Brian Gaynor: Company too complex for shareholders' good

George Kerr will get his way. Photo / File

COMMENT:

The best businesses are simple businesses.

These are companies with straightforward business models that haven't been muddied by complex restructuring, a change of direction, transferring registration to foreign countries or shifting from the NZX to an overseas stock exchange.

Uncomplicated companies include Fisher & Paykel Healthcare, Mainfreight, Port of Tauranga, Restaurant Brands, Ryman Healthcare and Tourism Holdings.

Unfortunately, many NZX listed companies are far too complex and, accordingly, deliver inferior investment returns to shareholders. This group includes many of the 1980s high flying investment companies, notably Brierley Investments, which moved to Singapore.

A more recent example is Richina Pacific, which was covered in the October 6 column.

Pyne Gould Corporation has similar characteristics to Richina Pacific. It has a strong majority shareholder, an incredibly complex business model and it re-domiciled to Guernsey in 2014.

Shareholders are now being asked to approve its delisting from the NZX and a move to The International Stock Exchange in Guernsey, at a special meeting in Queenstown next Wednesday.

Shareholders would be crazy to approve this move because New Zealanders usually have less legal protection on overseas markets and it is harder, and more expensive, to buy and sell shares on these markets.

Pyne Gould Corporation (PGC) can be traced back to 1851, when its founders commenced business in Christchurch.

It had a wide range of traditional activities including rural services, a finance company and trust operations. In 1985 it acquired a controlling stake in NZX-listed Christchurch Press and on-sold its shareholding for a large profit two years later.

This was a catalyst for converting PGC into an investment company.

In 2004 PGC had a compliance listing on the NZX, a listing without issuing new equity through an IPO. PGC, which had more than 1700 shareholders, had traded on the Unlisted Securities Market since the mid-1990s and its board believed it was time to move to the NZX.

The Christchurch company had three main operations at the time:

• Marac, a leading finance company, which contributed 63 per cent of group earnings.
• Perpetual Trust, which offered corporate trust and personal financial services, and generated 6 per cent of earnings.
• A 55 per cent stake in NZX-listed rural services provider Pyne Gould Guinness, which contributed 31 per cent of group earnings.

The eight-person board had five Christchurch representatives — chairman Sam Maling, Richard Elworthy, George Gould, Bruce Irvine and Steve Montgomery — and three Aucklanders — Bryan Mogridge, Tim Saunders and Warwick Steel.

The company listed on the NZX on March 30, 2004 at $5.55 a share, giving it a market value of $543 million. Six months later the stock hit an all-time high of $6.45, representing a $632m market value.

The first few years on the NZX were reasonably uneventful with the company exceeding its pre-listing net profit forecast.

The first big move was in the March 2006 year, when Pyne Gould Guinness merged with Wrightson to form PGG Wrightson. This reduced PGC's shareholding in the rural services group from 55 per cent to 22 per cent and generated an abnormal profit of $37.3m for PGC.

The first major shareholder change occurred in the 2007 year when George Kerr revealed he had a 10 per cent stake. Kerr, who is a descendent of the Pyne family, joined the PGC board in August 2008.

He acquired most of these shares at $4.50 each.

Kerr had an earlier role in several fund management businesses, including Sterling Grace Portfolio Management and Brook Asset Management.

He was also involved in numerous business ventures with John Darby, including property development and Equity Partners Asset Management.

In 2009 PGC had a controversial six-for-one rights issue at 40c per new share. The $272m capital raising was strongly criticised because $18m was being used to purchase Equity Partners from Kerr and Darby, issue costs were estimated at $13m and the company was reluctant to give full details of its future strategy.

From here on PGC became an incredibly complex company, almost too difficult to describe. The seeds of this complexity were sown in PGC's 2010 annual report with the announcement of the establishment of a new standalone private equity operation, Torchlight Investment Group.

The report revealed that Torchlight had successfully raised $150m through Torchlight Fund No 1 LP.

Torchlight Investment Group also managed several problem Marac property loans.
PGC's main developments since 2010 have been as follows:

• The February 22, 2011 Christchurch earthquake destroyed the PGC building, killing 14 staff members.
• The company reported a loss of $141m for the June 2011 year, while Kerr had increased his shareholding to 14.0 per cent.
• In the 2012 financial year Marac merged with the Canterbury and Southern Cross building societies to form Heartland New Zealand. Heartland shares were distributed to PGC shareholders. The company also sold its PGG Wrightson stake and was now firmly focused on Torchlight.
• Kerr was appointed group managing director in April 2012.
• In 2014, the company moved its registration to Guernsey.

The company was characterised by regulatory, audit and major litigation issues in the six years ended June 2018 and it spent more than $52m on legal and consultancy fees during this period.

It also established operations in Australia, Britain and the Cayman Islands, as well as New Zealand.

PGC reported a net profit of £5.7m for the June 2018 year compared with net losses of £19.7m and £2.8m for the two previous years (its financial statements are now in pound sterling).

This year PGC had a major victory in Cayman Islands proceedings brought by Aurora Funds Management, Crown Asset Management and the Accident Compensation Corporation against Torchlight Fund LP.

Crown Asset Management, which is wholly owned by the New Zealand Government, was incorporated in February 2012 to manage and realise the residual assets of five failed finance companies supported by the Crown under the Retail Deposit Guarantee Scheme.

The Cayman Islands judgment concluded: "the court has great difficulty in accepting the credibility of the petitioners' principal witness. In contrast, the court has found both Mr Kerr and Mr Naylor (a PGC director and a Torchlight executive director) to be honest and reliable. In circumstances where the petitioners' witnesses on the one hand and Mr Kerr and Mr Naylor on the other hand differ as to fact, the court unreservedly prefers and accepts the evidence of Mr Kerr and Mr Naylor. It is as simple as that."

Torchlight and PGC won the Cayman Islands court case but they haven't won the hearts and minds of investors as the NZX listed company now has a market value of only $60m, substantially below its 2004 post-listing value.

PGC will ask shareholders to approve the delisting from the NZX at next week's meeting because it wants to reduce the cost of having two auditors. These are Grant Thornton Guernsey under Guernsey law and Grant Thornton NZ in respect of NZ financial reporting legislation and NZX listing rules.

After NZX delisting it will move to the International Stock Exchange in Guernsey.

The notice of meeting states that the PGC board "considers that the Guernsey exchange will provide a more liquid market for PGC's shares and access to a wider pool of potential investors. This could make it easier for shareholders to sell shares, subject to them establishing a relationship with a broker".

TISE has over 2000 listed securities with a market capitalisation of £300 billion-plus.
The motion will be carried because parties associated with Kerr now own 80.2 per cent of PGC.

Kerr will get his way but Pyne Gould Corporation, which has evolved into an incredibly complex business model, has been a massive disappointment for most investors.

- Brian Gaynor is an executive director of Milford Asset Management.