KEY POINTS:
A major shareholder revolt is gathering steam at Guinness Peat Group as investors become increasingly concerned over the group's below-average share price performance, substandard communications, archaic capital management and antiquated corporate governance structure.
Ironically the company has developed many of the characteristics that GPG chairman Sir Ron Brierley
was critical of as it cut a swath through New Zealand's poorly governed and poorly performing firms in the 1960s, 1970s and 1980s.
The London-based investment company has underperformed on the NZ Exchange, Australian Stock Exchange and London Stock Exchange benchmark indices in recent years and its share price is trading at a huge discount to the assessed net asset value (NAV) per share.
The latter is a clear indication that investors have lost confidence in GPG's directors and management.
Investment companies are usually assessed on NAV, rather than earnings, and broker analysts estimate GPG's NAV between $1.89 and $2.34 (see table). Thus its $1.41 share price is 25.4 per cent to 39.7 per cent below assessed NAV.
This compares with its long-term average discount of around 12 per cent and discounts between 17.6 per cent and 27.8 per cent for Barramundi, Infratil, Kingfish, Marlin and Salvus, five other NZX-listed investment companies.
By contrast two of the long-standing ASX listed investment companies, Australian Foundation Investment and Milton Corporation, trade at a 3.3 per cent premium and 1.5 per cent discount to NAV respectively.
What is wrong with GPG and what can be done about it?
The first big problem was buying Coats, which represents about 40 per cent of group assets. Coats may turn out to be a good investment but it is destroying shareholder value at present because investors are focusing on its disappointing performance and are paying little attention to the group's other investments.
The Coats acquisition is difficult to understand because GPG's directors have investment, rather than operational, expertise and Brierley Investment's purchase of 100 per cent of Thistle Hotels, which occurred after Sir Ron had been demoted to founder president, was a major contributor to the demise of the NZX's former glamour stock.
In addition, GPG's successful investment decisions, including Tony Gibbs' amazing turn-around at Tower, have been swamped by Coats' disappointing performance.
Another major issue is GPG's substandard communications with shareholders. This week's interim commentary was short and almost totally focused on Coats, and GPG is one of the few major companies that doesn't release annual meeting addresses to the NZX even though the huge number of New Zealand shareholders have no opportunity to attend the London event.
Compared with Infratil, whose share price has outperformed GPG by a wide margin in recent years, disclosure is disappointing. This "trust us, we know what we are doing" approach is no longer acceptable in light of Coats' poor performance.
But worst of all was the following one-sentence comment by Sir Ron at the end of this week's announcement: "The board is working towards a substantial release of value to shareholders in 2010 which will coincide with GPG's 20th anniversary and my own retirement as chairman of the company."
What did he mean by this? Why wasn't he more specific?
News reports quoted him as saying: "That's up to my colleagues [any capital repayment or whether GPG would continue in its present form]. I assume they will want to carry on in some form. Once that group disbands then GPG as one knows it will cease to exist."
Brierley's comments suggest GPG is being run for the benefit of executive directors as it was hard to find any comments regarding the best interests of all shareholders.
Would a young Ron Brierley have allowed the directors and management of an underperforming company retain their positions until they decided it was time to "disband"?
Another issue with GPG is capital management, particularly the annual 1 for 10 bonus issues.
Bonus issues were a major characteristic of the New Zealand sharemarket in the 1970s and 1980s and Brierley Investments was a big fan of these. But bonus issues, like compounding interest, have a huge multiplier effect and 115.6 million additional shares were issued through this process last year and a further 128.8 million this year.
The company has also issued a further 22.1 million new shares through its dividend reinvestment scheme over the past 16 months.
The market is awash with GPG scrip and this has had a negative impact on the company's share price, particularly as confidence in the company has waned.
Sir Ron told Radio New Zealand this week that there would be plenty of good investment opportunities in the months and years ahead but surely the best opportunity for GPG is to buy its own shares as they are trading at a 30 per cent plus discount to NAV. GPG should be using its surplus cash to buy back shares and should abandon the annual archaic bonus issue.
A GPG shareholders' revolt has been growing before this week's report for several other reasons including that the board has no truly independent directors, the executive directors are paid far too much and they have a staggering 57.8 million options with no performance criteria.
This revolt has been evident at May's annual meeting when 145.9 million shares, or 29.5 per cent of those cast, voted against the issue of shares to directors when their options expire.
In addition 113.9 million shares voted against the acceptance of the directors' report & accounts and 42.8 million shares were cast against the re-election of Gary Weiss to the board compared with only 0.5 million the last time he stood for the board.
An increasing number of shareholders want the board to adopt an active strategy now rather than wait until they are ready to "disband". There are several options including:
* All assets should be liquidated, with Coats sold through an Asian IPO or a trade sale, and the proceeds distributed to shareholders. The sale of Coats may be difficult to achieve at present because IPOs are hard to get off the ground and private equity purchasers are cautious.
* All the investment assets, except Coats, should be sold and the proceeds distributed to shareholders. GPG should change its name to Coats and a new board, with expertise in manufacturing and international marketing, be appointed.
* The investment assets and Coats should be split into two different companies and an in specie distribution of all the Coats shares made to GPG shareholders. Both Coats and GPG would have a new board with the latter having a majority of independent directors.
Perhaps the only good news from this week's developments, which included a 5.4 per cent fall in GPG's share price, is that broker analysts have remained remarkably loyal to the company with six out of seven maintaining a buy recommendation.
But investors who buy GPG shares must be prepared to vote for change because the existing board seems to be determined to maintain the status quo until it decides to "disband" sometime.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management which holds GPG shares on behalf of clients. He also holds GPG shares in his own name.
