Investors sweat on Feltex deal

Tim Saunders says Feltex investors should get between 9c and 12c a share. The 2004 float price was $1.70. Picture / Richard Robinson

Feltex shareholders face months of uncertainty over the value of their shares despite the carpet company yesterday agreeing to sell itself to its arch rival Godfrey Hirst for $141.8 million.

Feltex chairman Tim Saunders, disclosing the agreement foreshadowed in yesterday's Business Herald, said he expected shareholders would receive between 9c and 12c a share - a deep plunge from the $1.70 float price in 2004.

However, he said the full payout would not be made until next May, when warranties Feltex had agreed to give Godfrey Hirst expire. The payout would also depend on Feltex's performance up to the settlement date in early October, ongoing working capital needs and the level of its debt - now about $128 million.

Feltex said in the worst case shareholders could be left with nothing.

It remains unclear whether Feltex's bank, ANZ, is having to write off some of its loans.

The deal will create one of the largest transtasman carpet groups, with $750 million of sales, an estimated 50 per cent share of wool and synthetic carpets in Australia and 50 per cent of the wool carpet market here.

"I am not at all comfortable with the situation of shareholders who put funds in at $1.70 and came out with 12c a share two years later," Saunders said. "We do not go into companies to destroy value and it is therefore very disappointing to us to be in this situation."

Yesterday, Feltex shares were put on a trading halt just after the market opened but not before some 264,000 changed hands at 12c, a modest 1.2c rise over Monday's close.

The Godfrey Hirst deal represents a value well below the share merger deal that company first proposed last year. This could have returned shareholders as much as 60c a share.

The deal - a sale of Feltex's assets and a distribution of any leftover cash to shareholders - is subject to due diligence, regulatory and competition approvals and the support of 75 per cent of shareholders. A vote will be held at a special meeting in September.

Saunders, who has sat on the board since 1997, said directors at every turn felt they were doing the best for shareholders but were caught unawares by the speed and the extent of the trading downturn at the start of 2005.

Since then, Feltex has issued a string of profit warnings and breached its banking covenants as it struggled to get the business back on an even keel.

"In hindsight the downturn identified cost structure problems that were more deeply rooted than we realised," Saunders said. The earlier Godfrey Hirst proposal had not been in a form that could be put to shareholders.

Feltex's 1340 staff - of whom 820 are in New Zealand and 520 in Australia - would be retained by Godfrey Hirst but contracts would be reviewed.

Saunders said workers should be comforted that the deal had been struck as it removed a degree of uncertainty over their future. He agreed, however, that Godfrey Hirst might review the business in the future.

Chief executive Peter Thomas, who had an interest in the private equity fund Credit Suisse First Boston Asian Merchant Partners that floated the business, will end his current role when the deal is completed. The terms of his severance have not been settled.

Ahead of the announcement National Distribution Union delegate Tony Sparks, a Feltex employee of 21 years, said it was a nervous time with the prospect of an Australian company taking over.

Godfrey Hirst finance director Jim Walsh would give no commitments.

"It is hard to say at the moment. We have to do due diligence. Over time there will be change just as there would have been in any case."

Walsh said the offer was fair given Feltex's record of failing to deliver on its promises. The deal represents a multiple of more than seven times this year's expected trading profits (before one-off items) of around $20 million.

Saunders said Feltex was now sound operationally, with positive cashflow, and its margins and forward sales were encouraging.

However, the deal was the best available, especially since ANZ had given it only until next month to reduce its debt load.

"We do not have unlimited time," Saunders said, "so we have negotiated to sell the business."

- Additional reporting by Jarrod Booker