COMMENT:

The resignation of Rubicon chief executive Luke Moriarty is the latest development in the company's sad history.

Rubicon has had total losses of US$54 million ($81.8m) over the past decade and has had only two positive profit figures in this 10-year period.

The company's adjusted share price has slumped 65 per cent while the benchmark NZX index has surged 167 per cent.

Advertisement

Rubicon shareholders have suffered huge losses while directors received total fees of $4.3m and Moriarty received $7.2m in salaries, bonuses and retention payments.

Shareholders are furious with the company's performance and there should be strong opposition to any exit payment offered to Moriarty.

Unfortunately, experience indicates that New Zealand's poorly performing chief executives often receive the highest exit payments.

Rubicon was established in January 2001 to hold several assets that Shell/Apache didn't want when this consortium acquired most of Fletcher Challenge Energy (FCE). Rubicon also acquired the following investments:
• 17.6 per cent of NZX-listed Fletcher Challenge Forests
• 31.7 per cent of ArborGen, a United States forest bio-engineering company.

FCE shareholders received cash and one Rubicon share for every FCE share they held.

Rubicon listed on the NZX on March 26, 2001, with Moriarty, a former Fletcher Challenge executive, at the helm while Hugh Fletcher was appointed a non-executive director.

The newly-listed company's prospectus stated: "Rubicon will be a business developer — providing the industry knowledge, management skills, business and commercial networks, and financial capital needed to develop businesses from ideas and intellectual capital. In order for the benefits from intellectual capital to be delivered innovation must be commercialised. This is the role to be played by Rubicon."

Rubicon was a high-profile company in the early 2000s for several reasons including:
• Guinness Peat Group (GPG) acquired a 19.9 per cent stake in 2002.
• United States based Perry Corporation purchased 19.8 per cent a few months later and had a bitter dispute with GPG that went all the way to the Privy Council.
• GPG made an unsuccessful partial takeover offer to raise its Rubicon stake to 50.01 per cent.
• In 2003 and 2004 Fletcher Challenge Forests sold its entire forest estate and related assets, mainly to offshore interests. The sale proceeds were returned to shareholders, including Rubicon. Fletcher Challenge Forests then changed its name to Tenon and remained listed on the NZX.
• In 2004 Rubicon made a successful partial takeover offer for Tenon that raised its holding above 50 per cent.
• GPG sold its shareholding in 2005.

Advertisement

After that, Rubicon was a massive disappointment with shareholder numbers plunging from 20,905 in 2002 to only 6432 in 2016 as investors lost interest in the struggling company.

At the end of 2016 Tenon, which was 58.9 per cent owned by Rubicon at the time, sold its United States distribution business to US private equity interests for US$110m. The price was equivalent to 7.3 times Tenon's 2016 EBITDA (earnings before interest, tax, depreciation and amortisation) for these businesses.

Following the sale, Rubicon received a capital return of US$43m from Tenon. Shortly afterwards Tenon announced the sale of its only remaining business, its New Zealand wood products manufacturing operation, to the Tenon Clearwood Limited Partnership (TCLP).

TCLP was 44.9 per cent owned by Rubicon with the remaining 55.1 per cent held by New Zealand and US private investors. Moriarty was Tenon's chairman at the time.

The sale represented a 5.3 times EBITDA multiple, well below the 7.3 times EBITDA multiple received for the earlier US sale.

Tenon made a second capital return, US$25m of which was received by Rubicon. None of the US$68m of capital returns received by Rubicon from Tenon were distributed to Rubicon shareholders.

Most of this Tenon money was used by Rubicon to raise its shareholding in ArborGen to 100 per cent, purchase 44.9 per cent of TCLP and repay debt.

On December 11, 2017, Rubicon announced it was selling its 44.9 per cent TCLP interest to Dorset Management Corporation (Knott) and Libra Partners NZ LLC (Libra).

These two investors would each purchase 20 per cent of TCLP from Rubicon with the remaining 4.9 per cent going to existing TCLP Limited Partners. Parties associated with Knott and Libra together own 45.9 per cent of Rubicon.

The notice of meeting to approve the transaction was dispatched on December 22 and the meeting was held in Christchurch on January 12.

There is almost no coverage of listed company events by the media, analysts, commentators or the NZ Shareholders Association during this three-week period.

The final price wasn't released to the NZX until 4.18pm on January 10. Proxies must be lodged 48 hours before a shareholders' meeting yet the final price wasn't released until 42 hours prior to the start of the January 12 meeting.

The final price was on a dollar per share basis, rather than the total amount, making it more difficult to understand and assess.

One of the most interesting revelations in the notice of meeting was: "Rubicon directors Hugh Fletcher, William Hasler, and Luke Moriarty, and management, (and/or parties associated with them), hold shares in TCLP.

While they are not contractually required or committed to acquire any of the shares Rubicon is proposing to sell, they do have a pro-rata pre-emptive rights (common to all TCLP shareholders) under the LPA which would enable them to do so in respect to some of the 4.9 per cent not being acquired by Knott and Libra."

This writer hasn't been able to find any earlier Rubicon disclosure that Moriarty and Fletcher were TCLP shareholders. According to the notice for the January 12 meeting the NZ/US dollar rate has a significant impact on TCLP's earnings.

It appears from this information, that the recent decline in the NZ/US dollar rate will boost TCLP's EBITDA by more than 20 per cent if the current rate is maintained for a full 12 months.

Rubicon's 2018 annual report, which covers only six months to March 31, announced the company had finally achieved its desired outlook to have 100 per cent of ArborGen as its sole operation.

Chairman Stephen Kasnet wrote: "ArborGen managed to record a US-GAAP EBITDA result for the 12 months to 31 March 2018 of US$4.3m (pre-transaction related costs and impairment costs)".

He went on to write "we are now targeting a US-GAAP EBITDA result approaching US$7 (US$10.6m) for the year ended 31 March 2019" but "this forecast earnings guidance obviously comes with the usual weather and demand condition disclaimers".

This EBITDA target of NZ$10.6m compares with Rubicon's current NZX value of $141m.

Kasnet resigned from the board on July 11 and New York-based David Knox Jn. was appointed chairman on August 10. Hugh Fletcher, who was appointed a director in March 2001, remains on the Rubicon board, as does Moriarty.

The Moriarty resignation announcement to the NZX on Wednesday stated he had given notice of his intention to finish his role with the company and will leave later this fiscal year but "more information will be provided at a later date".

In this columnist's view, Rubicon needs a complete clean out, including the replacement of KPMG, its auditors since 2001.

The company also needs to produce much clearer financial statements, report in NZ dollars rather than US dollars and stop rounding off all figures to the nearest US$ million.

Last, but not least, shareholders must insist Moriarty doesn't receive any exit payment as this money will come out of their pockets.

- Brian Gaynor is an Executive Director of Milford Asset Management.
Sign up to the NZ Herald Business page on Facebook for latest news, commentary, data and analysis