Graeme Hart: out of the ashes

Australian legend Burns Philp is on the comeback trail, and with it the fortunes of an enigmatic Kiwi high-flyer. GREG ANSLEY reports.

CANBERRA - Four years ago Graeme Hart, the enigmatic wonderkid of New Zealand business, became the goat.

He effectively consigned the wealth generated from the fire-sale of New Zealand's state assets to the ashes of Burns Philp, the one-time Australian blue chip stock burned to a crisp by its own ambition.

Next week Mr Hart becomes the phoenix.

On Monday, the company's $A1 billion ($1.2 billion) refinancing will be signed after the final allocation of preference shares in its buyback deal, and on Tuesday its annual results are tipped to show profits at least double the $A85 million forecast.

Burns Philp is back in business, big time.

The key questions facing the company no longer focus on its survival, but ask when dividends will resume, whether its headquarters will remain in Australia and, above all, when Mr Hart will sell his 50-odd per cent?

Consistent with an almost sub-zero public profile some analysts believe has played a central role in dampening market perceptions of the resurrection, Mr Hart is saying nothing.

He did not respond to a request for an interview lodged with his Rank Group in Auckland, and Burns Philp headquarters in Sydney primly advised that "Mr Hart does not do interviews".



His paranoia about public scrutiny is a trait his New Zealand friends seem willing to encourage.

"Graeme keeps a very low profile, and his friends respect that," is all his former right-hand man, David Brown, is prepared to say.

Those who have worked with him in the past, nevertheless, recall a man obsessed with the bottom line - to the point where his senior executives were expected to empty their own rubbish each night, to save on cleaning costs.

Unlike many extremely wealthy businessmen, he does not have a reputation for mingling with other high-flyers.

"My gut feel is he doesn't particularly trust people," recalls one former colleague. "He's very streetwise.

"He's hard as nails but he's also got a very friendly demeanour and he can charm people quite well. But, overall, he's extremely fixated on personal wealth."

If that has been his goal, he certainly attained it some time ago.

Several houses were demolished to make way for his $16 million mansion over several titles at Glendowie.

The palatial home, estimated by some to be the largest private residence in New Zealand, took years to build with the help of an in-house engineer and designer, and Italian craftsmen.

His $US20 million motor yacht Ulysses has reported running costs of $2.5 million a year.

In Burns Philp, the Kiwi corporate adventurer found a natural home: a once-great business house clad in romance and history, driven to the shoals by managers who bit off more than they could chew.

The company was formed in remote colonial Queensland by James Burns and Robert Philp, two hard-nosed Scottish migrants who began with a general store and expanded into a food, insurance, merchandising, pastoral and shipping empire that ran through the South Seas and into Asia.

And so it remained until the late 1980s and early 1990s, when a bid to topple United States giant McCormicks from the global spices throne sent Burns Philp plummeting to earth.

The company had sold its QBE Insurance holding for $A137 million in 1990, and over the next two years set out on an $A800 million herbs and spices buying spree, bolting it on to a solid core of yeast and bakery products, and to a string of retail, property, automotive, bulk handling and microbiological and antibiotics holdings.

But reality was already biting. The BBC Hardware chain was sold for $A460 million in 1994, and the following year further asset sales were flagged as profits tipped to a $A62 million loss, cash flows slowed, debt loads soared and institutional investors began champing nervously.

Worse was to come. McCormicks hammered Burns Philp to a $A60-million-a-year loss in the spice market, and local investment blunders hit home through a $A100 million payout to investors in the failed Victorian property trust Estate Mortgage.

In 1996-97, Burns Philp plunged to the second-worst crash in corporate Australia: profits dived by more than 600 per cent, market capitalisation collapsed by 90 per cent, and the company slid down the corporate rankings from Australia's 48th-largest company to number 500.

Across the Tasman, Mr Hart's predatory instincts were stirring.

The indifferent Mt Roskill Grammar student, tow-truck operator, car painter and taxi driver launched into business in 1974 when, at age 22, he established, then sold, his own printing shop before emerging with the Rank Group in the mid-80s.

