Brian Gaynor: Guinness Peat saga turns into soap opera

Sir Ron Brierley. Photo / Greg Bowker

The rationalisation of Guinness Peat Group (GPG), which is progressing satisfactorily as far as shareholders are concerned, is developing into a sad soap opera.

Founder and former chairman Sir Ron Brierley sent an extraordinary email to the New Zealand Shareholders Association (NZSA) this week in which he slammed former colleague Tony Gibbs for making a "phony claim", called GPG's New Zealand shareholders "show ponies" and NZSA members "anonymous corporate busybodies". His final comment was "please feel free to place this letter on your website".

The NZSA decided not to because it is attempting to promote rational discussion of important issues and avoid the personal attack approach adopted by Sir Ron. Nevertheless the email is now public because it was also sent to the media.

This prompted former NZSA chairman Bruce Sheppard to enter the fray. He hit the nail on the head when he wrote to Sir Ron: "GPG is a company which you have led, from its very beginning, an organisation which is rooted in the past and failed to evolve. You continued the tradition of ignoring your owners, and treating them with disrespect, you continued to use the old methods you deployed at Brierley Investments, which ultimately failed as you well know".

Sheppard added: "GPG has itself failed and you have had forced upon you a new group to effect the dismemberment of all you established".

Sir Ron's current position is a long way removed from the glowing description of him in the book Masters of the Market - Secrets of Australia's Leading Sharemarket Investors, published in 2003.

The authors described him "as in a class of his own. He is not your standard investor who buys a stock in the belief that it will rise over time.

He is a corporate raider - a term that flourished in the 1980s. Unlike those household names of the 1980s, Sir Ron Brierley has lasted the distance and is still generating double-digit returns for his investors."

But the writers also gave a strong hint that Sir Ron allowed his companies to become too big and disjointed.

In 1986 Brierley Investments (BIL) was New Zealand's largest listed company and his Industrial Equity (IEL) was Australia's third largest listed group, behind only BHP and National Australia Bank.

He also controlled Hong Kong-based Industrial Equity Pacific (IEP), which also operated in the US and UK.

The BIL/IEL/IEP group had grown too fast, it had three corporate jets and Sir Ron told the authors "the demise of Industrial Equity was just a matter of when and how".

Sir Ron doesn't like formal board meetings or agendas and this old-fashioned approach has its downside, particularly when companies expand geographically. GPG has become increasingly disjointed and dysfunctional, as did BIL, IEL and IEP, and shareholders had little option but to insist on major board changes last year.

Sir Ron is extremely angry over the dismemberment of GPG and his NZSA email stated, "I fear we are entering a period of increasing madness at GPG - I will have more to say in coming weeks and months".

However, much of the blame for the problems at BIL, IEL, IEP and GPG must rest with Sir Ron as he effectively started, controlled and appointed the directors and executives of these four companies. His unwillingness to adopt best practice corporate governance has been a major contributor to the repeated destruction of shareholder wealth at his companies.

Sir Ron also blames others when things go wrong. Yvonne van Dongen wrote in her book Brierley - The Man Behind the Corporate Legend that after the 1987 sharemarket crash he "had become increasingly remote from BIL and IEL management. Instead of giving the group his support when it was needed, he was negative and carping, blaming everyone else for the problems".

Sir Ron blamed chief executive Rodney Price for IEL's problems and unsuccessfully tried to get rid of him in 1988. He had more success removing GPG's Tony Gibbs last year.

Much has been made of Sir Ron's success as a corporate raider but there have also been huge lost opportunities, particularly Woolworths. IEL purchased the Australian supermarket group for just A$480 million in 1988. IEL was later acquired by Adelaide Steamship, which floated off Woolworths in 1993.

The dismembering of GPG, and the return of capital to shareholders, will be long-winded and complex for a number of reasons, including tax and potential pension fund liabilities. Tax complications were the major reason why an attempt to merge BIL and IEL in the late 1980s was abandoned.

The accompanying table lists GPG's major investments, cash, capital notes and other liabilities.

Coats, the 100 per cent-owned UK thread company, clearly dominates as it represents an estimated 33 per cent of total assets. The objective is to sell all of the remaining assets and effectively turn GPG into Coats.

The problem with this is that New Zealand investors, who hold a large percentage of GPG, tend to lose interest in a company when it reduces its exposure to this country.

This happened with Brierley Investments, Nufarm and Lion Nation. GPG will have to substantially improve its communication with NZ investors if they are to remain shareholders once all its Australasian investments are sold.

Tower and Turners & Growers, which represent 14 per cent of total group investments, will have to be sold if GPG is to have a material return of capital.

The Tower holding can be sold in a number of ways, including:

The 35 per cent stake is sold to one party which then makes a full takeover offer.

The 35 per cent stake is sold to one party which then asks Tower's shareholder for approval to exempt it from making an offer for other shares.

A 19.9 per cent holding is sold to one party and the remaining 15 per cent is placed with existing or new shareholders.

All 35 per cent is placed with existing or new shareholders.

An important consideration is the $200 million of cash sitting on Tower's balance sheet. GPG will want the majority of this returned to shareholders as soon as possible because if it isn't any bidder will have to pay an unjustified premium for this cash.

The CSR and Ridley stakes should be relatively easy to sell although it will be much more difficult to move Turners & Growers and Clearview Wealth.

A number of smaller investments will also be relatively difficult to sell.

The other aspects to be taken into account are cash, option proceeds, capital note repayments and net liabilities. Disclosure on most of these items is out of date but, based on the estimates contained in the accompanying table, GPG has a NAV of approximately $1.11 a share.

This is before any provision for pension fund liabilities and the tax impact of the breakup and capital distribution.

It is important to emphasise that the figures are approximate only because there is a great deal of uncertainty over Coats, GPG's pension fund liabilities and tax.

If sharemarkets continue to rise, and GPG receives premium offers for its major listed investments, then GPG shareholders could do relatively well from the break up.

However if the market recovery stalls GPG will find it much more difficult to sell some of its more unattractive investments.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management, which holds shares in GPG and a number of its investee companies on behalf of clients.

bgaynor@milfordasset.com