KEY POINTS:
Lloyd Morrison's astute purchase of 23.8 per cent of TrustPower is a clear indication that Sir Ron Brierley's reign as king of the New Zealand listed investment sector is coming to an end.
Sir Ron, aided by his able offsiders Tony Gibbs and Gary Weiss, has been the
undisputed champion of New Zealand investors for three decades but Morrison's share price performance and age indicate he is ready to claim the top spot.
Morrison's Infratil is still much smaller than Sir Ron's Guinness Peat Group but its performance has been better over the past one-year, two-year and five-year periods.
As the accompanying table shows, Infratil had a gross return of 26 per cent for the past 12 months compared with 21 per cent for GPG. In the past five years Morrison has delivered a total return of 180 per cent whereas Sir Ron has had a more modest 112 per cent.
Infratil also appeals to institutional investors because it has a young and impressive management team and excellent disclosure, whereas GPG's management is ageing and the group's disclosure is relatively poor.
GPG and Infratil dominate the listed investment sector, which is characterised in New Zealand by four different types of companies:
* Organisations that focus on a small number of strategic holdings and usually have a governance role in these investments. Infratil and Hellaby Holdings are the best examples.
* Listed entities that scour sharemarkets for undervalued assets and take an active role in some of these investments. GPG is the best example.
* Companies that take a portfolio investment approach but do not have a governance role in any of their investee companies. Carmel Fisher's Kingfish and the New Zealand Investment Trust are two examples.
* Investment companies that are run by individuals whose primary objective is to make fortunes for themselves. These individuals, best personified by Graeme Hart in New Zealand, usually disappoint shareholders even though they make no pretence that the best interests of all shareholders will be put ahead of their own.
Infratil, then called Infrastructure & Utilities NZ Ltd, was listed on the NZX in March 1994 after an IPO that raised $50 million. This was 33 months after Sir Ron achieved control of GPG, a former Equiticorp company, and 100 million existing shares in the British-based company were sold to New Zealand investors at 45c each.
Infratil's objective was to be a diversified, low-risk fund investing in the infrastructure and utilities sector. The prospectus identified electricity, natural gas, telecommunications, ports and airports as the most likely areas of investment.
Morrison has not deviated from his original plans. Infratil's first investment was 11 million shares in TrustPower at 92.5c each, and by January 1995 it owned 20 per cent of the Tauranga-based electricity group at an average price of 93.5c a share.
The Wellington investment company obtained a board seat and an agreement from TrustPower that if the electricity group made a share placement, then Infratil had a right to maintain its percentage shareholding.
In 1999 Infratil entered a co-investment agreement with Alliant Energy of Madison, Wisconsin, to jointly pursue investments in the New Zealand electricity sector. As part of this agreement Alliant acquired 10.6 per cent of TrustPower and 10.1 per cent of Infratil with board representation. Meanwhile Infratil had raised its stake in the Tauranga company to 25.8 per cent.
In June 2003 TrustPower bought back 40.9 million shares. As a consequence, Infratil and Alliant raised their shareholding to 35.2 per cent and 23.8 per cent respectively as they did not participate in the buy-back.
The TrustPower holding has continued to be Infratil's largest investment since the initial purchase in 1994.
When Alliant Energy put its 23.8 per cent TrustPower stake up for sale in September, it created competitive tension by asking one broker to investigate what it could realise through an institutional placement and another broker, whom Morrison worked for at the start of his career, to investigate a trade sale.
It was inevitable that Infratil would end up with the 23.8 per cent holding because of its close relationship with Alliant, but the purchase price was a big surprise.
On October 31, Morrison announced that Infratil was buying Alliant Energy New Zealand, the holding company for the 23.8 per cent TrustPower stake and 5.1 per cent holding, for $445 million.
This equates to approximately $6.20 a TrustPower share. Thus Infratil will be able to go from 35.2 per cent of TrustPower to majority control of 59 per cent, subject to shareholder approval at a special meeting, at a $1.40 discount to TrustPower's present market price of $7.60 a share.
This remarkable deal is due to Morrison's astute planning and his ability to build strong, long-term relationships with a number of parties including TrustPower, Alliant and the Tauranga Energy Consumer Trust. The last owns 28.6 per cent of the electricity group.
Assuming that the deal is completed, TrustPower will represent well in excess of 50 per cent of Infratil's assets with Wellington Airport, which is 66 per cent owned, and Stagecoach NZ (100 per cent) close together as the second and third largest investments. Infratil's other two important assets are Glasgow Prestwick Airport and a 20 per cent stake in the listed Australian company Energy Developments.
Infratil has a concentrated portfolio as these five investments will account for over 90 per cent of group assets after the Alliant deal.
The Wellington investment company also has an excellent disclosure regime as it releases a regular supply of factual information on its non-listed investments and TrustPower, which is its largest investment, is a listed company.
By contrast, GPG has a large and diverse range of investments and its disclosure is relatively poor.
Coats, the 100 per cent owed international knitting yarn and thread producer, is its largest investment, representing about 40 per cent of group assets. This is followed by the 20 per cent stake in Australian Wealth Management (11 per cent of group assets), 20 per cent of Tower (8 per cent), 52 per cent of Capral Aluminium (4 per cent) and 62 per cent of Turners & Growers (4 per cent).
GPG also has a diverse range of other investments, with the biggest five representing only two-thirds of group assets compared with over 90 per cent for Infratil.
The problem for investors is that Coats is unlisted and there is limited information on this worldwide manufacturer.
The other big difference between GPG and Infratil is in corporate governance. Sir Ron is chairman of GPG and the other four directors, Gibbs, Weiss, Graeme Cureton and Blake Nixon, are all executives.
This makes it difficult for the board to remove non-performing senior executives as there is a tendency for ageing executive directors to want to stay beyond their use-by date.
By contrast, Morrison is the only executive on the Infratil board, which is chaired by David Newman. The other directors are David Caygill, Humphrey Rolleston, Duncan Saville and John Peterson, an Alliant representative.
Sir Ron will always have a special place in the hearts of investors, but Morrison's performance, superior disclosure, youth, strong management team and better corporate governance structure suggest that the old master has a capable successor.
* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management, a GPG shareholder and a director of the New Zealand Investment Trust.
