Dose of Hart medicine

Graeme Hart has an enviable track record with moribund companies.

They are a shy and wealthy bunch. They each own more than 100,000 Carter Holt Harvey shares - worth $250,000 in billionaire Graeme Hart's $3.3 billion offer for the 105-year-old forest products giant.

Few wish to have their names in the paper. That is no wonder. With such a sum invested in a single stock, their investments are likely to amount to more than a million - enough of an incentive to protect their privacy jealously.

One inherited her CHH shares. Another bought into several of the many companies that have over the years been subsumed into what is now the fourth largest company on the sharemarket.

Others bought in simply because they believed the story. New Zealand could grow high-quality wood more quickly than most other places in the world. CHH, employing more than 10,000, had the cash and skills and people to profit from this natural advantage, not only growing the trees but also transforming them into high-quality products.

But largely they feel let down by CHH. Until June, when 51 per cent shareholder International Paper said it was bailing out after 13 years on the register, the shares had gone sideways. Then Hart fronted up with $2.50 a share, a price only touched once in the last five years.

By next Friday, when Hart's offer closes, these and the 16,000 others left on the CHH register must make a decision. They can take Hart's cash or hang on, believing the billionaire sees substantially more in CHH.

Neither choice is particularly easy.

Lindsay Hotham, an Auckland accountant with 109,000 CHH shares, is clear about his choice and is typical of those who share his view. "CHH management has been poor. I think Graeme Hart could hardly do worse," Hotham says.

His view is based on the billionaire's well-canvassed record.

The bald facts of his rise are enough for some - from towie to transtasman corporate raider worth as much as $2 billion if the National Business Review's Rich List is to be believed.

However, an analysis of his past investments, particularly his turnaround of the troubled Australian herbs and spices giant Burns Philp, exposes a pattern of reorganisation sure to be replicated at CHH.

Hart recognised Burns Philp had lost focus. Its rapid expansion in the 1990s to become the world's largest fresh yeast producer and the second largest spice processor had not been accompanied by the necessary rationalisation of operations of the acquired businesses.

Hart stripped out costs and made long-overdue writedowns.

He quickly jettisoned many of the spice operations and businesses well outside Burns' core capability and focused on yeast production.

This capability was built up to critical scale with the acquisition of Kraft Food's American yeast and bakery business and the whole thing was then flicked on to Associated British Foods for A$1.78 billion ($1.9 billion).

In late 2002, as this project neared its end, Burns Philp splashed out A$2.2 billion for Goodman Fielder.

Goodman was suffering from a price war, but it had failed to offset declining profits by taking cost out of the business.

Hart was merciless. Within a month he had emptied the head office; 500 people lost their jobs.

Over the next year, he got A$100 million in cost savings and invested A$32 million in new products.

Over the eight years Hart was running Burns Philp, the estimated A$490 million he pumped into the business grew to A$1.2 billion.

Those investors who have matched him dollar for dollar have enjoyed similar returns.

Just before buying Goodman, Hart bought New Zealand Dairy Foods on his own account. NZDF, owner of the Fresh n'Fruity yoghurt and Anchor dairy brands, had also invested millions upgrading its plant, but had not reaped the gains of these investments, nor followed through with the rationalisation of staff, plant and machinery.

One source recalls how in the early days of Hart taking control all spending "apart from paper clips and pencils" had to be signed off by one of two senior executives.

Hart also took advantage of uncertainty about new dairy industry regulations. At the time, NZDF's just created half-owner Fonterra was selling under duress.

Finally, decoupling the firm from the bureaucracy linked to the creation of Fonterra and a line-by-line attention to costs saw Hart realise a gross profit well in excess of $440 million when he sold this year.

Hart took similar actions at the Meadow Fresh and Tararua Dairy and the Kiwi cured meat operations he bought from Fonterra in August.

Hart will pocket a gross profit of at least A$240 million when these assets are folded into the new Goodman Fielder operation.

Investment bank Goldman Sachs JBWere, which this week said CHH's shares could be worth as much as $4.32 after a dose of Hart's medicine, describes the blueprint this way:

"Rank Group [Hart's private company] has a strong track record of acquiring out-of-favour commodity businesses, initiating fundamental operating improvements and then crystallising value as cyclical factors recover."

CHH fits Hart's bill. Pulp and paper prices, one of the most important drivers of CHH earnings, are low and are expected to improve. The kiwi dollar, now trading at post-float highs, will not remain at these levels and, as it falls, profits will improve. Its businesses are diverse and International Paper, say several sources,


Just over a month later, CHH said it would not meet the 2005 forecast. It was the third downgrade in less than three months. After six days of discussions, the independent directors disclosed CHH's 2006 full-year profits would be $110 million less than forecast. More to the point, the independent directors said they could not reconcile these forecasts with the earlier ones.

Fund managers and analysts doubt the earnings will be as bad as CHH management predicts. Still, the earnings debacle has added an abnormal degree of uncertainty to the choice faced by individual shareholders.

Meanwhile, Hart faces several risks. To name but a few: commodity prices may not rise; Hart has no expertise in forest products nor any experience in the highly specialised pulp and paper and sawmills.

Meanwhile, minority shareholders may also be left out in the cold.

Hart has borrowed significantly to fund his bid and odds must be short on him axing the dividend as he transfers some of the debt to the company.

The restructuring will be ugly and the share price could fall in line with ebbs in confidence that Hart can pull it off. And Hart, who now owns more than 75 per cent of the company, may use such a fall to bid once again. As he is within cooee of the 90 per cent threshold where he could compulsorily acquire the outstanding shares, small shareholders could be big losers.

In short, even Hart's record may not be enough of a reason to hold on.