Brian Gaynor: An unwelcome reminder of the 1980s

The manoeuvrings at Pyne Gould Corporation and PGG Wrightson are an unwelcome reminder of the 1980s.

The two South Island companies have come under the influence of two ambitious and aggressive businessmen, Craig Norgate and George Kerr, with Norgate stepping down as chairman of PGG Wrightson just two days after Kerr gained the ascendancy at Pyne Gould in controversial circumstances.

The two events are probably related.

Coinciding with their stewardship, and pending stewardship, has been the spinoff of a poorly performing IPO, unpaid related party obligations, a major uncompleted deal, the sale of a related party company to a listed entity, the shuffling of assets from one subsidiary to another, unfulfilled expectations and, last but not least, poor sharemarket performances.

This complex story begins in August 2003 when Norgate and the Otago-based McConnon family formed Rural Portfolio Investments (RPI) on a 50:50 ownership basis. This was one month after Norgate left the dairy giant Fonterra, where he was chief executive.

Between September and December 2003 RPI bought 12.3 per cent of Wrightson at $1.45 a share and the following year raised its stake to 50.01 per cent following a successful partial takeover offer at $1.65 a share.

Wrightson then acquired Williams & Kettle, had a one for eight bonus issue and merged with Pyne Gould Guinness on October 7, 2005 on the following terms;

Pyne Gould Guinness (PGG) effectively acquired Wrightson on the basis of 1.1536 PGG shares for every Wrightson share

Former Wrightson shareholders owned 60 per cent of the new company, which was named PGG Wrightson

The Norgate/McConnon partnership had its shareholding reduced from 50.01 per cent of Wrightson to 30 per cent of the new company

Pyne Gould Corporation went from 55.5 per cent of PGG to 22 per cent of PGG Wrightson.

As part of the merger agreement RPI and Pyne Gould have pre-emptive rights over each other's shareholding in PGG Wrightson.

There were big expectations for the new company but its share price has performed poorly and is now well below Norgate and McConnon's estimated adjusted purchase price of $1.23 a share.

Two developments highlight the problems at PGG Wrightson;

1) NZ Farming Systems Uruguay, which was established by PGG Wrightson in September 2006, was a mirror image of the commercial property spinoffs of the 1980s. Shares were issued to the public at $1.00 each and the company had a 1 for 2 rights issue at $1.50 a share before its NZX listing in December 2007. The Uruguayan company is now cash strapped, has been unable to pay its June 2008 year US$13.6 million performance fee to PGG Wrightson and is expected to report a loss of US$20 million for the June 2009 year.

2) PGG Wrightson's failure to fund its 50 per cent purchase of Silver Fern Farms for $220 million is a repeat of the failed deals of the 1980s, particularly the high profile Euro-National, Judge Corp, Ariadne and Renouf Corp transaction in 1987. PGG Wrightson has had to give Silver Fern Farms $30 million cash in compensation plus 10 million new shares. This has diluted the Norgate/McConnon shareholding to 27.5 per cent of PGG Wrightson and Pyne Gould's to 20 per cent.

This week's press release stated that Norgate's "decision to step down reflected the preference for an independent chair" but Norgate is a foot-on-the-accelerator formula one driver who has been sidelined because his pit crew, particularly the banks which now control the finances, have stopped filling his fuel tank.

A surprise is that Keith Smith, who is chairman of the struggling Uruguayan company and was a PGG Wrightson director when the unconditional deal with Silver Fern Farms was signed off, has replaced him as chairman.

George Kerr lodged his first substantial security holder notice for Pyne Gould on March 7, 2007. It revealed that he had 8.27 million shares or 8.4 per cent of the company, most of them acquired at $4.50.

He now owns 10.0 million shares, or 10.2 per cent of Pyne Gould, at an estimated cost in excess of more than $42 million. He is the company's largest shareholder and his shares have a current market value of $17 million.

Kerr was appointed to the Pyne Gould board in August 2008 but shareholders were only given a very brief profile of him. In the directors' interest section of the 2008 annual report he is listed as having only two directorships yet the Companies Office lists him on over fifty boards. Many of these are property related, including the Jacks Point development in Queenstown.

Kerr was involved in a number of fund management businesses including New Zealand Funds Management, Sterling Grace Portfolio Management and was chairman of Brook Asset Management. Sterling Grace was acquired by AXA for $248 million in 2001 when Kerr had a 13 per cent holding.

He is now involved in a large number of business ventures with John Darby, including property developments and Equity Partners Asset Management. Epam appears to be 50/50 owned by Kerr and Darby who are close neighbours near Lake Hayes, Queenstown.

Kerr is also the great great grandson of FH Pyne who founded Pyne & Co in 1887.

This week's Pyne Gould announcement can be summarised as:

Pyne Gould will purchase Epam from Kerr and Darby for $18 million

Marac, which is 100 per cent owned by Pyne Gould, will cease lending on development property and transfer its $160 million of property loans to its parent at face value. Pyne Gould believes that this will assist Marac in its application for a banking licence

Pyne Gould, not Marac, will take a one off after tax charge of between $60 million and $65 million on this portfolio for the June 2009 year.

Pyne Gould will raise new equity and Kerr will play a major role in underwriting this

Pyne Gould will place a great deal of emphasis on its asset management business with Kerr playing a major role.

There are a number of features of this announcement that take us back to the mid-1980s, particularly the acquisition of a company from a major shareholders without any information or approval of shareholders. These transactions were common 25 years ago and in most cases the listed company purchased a dog.

The $18 million Epam purchase price, which appears to be far too high, will help bridge the gap between what Kerr paid for his Pyne Gould shares and what they are worth now.

Another feature of the 1980s was the transfer of assets from one subsidiary to another to make the poorly performing one look good while pretending that the impaired assets wouldn't have a negative impact on the purchasing entity.

Should the Reserve Bank issue a banking licence to an organisation involved in related party transactions and paper shuffling activities?

It is hard to believe that it is pure coincidence that Norgate stepped down just two days after Kerr took a strong grip on Pyne Gould. Kerr also strengthened his position a few weeks after long serving Pyne Gould chief executive Brian Jolliffe retired.

Norgate and Kerr are extremely ambitious and aggressive individuals and it is unlikely that the two of them could work together, even in a wider group. Norgate has lost his firm grip on PGG Wrightson by getting it wrong in Uruguay and on the Silver Fern Farms deal.

Kerr has spotted his chance, he will have a big influence over the whole Pyne Gould/PGG Wrightson group and shareholders are in for an exciting ride.

It wouldn't be a surprise to see Pyne Gould buy the Norgate/McConnon interest in PGG Wrightson when its equity raising is completed.

Unfortunately there is no guarantee that Kerr's ambition and aggression will lead to superior returns for minority shareholders.

Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com