With a strategy of borrow, build and sell, he turned a $7.6 million party rental listing in 1987 to a $302 million fortune, buying the Government Printing Office for a knockdown $23 million and capturing Whitcoulls for $71 million (with $53 million borrowed on expected earnings).

After expanding through acquisitions, he privatised the group, finally selling to Blue Star stationery in 1997.

Legend has it that he looked at about 90 businesses before buying the Government Printing Office.

"He analyses everything to death," recalls another colleague. "He's no fool but he's happy to take big risks.

"He took a big risk on Burns Philp and got burned, but what he's done since then to rescue his position is a thing of beauty. It's really amazing what he's done."

Indeed, Mr Hart's start at Burns Philp could hardly have been worse.

After buying an initial 15 per cent stake - at a significant premium over the going share price - he watched as the company declared a $A173 million loss and slashed $A700 million from the value of its spice business to breach conditions on $A1 billion in bank loans.

Overnight, plummeting share prices wiped $A169 million off the stake of a man the Australian media began calling the biggest turkey on the bourse. Prices were to fall as low as 4Ac.

Confidence was further shaken when Burns Philp prematurely announced, then revoked, a bid to sell the spice division for a bargain $A235 million.

On the same day that Standard & Poor's lowered its long-term credit rating for the third time in as many months, Mr Hart lifted his holding and set about turning the company around.

He brought in Tom Degnan as chief executive, a man admired by analysts as a thoroughly capable, conservative manager with a strong background in Burns Philp's core business as a senior executive of America's Universal Foods Corp and Red Star Yeast. Last year Mr Degnan demonstrated his own faith in the company by buying 300,000 Burns Philp shares.

Mr Hart's strategy was one of consolidation, restructuring, cost cutting and asset sales, counting on the strong cash flow from yeast to convince bankers to refinance the company's crippling debts.

Non-core assets were sold, and the screws were tightened in a restructuring and cost-paring operation that cut staff and product lines, sold loss-making yeast plants in Perth and China, and introduced new marketing and distribution systems.

In late 1998, the company moved back from the brink with a $A300 million recapitalisation. Asset sales reduced its debts by $A400 million, and banks agreed to a three-year refinancing deal.

Mr Hart, whose own fall had been buffeted by a put option with Deutsche Bank, returned to paper profit as Burns Philp moved back into the black.

Pushed by a strong greenback, earnings soared, herbs and spices rebounded, and credit ratings and profits improved. Mr Hart's holding rose to about 53 per cent.

Last May, bankers agreed to a new refinancing deal under which the company's $A1 billion debt will be restructured into a five-year, $A900 million credit facility, with $A240 million in equity to be raised through a converting preference share issue.

Mr Hart, as the major note and option holder, stands to gain more than anyone.

"He got a good deal," says Melbourne analyst Geoff Wilson."They all squealed, but no one came up with a better proposal. He's the one who saved the company, and he committed to putting the money in."

Paul McCarthy, of Sydney broker Wilson HTM, says Burns Philp remains an overlooked stock whose share price, at present about 46Ac, should rise significantly over the next two years to at least 75Ac.

It is already looking for new yeast and bakery assets, especially in Asia, the Americas and eastern Europe, where above-average growth is expected to occur. Its terminals division, worth about $A150 million, may go on the market and selling the now-profitable spice business remains an option.

"If you assume the business just trundles along from where it currently is and stays in its current shape, by the end of fiscal 2004 you should have debt of somewhere between $A100 million and $A150 million, and shareholders funds approaching $A1 billion," Mr McCarthy says.

"So you've had a massive turnaround from two years ago - when it was probably $A100 million shareholders' funds to $A1 billion debt - and the company will have the cash flow to grow the business substantially in order to buy their shares back and create value."

Analysts believe it will take two years for the major funds and institutional investors to really take notice.

Meanwhile, Mr Hart, now sixth on the NBR Rich List with reported wealth of $260 million, is giving little away.

This year he said he was not about to sell any shares and would continue to build the company, but added: "If someone comes along and says 'We want to acquire Burns Philp', then of course I'd listen."

Either way, he has turned his turkey into pheasant.