Richard Inder: Mike Pero sale bitter pill for minority

George Gould's decision yesterday to sell his 54 per cent stake in Mike Pero Mortgages will leave a sour taste in the mouths of the mortgage broker's minority shareholders.

The deal will see the blue-blood South Island businessman emerge well ahead on his investment in the company he floated on the exchange last year. Meanwhile minority shareholders are nursing a near 20 per cent loss.

This sorry tale began in March 2004, when Gould bought Mike Pero from its namesake founder for $15 million.

However, after some complex financial engineering linked to the broker's $25 million flotation on the NZX a couple of months later, Gould emerged with his majority stake for an estimated investment of $1.5 million. Pero retained a minority stake.

Mike Pero's shares never rose above the $1 float price and later plunged as low as 55c after some of the big banks stopped paying so-called trail commissions - annual payments for every year the loan remains in force. Concern about the housing market also hurt.

The latest deal, which will proceed only if New Zealand Finance makes a a full takeover offer for the rest of the company, values Mike Pero's shares at $20.5 million. Gould's share of this will be about $11.07 million.

Gould was not available for comment yesterday. But in a media release he issued what some shareholders may regard as an understatement: "George Gould said the decision to accept the proposal is very much based around the best interests of Gould Holdings. [It] is no reflection on the business prospects of Mike Pero Mortgages."

Gould added that he had always wanted to build Mike Pero's earnings and that the takeover had not been anticipated.

It is not the first time Gould has fallen foul of minority shareholders. The bitter and protracted battle for control of the plastic packaging group Vertex was also in part due to his moves.

Gould, after acquiring a 19.9 per cent stake in Vertex, appointed himself and an associate to the board. He then sold that stake to private company Masthead, which operated rival plastics company Alto and subsequently launched a takeover offer for Vertex.

Before Gould and his associate resigned, they voted Masthead directors to the board. The appointment, in the view of the remaining directors, was inappropriate because the new directors were conflicted.

Minority shareholders are sure to now handle George Gould more carefully.


Cock-a-hoop

Private Timaru-based businessman Allan Hubbard will be cock-a-hoop over Pacific Retail's agreement this week to sell its finance business to US giant General Electric.

The $145 million deal, which values Pacific Retail Finance at 10.6 times this year's pre-tax earnings, sets a useful benchmark for the impending float of his finance business, South Canterbury Finance.

Applying this benchmark to South Canterbury's earnings implies a valuation of about $320 million. This is well ahead of the $280 million present estimate.

Hubbard is selling a 75 per cent stake in South Canterbury, so if the float scales these heights his personal gain would rise by about $30 million.

GE always could pay more. Once it takes control - after shareholder and overseas investment commission approval due later this year - it will stop raising cash from the local market.

Instead of issuing debentures paying a 9 per cent coupon, it will tap international investors. Backed by GE's AAA Standard & Poor's debt rating it will be able to raise funds at about 7 per cent. On PRF's $500 million loan book, this represents a saving of $10 million a year - three-quarters of this year's profit. GE is likely to have shared some of these so-called synergy gains with Pacific Retail Group.

Apart from that, however, the two companies may deserve a similar rating.

Pacific Retail Finance is more exposed to an economic downturn than South Canterbury. Its loan book is made up of personal loans and funding New Zealanders' addiction to wide-screen televisions and DVD players.

In any downturn - read redundancies and job uncertainty, less overtime and rising mortgage repayments - these sorts of loans are more easily reneged upon.

South Canterbury Finance will still suffer from a downturn, but its loan book is much-less geared to the consumer market, with personal loans representing less than 20 per cent of its book.

Both companies have a strong record of growth. Pacific Retail Finance grew its pretax profits from $8.7 million to $13.7 million in the year to March. South Canterbury's earnings in the year to June grew its profits from $5.8 million to $30.2 million.

Meanwhile, Pacific Retail Finance debentures now must be the best in the market. GE is promising to buy up all outstanding debenture as they roll over but cannot start until the deal is completed.

Until then punters can buy the bonds in the knowledge that they will be backed by GE. The US corporation's balance sheet is better quality than of any other finance company in New Zealand and therefore offers better protection against the - albeit remote - chances of a finance company meltdown.

The one risk to this strategy is the possibility the deal does not get the necessary approvals.

But since PRG, more than 80 per cent owned by Eric Watson, needs the cash for, among other things, propping up UK appliance chain PowerHouse, a deal looks likely.