Vexed question of public or private ownership

The question of whether the Stock Exchange is the best place for helping good companies gain critical mass has resurfaced again in recent days, as two great Kiwi companies announced different paths to growth.

The founder of The Warehouse, Stephen Tindall, took everyone by surprise when he announced he wanted to reprivatise his company and take it in new, riskier directions.

And there was more surprise when Christchurch company Mooring Systems Ltd (MSL) said it would perform a reverse takeover on respected European company Cavotec Group.

As the sharemarket saw last week, Warehouse shareholders are loathe to let their slice of the Red Sheds go, figuring that where the majority stakeholder sees value, so should they.

But if his plan does succeed, Mr Tindall says his plans to delist should not be seen as a reflection of the exchange.

"The Stock Exchange question, it does come up a lot, and I think there's a time and an evolution in companies when the right thing to do is to float, like it was for us in 1994 and clearly as it was for Rakon this year," he told Radio New Zealand.

"But there are also times when it's good to actually privatise. In my own private equity business, K1W1, I've in fact been instrumental in floating four companies along with our other investors in the last two years: three on the ASX and one in the States and these floating opportunities come at the appropriate times, and privatizations do as well."

Although Mooring Systems will remain listed in New Zealand, some analysts note that the merger with Cavotec means most shareholders will miss out on all of the value that Mooring Systems could give them.

MSL first listed in 2000 on the Stock Exchange's New Capital Market, the forerunner of the Alternative Market, and has been one of the few to successfully use the market to graduate from tiddler status.

The exchange wanted small cap companies to use the platform, with less stringent listing requirements, to spring into $100 million businesses.

While others have fallen by the wayside, MSL's share price has gone from an initial 50c a piece to its current level around $4.00.

Now, with its plan to join forces with Dutch-based Cavotec, a diversified company with interests in mining, airports and ports, MSL could jump right into the Top 50.

Cavotec has an annual turnover of $200 million. While potential earnings were difficult for the companies to forecast, on a pro forma basis the merged income for the six months to June would have been an ebit (earnings before interest and tax) of $10.8 million.

It's not a bad partner for a firm which has toiled away for several years to interest the conservative shipping industry in its vacuum operated automated mooring systems.

Analysts were at first a little mystified. Selwyn Blinkhorn of ABN Amro Craigs said it was great recognition for MSL but it also raised questions.

"It's intriguing that a very successful, private European company would want to back itself into Mooring Systems and list on the New Zealand market."

Possibly part of the attraction to Cavotec is New Zealand's Southern Hemisphere location.

Cavotec chairman and chief executive Stefan Widegren told media that while just under half its business last year was still in Europe, its ambitions were much more global.

Twenty-two per cent of its work was in Australia, which was poised to rise to 30 per cent, and India and the Middle East were growing markets.

"Our future is here, it's not in Europe. And here is where we want to grow."

Cavotec also undoubtedly knows the full implications of preliminary trials of MSL's technology by big shipping companies.

MSL has signed a $3.1 million deal with Salalah Port Services in Oman, is part of a US$45 million ($68.94 million) deal with the US Navy, and is trialling its system in Canada's St Lawrence seaway.

Forsyth Barr analyst David Price says MSL's technology has already been given an endorsement by Patricks and also by shipping giant Maersk.

"It's just huge, what it means to a port. If they can add one more TEU container -- they normally do 35 an hour -- if they can do one more an hour, the port efficiency goes up by 1 per cent."

That could mean an additional $20 million profit to a port.

Mr Price also notes that the public probably didn't realize how hard it had been for a small, thinly capitalised company in New Zealand to market their product overseas.

"Its been hard toil, I think the company probably didn't realize, they had the attitude that, 'Build it and the people will come'. But shipping is a very conservative industry and things they've done for hundreds of years they tend to think they'll do for hundreds more -- and so Moorings have got 10 staff to try and take on the world."

MSL's chief executive Peter Montgomery, who owns 19 per cent of the company, said as much when he told media that Cavotec's backing would help reassure clients that MSL could meet its liabilities and warranties -- and ensure it didn't get kicked around.

"We've dealt with a lot of large corporations that look at our balance sheet and they see how thin it is and they think they can beat us around on that."

He felt the merger was the best way to ensure MSL reached its full potential.

"I don't want to have a hitch, financially, where we have to consider more capital raising, more dilution, or we become vulnerable."

David Price says that the daunting prospect of raising capital in New Zealand was a reflection of our poor savings regime.

"The Government can probably look firmly at themselves for something like this. If it was Australia or somewhere else, the capital would be there, and this would probably never have happened, and it would be a New Zealand company."

In contrast to the usual pattern of mergers in New Zealand, MSL will remain on our sharemarket, but the deal's 20:80 ownership ratio for MSL and Cavotec shareholders will strip much of the "blue sky" premium out of MSL shares.

"The shareholders bought in knowing it was running on the smell of an oily rag,but they believed in Peter, his staff and the product," Mr Price said.

"That hasn't changed but what you're getting for your dollar is 20 cents of exposure to that, and the other 80c you're getting a more conservative, more reliable cashflow."

Even so, says Mr Montgomery, when you factor in the new entity's improved asset backing, earnings per share and probably accelerated sales from Cavotec's distribution network, it's still a good deal.

"We get the chance here to participate from the revenue and profits that Cavotec generate as well, and I don't see any dilution of value."

- NZPA