 10.1 per cent was acquired from the Kuwait Investment Office. This pushed its holding above 30 per cent which is the trigger point for a compulsory takeover offer under British takeover rules.

The shares came flooding in and on December 12, 1990 BIL announced it had 90 per cent of Mount Charlotte and was moving to compulsory acquisition.

BIL's inadequate management structure had finally come home to roost.

Management had not anticipated the impact of the takeover rules and was forced to make a full bid. This was not in the group's best interests.

Mount Charlotte immediately represented more than 50 per cent of group assets. This investment, which has never performed to expectations, has restricted BIL from taking advantage of buoyant international sharemarket conditions. It was a major contributor to last year's problems.

BIL would have been in trouble earlier if another takeover offer had been successful.

In 1988 the New Zealand Government offered the Bank of New Zealand for sale. Two parties did final due diligence, Brierley Investments and National Australia Bank (NAB).

A new BIL company, called BNZ Corporation, offered 145c a share, or $1.01 billion for the Government's 87 per cent holding. Under the proposal it would offer the bank's minority shareholders 144c a share in cash or an alternative of 145c worth of BNZ Corporation shares.

BNZ Corporation would then make a bid for Brierley Investments on the basis of one BNZ Corporation share for each Brierley Investments share.

After these transactions, Brierley Investments and the Bank of New Zealand would be 100 per cent owned subsidiaries of BNZ Corporation. The two wholly owned subsidiaries would be run as separate organisations and BNZ Corporation would replace Brierley Investments as the listed company.

On December 20, 1988 a special cabinet meeting was held to consider the issue. NAB's offer had conditions and the Treasury recommended that the Bank of New Zealand be sold to BIL.

The cabinet rejected the proposal. Had Roger Douglas and Richard Prebble been there - Sir Roger had resigned from cabinet a week earlier and Mr Prebble had been sacked in November - the Treasury's recommendation would have been accepted and BIL would have acquired the country's ailing bank. The investment group would have been in trouble a good deal earlier.

The irony of this is that NAB later acquired the BNZ for 80c a share and Sir Roger Douglas was made a director of BIL. He was chairman for a short period last year after Bob Matthew's departure.

The most frustrating aspect of BIL's performance is that nearly 200,000 New Zealanders have received a pathetic return on their investment.

Their capital has been ineffectively utilised as management has failed to take advantage of the strong international sharemarket conditions over recent years. BIL has also been a minor participant in the New Zealand Government's lucrative privatisation programme.

As the group's best years are behind it, remaining shareholders should not expect any major improvement from its move to Singapore. Unlike former All Blacks, who finish their careers in foreign countries, Brierley Investments will never return to New Zealand.

BIL's directors should have accepted that the group's use-by date has expired. The best course would have been a well-managed liquidation and repayment of capital to shareholders.

* Disclosure of interests; Brian Gaynor is a BIL shareholder.