Jenny Ruth: Mainfreight warmed-up for Owens effort

COMMENT

With Mainfreight's $62.2 million takeover now likely to succeed, one glaring consequence will be a decidedly over-stretched balance sheet.

At June 30, the company had $59.2 million in equity against $175.5 million in total assets, which was already tight.

So why didn't it structure the bid differently, such as offering shares instead of cash?

"We didn't have any intention of diluting Mainfreight shareholders through this process," says managing director Don Braid.

Does that mean executive chairman Bruce Plested didn't want to be diluted?

"He's at 29 per cent, but there's still a few others. We took the decision on behalf of all shareholders. We still believe our share is under-valued at current levels - it's on a PE [price to earnings ratio] of about 11.5 currently," Braid says.

He is promising it won't stay so stretched for long. The takeover's funding "will be a bridging facility in place for a set period", he says.

"We would then convert that facility into subordinated debt or equity - we would have an equity raising of sorts in the six-to-nine month period after the transaction is completed."

On top of that he hints at the likelihood Mainfreight will sell some of Owens' assets. "There could be some opportunities coming out of the transaction to reduce debt."

The other consequence is having a business the same size as itself to integrate. The company has struggled to bring its acquired Australian operations into profit, and still hasn't managed it.

In the three months ended June 30, its Australian domestic operations operating losses grew from $926,000 in the same quarter a year earlier to $1.24 million. And it lost $3.1 million in the previous year.

Nevertheless, Mainfreight does have a history of successfully doubling in size through takeovers.

The first was Mogul, followed by Daily Freightways (Braid's former employer) in 1994.

Daily Freight was in trouble when Mainfreight bought it, just as Owens is now.

Owens' net profit before one-off losses fell 43 per cent to $3 million in the year ended March and the company has been restructuring for years without visible signs of improvement.

So what's Braid's verdict on what's wrong with Owens?

"Some of their problems have been the diversification they've had in a variety of businesses. Not all of them have been transport linked or had the ability to be part of the overall supply chain for a customer and subsequently the added value and the quality has perhaps been lost," he says.

"And the ability to give shareholders a better return hasn't been possible."

Braid reckons Mainfreight will bring much greater focus to Owens.

"From a transport logistics analysis, our business is very integrated by comparison."

Owens will bring Mainfreight economies of scale in both the domestic and international freight markets and an expanded customer base.

The challenge will be to lift the quality of service and to encourage Owens' customers to use a wide range of Mainfreight's services, its "supply chain capabilities", he says.

"There will be a lot of hard work to do in the initial phase. We would like to ensure that the people of Owens understand the requirements of Mainfreight and the ways in which we wish to run the business."

Through that process, maintaining staff morale and communication will be vital, he says.

During the takeover process, Mainfreight complained bitterly about the lack of information Owens provided on how it has been trading since it sold most of its Hirepool business in May (Owens still owns 24.5 per cent).

Mainfreight even complained to the Takeovers Panel but got short shrift when the panel decided, after talking to both sides, to take no further action.

Braid indicates relations thawed when Mainfreight started talking to the Owens board about what price it would need to offer to secure the Owens directors' backing.

The rhetoric coming out of Owens when it sold Hirepool was that the transport needed rationalising and that it planned to participate in it.

But Braid doesn't seem to think much more consolidation is needed after a takeover "that's a pretty good rationalisation. I'm not sure to what Owens was referring or what they had up their sleeves. It's important to have good competition."

Mainfreight's move back in May and June to build a 15 per cent stake in Owens was widely viewed as a defence against Toll Holdings' presence in New Zealand with its takeover bid for Tranz Rail and the possibility that Owens would buy Tranz Rail's trucking operations.

Mainfreight's relationship with Tranz Rail throughout its history has been fractious at best. But Mainfreight is still a major Tranz Rail customer, providing it with more than $15 million in sales a year.

Braid is cautious on the outlook for that relationship if Toll's bid succeeds.

"They seem to understand us better than perhaps some of the decisions that have been made in the past at Tranz Rail. We know the Toll people pretty well. We understand the way they think. We don't want to move any more freight by road. In our opinion, we move too much freight by road," he says.

And Mainfreight and Toll had discussed the current situation.

Braid says some observers think his company's relationship with Toll, a giant in Australia's transport sector, is far more competitive than it is.

"Mainfreight is still a far more focused niche player. We're going to compete with Toll, there's no doubt about that, in certain sectors, but we're a lot smaller."

Many people are confused about Mainfreight's market niche because they see Mainfreight all over the trucks, he says. But Mainfreight's trucks are owned by their drivers and the roading side of the business is relatively small.

The company specialises in less than container load (LCL) freight. Picking up that freight and taking it to its destination is Mainfreight's business, regardless of the mode of transport, he says. So Mainfreight is a Tranz Rail customer and a major Air New Zealand, Qantas and coastal and international shipping customer.

"We're a logistics business specialising in LCL freight," Braid says. "I think we could be complementary to Toll in the NZ market and maybe in Australia, too. We could be providers of extremely valuable business to the rail network. It could be to the benefit of both parties."

Mainfreight

Based in Penrose, Auckland.

Divisions

Freight forwarding: Mainfreight Transport, Daily Freight, Chemcouriers.

Logistics: Mainfreight Logistics.

International: Mainfreight International, Carotrans International, Lep International.