Brian Gaynor: Deja vu on the NZX

Sir Ron Brierley. Photo / Archive

A strong sense of deja vu has pervaded the NZX in recent days, with Sir Ron Brierley purchasing a stake in Wellington Merchants from the Cushing family, Augusta Capital acquiring a shareholding in NPT and a proposed takeover offer for Hellaby Holdings.

Sir Ron and Sir Selwyn Cushing were driving forces behind Brierley Investments in the 1970s and 80s, Augusta Capital is effectively controlled by Mark Francis, the son of Chase Corporation's Peter Francis, and Hellaby Holdings was a high-flying 1980s company.

These recent developments at Wellington Merchants, Augusta Capital, NPT and Hellaby demonstrate once again the small size of the domestic investment sector, as many of the same individuals, and their families, keep popping up again and again. They also illustrate the huge number of NZX backdoor listings, both good and bad, over the past few decades.

Sir Ron, who is 79, is back again with Mercantile Investment Company. This is his fifth major listed investment company following Brierley Investments, Industrial Equities Limited (IEL), Industrial Equity (Pacific) and GPG. The latter three were backdoor listings through Australia's Citizens and Graziers Life Assurance Company, Shanghai Docklands and UK investment bank Guinness Peat respectively.

Mercantile Investment, his latest backdoor listing, was formerly known as India Equities Fund. Its Indian equities portfolio plunged in value during the global financial crisis and shareholders voted to liquidate the portfolio and return 90 per cent of capital to shareholders.

Sir Ron gained control of India Equities in early 2012 when he sold his private portfolio in return for shares in the company. This gave him a 54.3 per cent shareholding and the company subsequently changed its name to Mercantile Investment.

Under Sir Ron's stewardship, Mercantile's after-tax net tangible asset value has increased from 6.4Ac to 16.8Ac since the end of 2011. The company's ASX share price is 16Ac and it listed on the NZX in July last year.

Mercantile has a sharemarket value of only A$45 million ($47m), which is well below Brierley Investments' market value of $5.48 billion at the end of 1986 and GPG's peak of just over $2.4b.

Sir Ron is investing in one of his hometown companies with a takeover offer for Wellington Merchants, formerly known as Kirkcaldie & Stains.

Kirkcaldie & Stains closed its iconic department store earlier this year when David Jones took possession of the store site. Sir Ron made a takeover offer at $2.75 a share in March which was subsequently increased to $3.00 a share. The offer was unsuccessful.

Sir Ron made another offer at $3.45 a share in August, which values the company at just over $7m compared with estimated cash and near cash holdings slightly in excess of this. The company has minimal additional assets.

Last week Sir Selwyn Cushing accepted the offer in respect of his 19.55 per cent Wellington Merchants shareholding and Mercantile Investment now holds 78.4 per cent of the target company.

Could we see a repeat of the 1970s, with Sir Ron using Wellington Merchants & Mercantile Investment as his transtasman investment vehicles, in a similar vein to his use of Brierley Investments and IEL four decades ago?

The independent adviser's report did not discount the possibility of Sir Ron using Wellington Merchants as yet another backdoor listed investment company.

Could we see a repeat of the 1970s, with Sir Ron using Wellington Merchants & Mercantile Investment as his transtasman investment vehicles, in a similar vein to his use of Brierley Investments and IEL four decades ago?

Mercantile's other main NZX investment is a 17.4 per cent shareholding in Christchurch based Smiths City Group. Small South Island listed companies were an important feature of Brierley Investments' acquisition strategies in its early days.

On Monday Augusta Capital announced that it had acquired a 9.3 per cent stake in listed property company NPT from the Accident Compensation Corporation. Sir Selwyn Cushing's business interests hold a 3.7 per cent stake in NPT and David Cushing, Sir Selwyn's son, was a NPT director until two years ago.

Augusta's CEO, Mark Francis, is the son of Peter Francis, a leading figure in Chase Corporation, a NZX backdoor listing in 1983. Chase listed its property investment and development activities through Fountain Corporation, a manufacturer and distributor of electronics and consumer products.

Chase went bust after the 1987 sharemarket crash, partly because it had too many investments in other listed companies.

Augusta Capital, which originally listed as Kermadec Property Fund, is unlikely to make the same mistake as it has a number of experienced non-executive independent directors while the Chase board was dominated by executive directors.

Hellaby Holdings, which was subject to a takeover offer this week, had its origins in Renouf Corporation which listed on the NZX in 1984 following an IPO.

The post-1987 sharemarket crash period was characterised by infighting, litigation, controversy and huge losses by the four companies.

In 1986 and 1987, Renouf Corporation, Kupe Group, Bruce Judge's Ariadne Australia and Rod Petricevic's Euro-National were involved in a number of complex transactions and share cross-holdings.

The post-1987 sharemarket crash period was characterised by infighting, litigation, controversy and huge losses by the four companies. By the end of 1991, Ariadne was the ultimate parent, owning 36.5 per cent of Renouf and 27.7 per cent of Euro-National. Euro-National in turn owned 47.5 per cent of Kupe Group.

Renouf reported a New Zealand record loss of $401m for the June 1988 year because of problems associated with the above cross shareholdings and investments in a number of Bruce Judge-related companies, Renouf Properties and a product associated with Sir Ron Brierley's IEL.

Ariadne Australia remains listed on the ASX and is controlled by Gary Weiss, who was one of Sir Ron Brierley's colleagues at GPG. Daniel Weiss, Gary's son and Ariadne's investment manager, is on the Mercantile Investment board and Gary is his alternate director. Ariadne owns just over 5 per cent of Mercantile Investment.

Euro-National is now NZX listed as Millennium & Copthorne, Kupe is CDI Investments and Renouf Corporation is Hellaby Holdings. These are three of the best performing NZX backdoor listings.

In the early 1990s Renouf Corporation was restructured by Tur Borren and Hugh Green and the company changed its name to Hellaby Holdings. As part of this restructuring, Green acquired a 34 per cent Hellaby stake for just $5m.

Renouf Corporation had acquired 100 per cent of Kirkcaldie & Stains from UK-based British Overseas Stores in 1985 and the department store owner was one of the assets transferred to Hellaby.

Hellaby sold a 40 per cent stake in Kirkcaldie & Stains in 1995 and had reduced its holding to 26 per cent by mid-1997.

Hellaby had no remaining shareholding when Kirkcaldie & Stains listed on the NZX in 2001. The department store had a compliant listing without raising any new money from the public.

The Hellaby takeover offer this week was probably facilitated by a major split in the Green family following the death of Hugh Green in 2012. The Green family has accepted the $3.30 a share offer in respect of its 27.2 per cent holding and will receive $87.7m for its stake.

Hugh Green's Hellaby investment has been an enormous success in terms of capital appreciation and the listed investment company has also paid substantial dividends since 1993.

Finally, to complete the loop on backdoor listings, it is worth noting that the Hellaby CEO Alan Clark was CEO of Abano Healthcare for 15 years. Abano was another successful backdoor listing through New Zealand Petroleum.

The vast majority of NZX backdoor listings have been unsuccessful, particularly over the longer term, but there have been a number of notable exceptions to this rule.

Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management which holds shares in Hellaby Holdings, Abano Healthcare and Millennium & Copthorne on behalf of clients.