Ceramco's loss Baycorp's gain

By Brian Gaynor

It is difficult to ignore the contrasting fortunes of Baycorp and Ceramco.

The two companies are often compared because Ceramco was Baycorp's largest shareholder and Charles Bidwill has had a major influence on both companies.

Six years ago Ceramco had a sharemarket value of $453 million while Baycorp was worth just $52 million. Baycorp is now valued at $506 million while Ceramco has slumped to just $69 million.

In a perfectly timed move, Mr Bidwill jumped from Ceramco to Baycorp in 1994.

Ceramco has gone from crisis to crisis and the recent decision to close Bendon's manufacturing operations is another attempt to reverse its declining fortunes.

In the meantime, Baycorp has gone from strength to strength and has delivered outstanding share-price growth to its shareholders.

The story begins in the early 1980s when Mr Bidwill and Alan Gibbs took a controlling interest in Atlas Majestic, the electronics manufacturer.

The acquisition was not a success and after many sleepless nights the two budding entrepreneurs were rescued when Ceramco acquired Atlas in 1985.

They quickly took control of Ceramco - Mr Gibbs as chairman and Mr Bidwill as managing director - and in mid-1987 the company merged with Bendon. The merger proposal was particularly optimistic and a net profit of $42 million was forecast for the new group.

One of the merged group's first major moves was to purchase an initial 9.1 per cent of Baycorp in July 1988. The purchase price was 143 cents per share (throughout the column Baycorp's share price and capital have been adjusted for subsequent capital reconstructions).

Over the next 12 months Ceramco gradually increased its holding to 14.8 per cent and Mr Bidwill was appointed to the Baycorp board.

Baycorp experienced major problems in Australia and its share price plunged to four cents in 1990. Ceramco wrote off its Baycorp investment - a total of $11 million - in 1990.

The two controlling shareholders were not totally convinced that Ceramco had a bright future and by mid-1990 Mr Gibbs had reduced his holding to 128,000 shares and Mr Bidwill to 2.2 million.

Mr Gibbs lost interest in Ceramco and resigned as chairman in 1990. Mr Bidwill stayed on and began to recognise the potential of Baycorp.

In the two years up to September 1992 he purchased 4.4 million Baycorp shares and Ceramco also increased its shareholding. During this period Baycorp's share price rarely rose above 60 cents per share.

At the same time Mr Bidwill increased his Ceramco holding from 2.2 million shares to 4.1 million. These purchases were consistent with positive public comments by him and chairman Peter Grayburn.

Although Ceramco had failed to live up to its pre-merger predictions there were strong indications that the Employment Contracts Act 1991 would have a positive impact on the group's manufacturing operations and export growth.

In 1991 Mr Grayburn told shareholders that "the National Government has put in place many of the necessary reforms which the previous Government failed to complete" and "total group export sales are anticipated to increase from $30 million to $40 million in the 1991-92 year."

Mr Bidwill told shareholders that Bendon's manufacturing operations "were at the forefront of apparel manufacturing technology."

In 1992 the managing director said that an increasing proportion of the group's Australian manufacturing would be moved to New Zealand and "the company and its staff are enjoying the increased benefits now available under the Employment Contracts Act."

Although Ceramco continued to make positive public comments Mr Bidwill identified better prospects at Baycorp. In March 1994 he resigned as Ceramco' managing director but kept his board seat.

This was an astute move as Ceramco's earnings dropped sharply after his departure. Net profit declined from $17 million in 1994 to $8.7 million in 1995 and was just $4 million, excluding non-recurring items, in the March 1999 year.

In his last two years as managing director Mr Bidwill reduced his Ceramco shareholding from 4.1 million to 800,000. The company's share price was well in excess of 500 cents per share during most of this period.

Almost immediately Mr Bidwill accepted an executive position at Baycorp and in October 1995, a decade after the Atlas/Ceramco merger, he finally resigned from the Ceramco board. A few weeks after this retirement Ceramco sold its 19 per cent shareholding in Baycorp for $12.3 million.

It appeared that Mr Bidwill purchased one million of these at 169 cents each (two million shares at 85 cents after adjusting for the recent 2:1 share split) but it is not clear whether any other Ceramco shareholders were offered Baycorp shares.

Four years later this 19 per cent shareholding is worth $96 million.

This is a spectacular $83.7 million above Ceramco's 1995 sale price.

The Baycorp transaction poses a number of questions:

* Why did Ceramco sell its Baycorp shareholding when directors knew that Mr Bidwill had been a long-standing Baycorp board member and was continuing to increase his shareholding in the company?

* Would Mr Bidwill have blocked the sale if he had remained on the Ceramco board?

* Why were the Baycorp shares not distributed to Ceramco shareholders or offered to them on a first preference basis?

In the past seven months Mr Bidwill has sold 5.3 million Baycorp shares for $32 million and his remaining shareholding is worth a further $38 million.

As the total realised and unrealised value of his Baycorp shareholding is $70 million - compared with a total cost of less than $10 million - Mr Bidwill has been a big beneficiary of Baycorp's strong share price performance.

Mr Bidwill's good fortune is no consolation to Ceramco's long suffering shareholders. They have been given a steady stream of positive predictions yet in the past decade the company's apparel manufacturing operations have gone from world class to closure.

The tariff reductions and high New Zealand dollar have been major contributors to the company's problems but poor management has also been a factor.

Some of the blame can be attributed to the Employment Contracts Act - it encouraged Ceramco to expand Bendon's manufacturing operations when other Government policies were having a negative impact on those activities.

Bendon is closing its remaining manufacturing operations and will source its product from Asia. Following this the company will concentrate on marketing.

This is appropriate strategy in the current economic environment although managing director Hugo Venter put an unrealistic spin on the situation when he wrote in the New Zealand Herald that the latest move would "generate more substantial export earnings for the country."

The closure of the Bendon plants will have a negative impact on the country's merchandise trade figures because exports will fall and imports rise. There will be some compensating figures in the current account but the overall impact on the major economic statistics will be negative.

Although Ceramco has interesting recovery potential Baycorp will continue to offer better long-term growth prospects.

Mr Bidwill's share transactions will be one of the key features to watch with Baycorp. Mr Bidwill is an astute investor and any further share sales by him could be an indicator that Baycorp's growth rate is slowing.

* Disclosure of interest: Brian Gaynor is a Baycorp and Ceramco shareholder.