Abano tips positive earnings from struggling joint venture

Alan Clarke.

Abano Healthcare, the medical investor embroiled in a dispute with its biggest shareholder, anticipates its Australian and Asian audiology joint venture will start making a positive contribution to earnings in the next financial year.

Bay International, which is jointly-owned by Abano and dissident shareholder Peter Hutson, is on track to break even on an earnings before interest, tax, depreciation and amortisation basis, after boosting Australian sales in recent years, Abano managing director Alan Clarke told Radio New Zealand. Abano appointed a new chief of its Australia audiology unit, and opened new outlets in malls rather than using the stand-alone suburban hearing aid clinic model that had proved successful in New Zealand.

"Over the last 18 to 24 months, that has really moved that business now to the level of breakeven and where it will start laying down positive earnings going into the new financial year," Clarke said.

The audiology unit has been a perennial underperformer since the successful sale of the New Zealand business in 2009 for $158 million to National Hearing Centre. Abano retained the Australian and Asian businesses, letting Hutson lift his stake to an equal share from 40 percent, with an $11 million payment used to leave the unit debt-free.

At the time of the transaction, Bay had $17.3 million in assets and the same amount in liabilities, and was forecast to be loss-making for the following two years, according to a KordaMentha independent adviser's report on the transaction. The KordaMentha report said the transaction was fair to Abano shareholders not associated with Hutson.

Since then, the audiology unit's assets rose to $22.3 million as at Nov. 30, while its liabilities climbed to $47.1 million. It made a first-half Ebitda-loss of $3.3 million in the six months ended Nov. 30, down from a loss of $6.2 million a year earlier.

Hutson and fellow shareholder James Reeve are agitating for change on the Abano board, seeking a special meeting to dump chairman Trevor Janes.

Hutson was a director of Abano until last September when he teamed with and Reeves to mount a full takeover bid for Abano pitched as high as $7.80 a share. The board rejected the offer, relying in part on a report by investment house Grant Samuel, which Hutson and Reeves says gave an inflated valuation.

The aborted bid was backed by private equity firm Archer Capital, which would have sold the audiology unit to Hutson for a nominal sum, retaining the rest of Abano's businesses.

Last month Abano offered to buy out Hutson's stake for $12.9 million, below the bottom end of the $16.7 million and $19.8 million range in a Grant Samuel independent adviser's report commissioned in anticipation of a takeover offer.

The Grant Samuel report said Bay International was loss-making in Australia, with "significant potential to expand and generate good earnings once the new store development is recommenced," and breaking even in Asia.

"Despite Taiwan having considerable potential for growth given the very low penetration of audiology outlets, Grant Samuel is not convinced that Bay International has developed a workable strategy for achieving sustained growth in this market," the report said.

Last week the Employment Relations Authority upheld Abano's right to sack Peter Hutson and his wife Anya from their positions at Bay as chief executive and human resources director, which was written into their temporary contracts in 2009. The Hutsons claimed Abano's right to terminate their employment fell away after the end of the three-year term of their contracts, something the ERA rejected.

Abano sought to oust them after the Hutsons turned down a suggestion that protocols be put in place to manage conflicts of interest when Peter Hutson's involvement in a takeover bid emerged last year.

The termination of Hutsons' employment doesn't affect their shareholding or rights to board representation, though the KordaMentha report cites a five-year non-compete condition in the shareholders' agreement after Peter Hutson ceases to be an employee or sells his shares.

Hutson was seen as the driving force behind the successful New Zealand audiology expansion, and Abano backed him to do it again in Australia and Asia after selling the local business.

Abano shares were unchanged at $6.93, and have gained 8.8 percent this year. The stock is rated an average 'buy' according to two analyst recommendations compiled by Reuters, with a median target price of $7.58.