COMMENT:

The proposed offer for 75 per cent of Restaurant Brands illustrates two clear developments.

The first is that New Zealand companies are now being targeted by buyers from a wide range of countries whereas most takeover offers in the past came from Britain or Australia.

A large Mexican investor is proposing to bid for Restaurant Brands, while recent acquisitions have come from the Philippines (Tegel Group), Denmark (PGG Wrightson Seeds), Britain & Germany (Orion Health's Rhapsody business), Singapore (Fliway Group and 69.9 per cent of NZ Oil & Gas), China (Trilogy International & Airwork Holdings) and Canada (Opus International Consultants).

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The second development is that it is becoming more and more obvious that the quality of management is a key driver of a company's success.

Restaurant Brands was a huge disappointment in its first decade on the NZX as its market value slumped from $187 million to under $100m. But since Russel Creedy was appointed chief executive in 2007, the company's market value has soared from $97m to $1078m.

Creedy's huge success clearly demonstrates that the primary objective of most boards should be to choose high-performing chief executives.

In 1997, Restaurant Brands acquired the assets of KFC International New Zealand and listed on the NZX with an IPO value of $187m. These NZ assets included 77 KFC stores, 43 Pizza Hut outlets and two joint KFC and Pizza Hut facilities.

The prospectus stated: "KFC (NZ)'s stores are among the best performing KFC stores in the world in terms of sales and profitability".

The company's IPO was extensively promoted with two-page colour newspaper advertising. The pre-listing hype had a positive impact on investors and a few months after listing Restaurant Brands had a market capitalisation of $225m.

But the company failed to meet its prospectus forecasts for its November 1998 and November 1999 years and its market value plunged to just $55m in October 1998.

Investors were extremely disappointed, particularly after the optimistic prospectus forecasts. The fast food company went into its shell and made almost no attempt to communicate with investors.

A major change occurred in August 2003 when long-standing chief executive Jim Collier was replaced by Vicki Salmon, who was a non-executive director of the company at the time.

Restaurant Brands made a good recovery under Salmon's stewardship and reported net earnings of $11.0m for the February 2005 year compared with $8.1m for the previous year (the company's balance date had been changed from November to February in 2002).

The first takeover offer was announced on May 14, 2004 when King Win Laurel International, a small NZ/UK company, revealed that it proposed to make an offer for Restaurant Brands at $1.50 a share. This valued the company at $144m.

The offer was withdrawn four days later because it failed to comply with several aspects of the Takeovers Code.

Thirteen months later, Restaurant Brands received an offer from private equity firm CVC Asia Pacific at $1.65 a share. This valued the fast food company at $159m, still $28m below its IPO value eight years earlier.

Restaurant Brands appointed an independent committee of directors to consider the offer and Grant Samuel was appointed to prepare an independent report.

CVC stated that it would need to negotiate certain commercial matters with Yum Restaurants International, the franchisor of the KFC and Pizza Hut brands. The commercial relationship between Yum and Restaurant Brands is a key factor for any company wanting to acquire the NZX listed group.

On October 11, 2005, Restaurant Brands announced that CVC Asia Pacific was not proceeding with its intended offer because of its inability to reach agreement with Yum.

Chairman Bill Falconer and his board allowed CVC to do due diligence but would not release the Grant Samuel independent report nor give specific details of the disagreement between CVC and Yum.

Restaurant Brands slipped back into oblivion after the aborted CVC offer.

The company continued to disappoint as it reported net earnings after tax of only $6.5m for the year to February 2007. This compared with its 1997 prospectus net profit forecast of $13.9m for the 1997/98 year, which was nine years earlier.

It wouldn't be an exaggeration to say that Restaurant Brands was a total dog as far as investors were concerned as GFC storm clouds appeared on the horizon.

Ted van Arkel replaced Falconer as chairman in July 2006 and his most important announcement was released to the NZX on March 14, 2007.

It stated that the company's CEO Vicki Salmon had resigned as both chief executive and as a director of the company. The chairman went on to state: "the company will undertake a search process to identify an appropriate replacement, and in the meantime Russel Creedy, commercial services director, will be appointed acting chief executive."

Six months later, van Arkel announced that Creedy had been appointed the new CEO after an extensive international search.

Creedy's appointment was a stroke of genius, as demonstrated by the figures in the accompanying table. The figures outline the performance of the company over the past five years and for the February 2007 year, the year before Creedy took the helm.

The following changes have occurred since 2007:

• The remaining 23 loss-making Pizza Hut Victoria stores were sold in the 2007/08 year
• KFC NZ store numbers have increased from 87 to 94 with the ebitda (earnings before interest, tax, depreciation and amortisation) of these outlets expanding from $31.2m in 2006/07 to $66.0m in the February 2008 year
• Pizza Hut NZ store numbers have been reduced from 103 to 36 and Starbucks Coffee outlets from 47 to 22 over the same period
• The company now has 19 Carl's Jr. stores in New Zealand
• Restaurant Brands has acquired 61 KFC stores in Australia, as well as 45 Pizza Hut and 37 Taco Bell outlets in Hawaii.

KFC NZ now has an ebitda margin of 20.7 per cent, compared with 17.1 per cent in 2006/07, while Starbucks Coffee's margin has increased from 11.5 per cent in 2007 to 18.6 per cent.

On Thursday morning, just before the partial takeover announcement, the NZ fast food company reported an adjusted net profit of $21.9m for the first half of its February 2019 year compared with $20.4m in the same period last year.

The proposed takeover announcement that quickly followed was vague and sparse on detail. It stated that the proposed bid from Finaccess Capital for 75 per cent of Restaurant Brands at $9.45 a share "does not constitute a takeover notice pursuant to the Takeovers Code.

Restaurant Brands and Finaccess are in discussions to seek to agree and finalise the terms of any takeover implementation arrangements which, if agreed, could result in Finaccess issuing a takeover notice to Restaurant Brands".

The announcement emphasised that there was no guarantee that a formal takeover offer would be issued.

One of the uncertainties seems to be the commercial agreements between Yum and the NZX listed company, which stopped the CVC offer in 2005.

In addition, Restaurant Brands announced several times in 2005, 2006 and 2007 that it had been approached by additional parties that were interested in acquiring the NZX company. However, none of these approaches resulted in formal offers.

Is the 75 per cent Mexican offer, rather than a more conventional 100 per cent bid, an attempt by Finaccess Capital to obtain Yum approval on the basis that the company will remain listed on the NZX and be partially independent?

Restaurant Brands has been an excellent communicator as far as its operational performance has been concerned but it has come up very short in terms of explaining takeover approaches, particularly how its commercial arrangements with Yum have impacted on these proposed bids.

Thursday's takeover announcement should have contained far more detail, particularly as there have been numerous approaches to acquire the company in the past that have come to nothing.

- Brian Gaynor is an executive director of Milford Asset Management which holds Restaurant Brands shares on behalf of clients.