Is Brierley dealing investors a dud hand?

By Rod Oram

Between the lines

With the sale of Sky City, the Brierley Investments' board has shown its hand.

It's playing a short-term game to get unhappy investors off its back. But by doing so, it is giving up long-term value shareholders would have enjoyed.

Sky City offers upside. Profits are rising fast even in a recession and there's more to come if it sorts out its under-performing hotel and tower and starts up Hamilton and Queenstown casinos. And then there's the blue sky stuff: its hints of other gambling opportunities which may mean pub slots and the TAB.

Indeed, Brierley chairman Sir Selwyn Cushing yesterday gave a glowing testimonial to Sky City even as he said goodbye. "There is little further we can add to this business and this offer recognises the time is appropriate for the next generation of investors to participate in Sky City."

There are three flaws in this reasoning.

First, Brierley has little to offer Sky City's management, but its more-than-widely dispersed new shareholders will contribute.

Second, Brierley is exiting opportunistically after a spurt in Sky City's shares, but the price is still 16 per cent below its peak.

Third, Brierley shareholders deserve to keep harvesting the fruits their capital created.

So why does Brierley want the money now? It implied that the cash - some $220 million this year if its Sky City shares sell at $7 each, and $220 million next - will help its debt refinancing.

But its balance sheet was already back in reasonable nick thanks to previous asset sales and capital repayments from some of its investments. A few hundred million dollars less debt this year won't help Brierley negotiate an even better deal from banks.

If Brierley was playing a long game it would hang on to Sky City for dividend income of $21.5 million a year (based on the latest interim) and capital appreciation to come.

Instead, it is playing a short game. It can make tax-free capital repayments up to a value of just over 50 cents a share. It could use some of that tax-free capacity to make a substantial share buyback; the Sky City deal helps give it the financial leeway to do so.

A buyback would give restive shareholders a quick exit, partial or otherwise. The prime candidate is Tan Sri Quek and his Camerlin consortium of Asian investors, unhappy holders of 20 per cent of Brierley.

If a buyback keeps Quek quiet and gives the Brierley board time to work on its underperforming assets, then the expedient sale of Sky City is a little more palatable.

But if Quek is playing short and long games - pushing for a share buyback soon and control of Brierley's Thistle Hotels later - then the board is short-changing shareholders who own 80 per cent of Brierley.