KEY POINTS:
Two years ago, former Fletcher Building chief executive Ralph Waters warned that if interest rates stayed high and the economic cycle got tough, some of the private equity deals being done at giddy prices were "going to end in some train smashes".
A year after Waters made his
prediction, the sub-prime crisis blew up. Another year on and it has now developed into a global credit crisis that has forced interest rates higher than even Waters feared, and has also now tripped up most economies round the world.
Where does that leave the private equity model which thrived on cheap credit?
Ask any private equity firm how they're doing and they're likely to tell you things are just fine. Some might tell you that actually, they're sitting on millions in investor funds and are looking for the right opportunities.
Still activity is clearly well down, even overseas. Bloomberg data points to a 71 per cent fall in the value of private equity deals announced so far this year.
But one or two market watchers Stock Takes spoke to this week reckon the train smashes are not far off.
One went even so far as to suggest the pool of cash some firms were sitting on was quietly being used to prop up businesses acquired in recent years that were now doing it tough.
One of the advantages of private equity ownership, we were told during the sector's boom, was that companies that were previously listed and had to comply with continuous disclosure requirements would be freed up to make necessary changes away from the gaze of rivals and the market.
Stock Takes wonders what is now going on behind these closed doors. The turnaround and streamlining of businesses under the supervision of some of the sharpest business minds around? Or perhaps, in some cases, a desperate struggle for survival under the crippling weight of ballooning debt-servicing costs.
At the very least, says a local fund manager, the turnaround period for some of these private equity-owned businesses has probably been extended from a couple of years to several.
AXE YET TO DROP
Two years after it went public with its bold plan, NZX's bid to grab a chunk of the ASX's business is still tied up in red tape.
AXE ECN, a joint venture between the NZX and leading investment banks Citigroup, CommSec, Goldman Sachs JBWere, Macquarie Securities, Merrill Lynch and Credit Suisse was scheduled to begin operating early last year.
The original idea was that it would target crossing of large off-market trades, but it now plans to offer a sharply priced full-service trading platform.
Since NZX announced its AXE ECN plans a couple of other players, Liquidnet and Chi-X, have thrown their hats in the ring and are also awaiting the green light from the Australian Government.
AXE ECN does appear to have a lot going for it.
Between them, its investment bank owners account for about 45 per cent of ASX's current turnover, a decent chunk of which could find its way on to AXE.
AXE ECN boss Greg Yanco yesterday told Stock Takes he and his team understood a final Government decision by Australia's federal Cabinet was expected before Parliament sat next on August 26.
"It's like imminent, but taking a lot longer than we expected."
Then again, Stock Takes also heard "rumblings" that Australia's Cabinet currently has a very full agenda and may not have time to consider the issue.
TOWER OF CASH
With the sale of its Tower Australia stake announced last week for A$376 million, Guinness Peat Group is continuing to do what it does best - take strategic stakes in undervalued companies, work with management to get the business back on track and then sell out for a tidy profit.
Goldman Sachs JBWere says the sale price, at a 34 per cent premium to Tower Australia's previous closing price, adds a further $117 million or 8c per share to its assessment of GPG's net asset value.
Analyst Rodney Deacon says, taking a conservative approach and allowing only for the first two tranches of the three stage sale process which will account for two thirds of GPG's 29.7 per cent stake, the deal will add 6cps to GPG's net asset value (NAV).
However, along with recent movements in share prices and exchange rates that is doubled and Goldman Sachs' NAV on GPG rises 12c to $2.22 per share. Closing at $1.55 yesterday GPG's shares are trading at a 67c, or 30 per cent, discount to that which is one reason why Goldman Sachs has GPG on its conviction list as a "buy".
Should Tower Australia shareholders give their approval for the third stage of the deal, Deacon reckons GPG will have about $1 billion in cash in its portfolio.
"While we may see GPG taking advantage of the recent de-rating of equity markets globally to seek out other undervalued investments, we think a more positive catalyst for the GPG shares would be a capital return to its investors," wrote Deacon in a note.
SO FAR, NOT SO BAD
The reporting season is in full swing, and so is the international credit crunch and a recession in the domestic economy.
Given those headwinds it's gratifying to see that so far there have been few real clangers reported by our listed firms, says Mint Asset Management's Shane Solly.
Okay, Telecom, our biggest stock, didn't have a great result, but that has been about the worst so far among the blue chips. Fletcher Building's bottom line was also down but its revenue and underlying profit were up, and it has to be said the market has been pricing a considerably softer performance from the company for some months now.
"Some of the more economically sensitive stocks have generally come out and said they're reasonably intact," says Solly who also pointed out most local corporates' balance sheets remain pretty sound.
Solly says forward-looking commentary has been mixed but halfway through the season, so far it's not so bad.
BANKING ON THE FEEL-GOOD FACTOR
Don't think that private equity and sharemarket operators are all about cold hard cash, they can also be about warm fuzzies.
Another of NZX's new developing businesses, emissions trading platform TZ1 yesterday fired up the feel-good factor, announcing it had been appointed a global registry for the Malua Wildlife Habitat Conservation Bank, a private equity venture that aims to conserve an area of rainforest in Malua, Malaysia.
The biobank, as it is calling itself, is raising money for its conservation efforts and will generate biodiversity conservation certificates, each of which will represent 100sq m of rainforest restoration and protection.
It would use a multimillion dollar investment from the Eco Products Fund to restore and protect 34,000ha of formerly logged forest. The eco fund is a private equity fund jointly managed by New Forests Inc of Washington, DC and Equator Environmental of New York.
It has committed up to US$10 million ($14.4 million) to the Malua Forest Reserve - and the orang-utans that live there - during the next six years, and will also endow a trust fund for conservation management for a further 44 years.
NORRIS KEEPS A STEADY COURSE
Former Air New Zealand and ASB Bank boss Ralph Norris appears to be doing a pretty good job of steering Commonwealth Bank of Australia through the credit crunch.
CBA, Australia's biggest bank and the owner of ASB here, this week reported a 7 per cent increase in full-year net profit to a record A$4.79 billion ($5.96 billion).
Cash earnings per share, the favoured measure amongst analysts, were up 3 per cent which looks like it should be better than both ANZ and NAB who recently revealed blowouts in bad debt charge ahead of their September balance dates. Of course CBA is not totally immune to the deteriorating credit market, and it set aside an extra A$212 million to cover the possibility that more loans will go bad taking its collective provisioning to A$930 million, more than double last year's A$434 million.
Still, Norris - who reportedly received a combined salary and share package of A$10 million in 2007 as CBA chief executive - managed some optimism despite the gloom hanging over the Australian banking sector. "There are some signs the US economy is starting to improve," he said.
He talked up the prospects that the hard times would throw up acquisition opportunities. You have to assume they would need to be particularly attractive given CBA backed out of negotiations to buy ABN Amro's Australasian businesses this week.
