Brian Gaynor: Company has failed to cross the Rubicon

Caesar boldly crossed the Rubicon with his troops in 49BC, initiating a successful civil war against the Roman nobility. Photo / Supplied

Opinion

Rubicon, which has 8000 shareholders, badly needs a dose of shareholder activism.

The company has failed to deliver on many of its promises, its reporting to shareholders is tardy and it is the third worst performing NZX company over the past 12 months as its share price has plunged 72.3 per cent, from $1.30 to just 36c.

Rubicon has been a major disappointment yet highly paid chief executive Luke Moriarty remains entrenched after eleven years in that position and three of the five non-executive directors have been on the board since early 2001.

Why do the chief executive and directors of such a poorly performing major company have such long tenures? Do Rubicon's shareholders have any ability to initiate badly needed changes at the company?

Rubicon was formed in early 2001 as part of the breakup of the Fletcher Challenge group. The breakup involved the dismantling of the Fletcher Challenge targeted share structure and the separation of each division from the Fletcher Challenge Group.

When Fletcher Challenge Energy was sold to Shell and Apache Corporation its shareholders received cash, an entitlement to Capstone Turbine Corporation shares and one Rubicon share for every Fletcher Challenge Energy share held.

Rubicon had the following objectives when it was formed:

* To hold a number of surplus assets from the Fletcher Challenge Group. This included shareholdings in New Zealand Refining, Capstone, 2.8 per cent of NZX listed Genesis Research and Development, a Brisbane fuels terminal business, the Challenge petrol retailing operation, 17.6 per cent of Fletcher Challenge Forests and 31.7 per cent of ArborGen, a forest bio-engineering joint-venture in the United States.

* To act as a business development company through the provision of industry knowledge, management skills and financial capital that is required to create new businesses.

The driving force behind the new company, which listed on the NZX on March 26, 2001, was Moriarty. He was described in Rubicon's original prospectus as "instrumental in the structuring of the financial separation of the Fletcher Challenge Group" and was Fletcher Challenge's "head of strategy and growth".

The company derived its name from a small Italian river (Rubicone) that flows into the Adriatic Sea north of Rimini. The movement of Julius Caesar's troops over the Rubicon in 49BC, which violated a law forbidding a general to lead an army out of his assigned province, initiated Caesar's successful civil war against the Roman nobility.

"Crossing the Rubicon" now symbolises a determined course of action or a point of no return.

The Capstone shares, Brisbane fuels terminal business and the Challenge petrol operations were quickly divested.

Rubicon was constantly in the limelight in its early years because of a number of high profile developments including:

* Guinness Peat Group (GPG) acquired a 19.9 per cent stake in Rubicon and Tony Gibbs and Gary Weiss joined the board.

* United States based Perry Corporation purchased a 19.8 per cent shareholding and became involved in a bitter dispute with GPG that went all the way to the Privy Council.

* A Rubicon proposal to sell its Fletcher Challenge Forests (FCF) shareholding and purchase the Tahorakuri forest estate from FCF was rejected by shareholders, mainly because of strong opposition by GPG.

* GPG made an unsuccessful partial takeover offer to raise its stake in Rubicon to 50.01 per cent.

* In 2003 and 2004 FCF sold its entire forest estate and related assets, mostly to overseas interests. The proceeds were returned to shareholders, including Rubicon, and Fletcher Challenge Forests changed its name to Tenon.

* In 2004 Rubicon made a successful partial takeover offer for Tenon that raised its stake to 50.01 per cent.

* GPG sold all its Rubicon shares in September 2005 and Gibbs resigned from the board (Weiss had quit in June 2004).

Rubicon now has just two assets; a 59.0 per cent stake in the NZX listed Tenon and 33.33 per cent of ArborGen.

Tenon, which is chaired by Moriarty, has wood processing and manufacturing activities in Taupo, United States and Canada. It is also one of the NZX's worst performing companies over the past 12 months as its share price has fallen 32.7 per cent, from $1.10 to 74c.

Tenon blames its poor performance on the depressed residential housing sector and on the high exchange rate, which averaged US81c in the six months ended December 2011 compared with US71c in the first half of the June 2011 year.

It reported a net loss of US$6 million for the six months to December 2011 compared to breakeven for the previous corresponding period. The interim report contained the following hint of optimism: "While we will need to see how wider economic events and key housing data track over the next six months before a new 'direction' can be called with certainty, these [US Government incentives to encourage more mortgage lending] are certainly positive early signs of a recovery emerging."

Late last week Tenon announced that the complex tax dispute between the IRD and the receivers of the Central North Island Forest Partnership, which was partly owned by Fletcher Challenge Forest, remains unresolved.

Should the receivers win then Tenon, as a second ranking security holder, would be entitled to receive in the order of $90 million. This compares with Tenon's current sharemarket value of only $48.6 million.

ArborGen, which is also chaired by Moriarty, is another major disappointment.

The company, which makes seedlings from which high productivity trees are grown, spent US$4 million on a proposed IPO last year which was abandoned. This was a major point of discussion at last year's Rubicon annual meeting with shareholders expressing their disappointment over the abandonment.

The problem is that ArborGen is not profitable and its financial resources are being depleted by expenditure on research and product development.

Nevertheless, Rubicon noted in its recent interim report: "In short, ArborGen is a unique company of enormous potential, and it should be valued accordingly. The deferral of the IPO has not changed this conclusion in any way."

ArborGen also appointed Andrew Baum as its new chief executive at the end of February.

Rubicon is a classic case of entrenched mediocrity and overpaid executives. Moriarty has received cash remuneration in excess of $6 million over the past 10 years in addition to a large number of Rubicon shares. Tenon and ArborGen, which he chairs, have been a major disappointment as both companies have focused on the United States markets whereas China has offered much more profitable opportunities.

In addition the forest assets sold by Tenon, when it was known as Fletcher Challenge Forests, have been far more profitable than the assets it retained and Rubicon hasn't developed any new businesses as outlined in its original prospectus.

Moriarty's remuneration disclosure is below best practice, Rubicon's December 2011 interim result was posted on the NZX website after the 60 day reporting period had expired and the company makes little effort to promote itself to New Zealand investors.

As a result Rubicon has only 8031 shareholders, according to its 2011 annual report, compared with 20,905 nine years earlier.

Meanwhile Hugh Fletcher, Bill Hasler and chairman Stephen Kasnet have all been on the Rubicon board since 2001.

There is no reason for Rubicon to exist, it should be disbanded and its shareholdings in Tenon and ArborGen distributed to Rubicon's shareholders.

However, this will be difficult to achieve because Moriarty and the other directors are on a good wicket, Rubicon is controlled by a number of US investors and amongst the largest New Zealand shareholders are Fletcher Brothers Ltd, which is controlled by Hugh Fletcher and his wife, and Luke Moriarty's superannuation fund.

Rubicon badly needs a major shake-up but, unfortunately, its overseas shareholders and directors seem to be asleep at the wheel. They seem to have forgotten that "Crossing the Rubicon" is supposed to symbolise a determined course of action.

Brian Gaynor is an executive director of Milford Asset Management.