Brian Gaynor: The Kiwi companies facing the music

COMMENT:

Liza Minnelli's Money makes the world go around could have been the NZX's theme song this week, particularly after Infratil announced early Monday that it would be paying $100 million extra to H.R.L. Morrison & Co, its external manager.

Money has also been an important issue at Rubicon, where long-standing executives Luke Moriarty and Mark Taylor have received severance payments, and at Westland Co-operative Dairy Company, where chairman Pete Morrison will be a major beneficiary of a proposed takeover offer for the co-op.

First Rubicon, which has been one of the most controversial and disappointing NZX companies since listing in March 2001.

During this 18-year period the company has reported total losses of US$56 million ($83.2m) and its share price has slumped 53 per cent on an adjusted basis.

This compares with a 420 per cent uplift in the NZX50 Gross Index over the same period.

Rubicon's CEO Luke Moriarty and CFO Mark Taylor have been with the company since 2001.

When Moriarty and Taylor announced last August that they intended to leave in 2019, it seemed inconceivable that they would be given severance payments.

However, on March 29 the company made the following statement: "Rubicon announced today that its CEO (Luke Moriarty) and CFO (Mark Taylor), have departed the company, and that all parties had amicably agreed a settlement in relation to the finalisation of their roles.

"Rubicon has agreed to make to Messrs Moriarty and Taylor (in the aggregate) a cash payment of NZ$100,000 and an allotment of nine million Rubicon ordinary shares.

"Four million of these shares are to be issued on 1 April 2019, with the balance of the issuance and allotment to be completed by 1 April 2022."

These agreements are worth $1.9m and it appears from subsequent NZX disclosures that Moriarty received 59 per cent of the entitlements and Taylor 41 per cent.

The $1.9m appears to be relatively small but it represents 2.0 per cent of Rubicon's sharemarket value while the $100m performance fee paid to Infratil's external manager represents 4.2 per cent of the latter's market value.

Infratil is in a better position to pay the $100m of performance fees, compared with Rubicon's $1.9m severance commitment, because severance payments are usually associated with senior executives of companies that haven't performed well and are not in a strong financial position.

Rubicon remains in the doldrums as Hurricane Michael and related weather extremes, which hit the southern United States in the December 2018 quarter, have harmed ArborGen, its tree seeding business.

Rubicon told the NZX in January that weather issues had impacted on ArborGen's "current sales season more than we had originally projected, as they have negatively impacted the ability of many of our customers to plant their current season's seedling volume due to sustained high levels of water".

Last week's column on the proposed takeover of Westland Co-operative Dairy Company by Mongolia-based Yili Group received the usual responses.

These are that dairy co-ops are the best structure for farmers and if Fonterra changed from a co-op to a limited liability company, and listed on the NZX, it would be quickly taken over by foreign interests.

The short answer to this is that small co-ops can be successful, with the Tatua Co-operative Dairy Company being a good example of this.

But Tatua, which was established in 1914, has revenue of only $349m compared with Westland's $693m and Fonterra's massive $20,438m.

Tatua's small regionally-based co-op model is not the answer to Fonterra's poor performance.

The other argument is that Fonterra would be quickly acquired by foreign interests if it listed on the NZX, but non-listed companies are not immune from takeover offers, as demonstrated by the Yili offer for Westland.

There is also a strong argument that listed company shareholders would show far more fight than the Westland directors are currently displaying.

An important issue is that the ownership structure of the dairy sector is changing as family farms are being purchased by corporate entities.

This is reflected in the following ownership structures:
• The five largest Tatua shareholders now own 15.0 per cent of the co-op compared with 12.7 per cent a decade ago
• The five largest Westland shareholders own 11.9 per cent of the co-op compared with 8.7 per cent in 2009. Westland chairman Pete Morrison owns 2.9 per cent of the
co-op and will receive a $7.1m windfall if the Yili takeover offer is successful.
• Fonterra is an exception with its five largest shareholders, excluding its listed Shareholders' Fund, now owning 0.31 per cent of the co-op compared with 0.33 per cent a decade ago.

Maybe one of Fonterra's biggest problems is its ownership structure, with no single shareholder or group of shareholders having a significant influence over directors and management.

An obvious solution to Fonterra's poor performance is for the co-op to change to a limited liability company and list on the NZX, while adopting the same 10 per cent shareholder cap as the listed NZX company has adopted.

Meanwhile, Infratil shocked the market at 8.30am on Monday when it announced that it was required to pay a performance fee of between $95m and $105m to its external manager.

To understand this, we need to look at the fees that Infratil is required to pay to H.R.L. Morrison & Co, which manages the company's portfolio of assets.

These external fee structures have been extremely controversial in recent years, including recently at Vital Healthcare Property Trust.

Infratil has two basic fee requirements;
1: A NZ-based management fee of 1.125 per cent on the value of Infratil's portfolio of assets up to $50m, 1.0 per cent on total assets between $50m and $150m, and 0.8 per cent on total assets in excess of $150m
2: A range of additional fees on non-New Zealand assets. These include 1.5 per cent of the cost price of any non-Australasian investments and the book value of the debt in any wholly-owned non-Australian investments.

In addition, "an international fund incentive fee is payable at the rate of 20 per cent of gains on the international assets, including Australia, in excess of 12 per cent per annum post tax".

This 20 per cent performance fee on the increase in the value of non-NZ assets has been a huge bonanza for the management company in the March 2019 year.

These increases have been:
• The value of Canberra Data Centres surged from $453m in March 2018 to the $841m to $942m range in March 2019, delivering a $64m performance fee to the external manager.
• Longroad Energy's valuation increased from $16m to $128m in the March 2019 year resulting in a performance fee of $22m
• Tilt Renewables produced a performance fee of $2m after an increase in value, as far as Infratil was concerned, from $286m to the $650m to $785m range. This uplift primarily reflects an increase in Infratil's Tilt shareholding through a takeover offer and its contribution to Tilt's recent equity raising.
• A performance fee of $12m from the conditional sale of ANU Student

Accommodation for A$162m ($170m). This asset was worth NZ$96m in March 2018.

The problem with these valuation increases, particularly the Canberra Data Centres, is that they are largely subjective and dependent on several assumptions.

These sort of assumptions can have a significant impact on the final values.

The immediate reaction to the $100m performance fee was negative but investors became more relaxed after Infratil's investor day on Wednesday where the activities of the Canberra Data Centres, Longroad Energy and Tilt Renewables were all covered in considerable detail.

Infratil has always been good at investor relations and the announcement of a $100m performance payment just two days before a positive investor day was a particularly astute move.

- Brian Gaynor is a director of Milford Asset Management, which owns shares in Infratil on behalf of clients.