Brian Gaynor: Body language tells a tale or three

There were two important shareholder developments this week.

On Monday, the High Court endorsed a decision by the Takeovers Panel regarding Oyster Bay Marlborough Vineyards that should ensure all relevant matters are included in target company statements.

Three days later, the Shareholders' Association had an important victory when its resolution to remove a Feltex director was successful after receiving unanimous support from the company's other board members.

The Feltex annual meeting was a fascinating study of human behaviour or, more accurately, "the corporate version of the blame game".

Chairman Tim Saunders blamed the Australian economy, exchange rates and outside economic advisers for the company's inability to achieve its prospectus forecasts.

The problem with that approach is that New Zealand investors have had a raw deal from private equity firms that have sold assets through IPOs. These private equity firms are supposed to employ some of the sharpest brains on the planet.

There have been four private equity IPOs in recent years: Feltex, Freightways, Frucor and Vertex.

As the accompanying table demonstrates, three of the four have missed the prospectus forecasts by the proverbial mile.

Feltex reported net earnings of $11.7 million for the June 2005 year compared with its forecast of $23.9 million.

Frucor achieved net earnings of only $11.7 million in its June 2001 year compared with a forecast of $20.4 million and Vertex could only achieve earnings of $1.2 million for its March 2003 year compared with its $5.8 million forecast.

One can't but get the feeling that private equity firms see New Zealand investors as a soft touch when they want to sell assets.

Another frustrating aspect of the Feltex meeting was Saunders' rejection of many requests to give up-to-date financial information and projections for the June 2006 year.

Why are companies willing to give detailed financial forecasts when they are selling shares to the public but are reluctant to supply forward-looking figures once investors have paid their money?

Saunders opened the proceedings with a 40-minute dissertation on the company's woes. The other directors sat with solemn faces while avoiding eye contact with shareholders.

When new chief executive officer Peter Thomas spoke, the body language of former CEO Sam Magill changed dramatically. He started twiddling his thumbs, tapping his fingertips on the table and shaking his head.

It was clear that Magill had no time for Thomas and his ideas.

That is not surprising as they have totally different backgrounds.

Magill has more than 36 years in the carpet industry and was either managing director or general manager of Carpets International Malaysia, Invicta Carpets, Capital Carpet Industries and Shaw Industries. The latter was bought by Feltex in 2000 and Magill was appointed managing director.

At one stage, Saunders thought highly of Magill, as he wrote in the prospectus: "Our senior executives are among the most experienced in the Australasian carpet industry and have the experience and market knowledge required to continue to grow the Feltex business."

By contrast, Thomas had 28 years as an investment banker, mainly with Credit Suisse First Boston (CSFB). In the 1980s, he had an awesome reputation for travelling continuously between Wellington, Melbourne, New York, London and Hong Kong while working on investment-banking deals.

Thomas indicated that Feltex's poor performance was due to poor leadership and culture.

His address to shareholders would have gone down well in a foreign-exchange dealing room at CSFB as he placed a great deal of emphasis on team culture, using the word "team" 44 times.

The appointment of Thomas is difficult to comprehend. He has had a distinguished career in investment banking but there is a huge gap between Wall Street and carpet manufacturing.

In addition, he was appointed to the Feltex board in 1996 after it was acquired by CSFB. As a former CSFB senior executive - he left the investment bank in 2001 - it is reasonable to assume he has had a significant influence over the purchase of Shaw, the appointment of Magill, the IPO strategy and the prospectus.

Saunders told the meeting that there were four candidates for the CEO position. Thomas put his hat in the ring eight weeks after the selection process started and the board is delighted he is now chief executive.

But this raises two important questions:
* Would Thomas have even been considered if he was an outside candidate?
* Does an existing board member have an unfair advantage in the chief executive selection process?

The most interesting resolution was the Shareholders' Association proposal that Magill be removed from the board.

Magill told shareholders, as he fought back the tears, about the campaign to blame him for Feltex's problems. He spoke about the personal hurt he had experienced and his biggest regret was that he had not stood up to the board.

He argued that the recent Cavalier profit downgrade showed that the entire carpet industry was experiencing difficulties and he questioned the new strategies being implemented by Thomas.

The motion was carried by a huge majority, with only 235,905 shares voting to keep Magill on the board. This indicated that the former chief executive did not vote his 2.65 million shares in support of himself.

The association had a landmark victory and its three-pronged attack by Des Hunt, Bruce Sheppard and Ross Dillon was effective and applauded by Feltex shareholders.

Unfortunately, there was little other good news for shareholders as Feltex is expected to report another drop in earnings for the June 2006 and there will be no dividend.

The High Court decision regarding the Oyster Bay Marlborough Vineyard was a major victory for the Takeovers Panel, Peter Yealands and David Rankin.

Justice Miller found that the disclosure regarding land values in the target company statement and independent advisers' report was inadequate and Delegat's offer for Oyster Bay is now void.

The High Court decision is timely because the panel is concerned that parties are not complying with the Takeovers Code.

In its recent newsletter Code Word, the panel said: "It appears that companies and their legal advisers treat compliance with the code as an option rather than a legal obligation.

"When an incumbent management supports a takeover offer, possibly one made by an existing majority holder for the shares it does not already hold, there is less incentive for management to inflate the value of a company.

"In these circumstances, information about the target company's future prospects that is given to the adviser may be relatively conservative."

The latter comments could easily apply to Oyster Bay as Delegat's owned 32.6 per cent of the target company before the bidding battle began and both companies are run by the same management team.

The target company statement and independent adviser's report play important roles in the takeover process and it is encouraging to see that the panel is prepared to protect the integrity of these documents.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.