Brian Gaynor: Finding best options for distressed firms

Infratil director Duncan Saville may not have offered the best strategy for South Canterbury Finance. Photo / Mark Mitchell

The run-up to Christmas is usually fairly hectic and this year will be no exception, based on this week's developments.

The South Canterbury Finance/Allan Hubbard drama will continue to hog the headlines; Delegat's will try to convince Oyster Bay Marlborough Vineyards' shareholders to accept its takeover offer and corporate governance will be an ongoing issue, as demonstrated by AMP NZ Office Trust's unit-holders meeting.

The release of documents by the Treasury on South Canterbury Finance (SCF) has reignited the debate over whether receiverships, moratoriums or recapitalisations are the best options for distressed companies.

This is a repeat of the Hanover Finance arguments at the end of 2008 and last year.

Treasury documents show that there were a number of recapitalisation proposals for SCF but we do not know the exact details of these. They were all rejected by ministers.

It appears that one proposal came from Duncan Saville, a low-profile South African-born businessman who worked for Industrial Equity (Pacific), Brierley Investments' Hong Kong-listed vehicle, in the 1980s.

Saville first appeared on the New Zealand scene in 1994 as a director of Lloyd Morrison's newly established Infratil. He was appointed to the Infratil International board, another Morrison-listed entity, in 1999.

Infratil International, which changed its name to Utilico International, was not a success.

Saville accumulated a 48 per cent holding and sold all of the company's infrastructure assets.

Shareholders received a $46 million capital return and Saville invested most of the remaining funds in ERG convertible notes.

ERG is a Western Australia-based telecommunications firm that specialises in smart card applications and automatic fare-collection systems.

The ERG investment was not a winner as far as New Zealand investors were concerned, Utilico's share price languished, the company changed its name to Vix International and Saville made a successful takeover offer in 2008.

Saville also became involved in Dairy Brands, another listed New Zealand company, in January 2000 when he purchased a 39.9 per cent stake.

In February 2001, shareholders agreed to sell the company's 14 dairy farms and distribute the proceeds. Following a share buyback, Saville controlled 78.5 per cent of the NZX-listed company.

Dairy Brands changed its name to FinMedia and purchased a minority interest in Hemscott, a United Kingdom supplier of business and financial information that was listed on the Alternative Investment Market of the London Stock Exchange. Parties associated with Saville owned 36.3 per cent of Hemscott.

FinMedia acquired more than half of Hemscott but the New Zealand-listed company was placed into voluntary liquidation in 2005 and delisted from the NZX.

Hemscott is now owned by the United States-based Morningstar group.

Saville is a successful and wealthy businessman but are his strategies the best option for SCF?

It is unclear whether Saville had been willing to inject significant capital into SCF, and whether he has much expertise regarding the loan recoveries of distressed financial institutions.

One of Saville's companies was also supposed to take part in the Allied Farmers/Hanover Finance deal but did not go through with it.

On November 24, Allied Farmers announced that Resimac, controlled by Saville, would contribute $7 million of capital to Allied Farmers and Allied Farmers Finance.

Allied Farmers chairman John Loughlin said this $7 million was "an important part of the 'go-forward' for the company" following the announcement of the Hanover deal.

There are clearly big differences between receivers and deal-making businessmen, as the former have specific skills and stay the distance whereas the latter have limited experience and often depart before finishing the job. Saville quickly moved on from Utilico International and FinMedia and Resimac didn't contribute to Allied Farmers although a NZX announcement said the company had a signed agreement to do so.

As far as Allied Farmers is concerned, Loughlin resigned in August and managing director Rob Alloway is quitting his position in December. The company still has major problems and the Hanover assets have not been dealt with fully.

The Government would be extremely stupid to give control of SCF to an outside party that contributes little capital. This is the unfortunate situation facing Hanover Finance investors, who have been handed a huge timebomb covered in beautiful gift wrapping.

Delegat's takeover offer for Oyster Bay Marlborough Vineyards is a fascinating development because it brings back memories of the high-profile battle for control of the vineyard owner five years ago, and the Grant Samuel independent report will be particularly interesting.

In May 2005, Peter Yealands made a partial offer for Oyster Bay at $3.10 a share, mainly because he believed that the company's land holdings were undervalued.

Yealands' offer started a bidding war with Delegat's, with the price bid up to $4 a share.

Ferrier Hodgson's independent report did not value the land at market, Yealands objected, the Takeovers Panel intervened, Delegat's offer was declared null and void and the latter launched a new partial offer at $6 a share.

Delegat's offer received 88.3 per cent acceptances but shares were returned on a pro rata basis as the offer was for only 50.1 per cent.

The latest offer, which is conditional on reaching 90 per cent, is at $1.80 a share compared with the target company's net tangible asset backing of $4.86 a share.

The bid values Oyster Bay's production vineyards at about $50,000 to $60,000/ha, compared with the mid-2000s highs of between $250,000 and $300,000/ha, and recent buyers' interest was reported at about $100,000/ha.

Grant Samuel's report should cover this land value issue but the problem for Oyster Bay shareholders is that sharemarket investors put more value on cash flows than asset values.

As a result, most farm, vineyard and property companies are listed on the NZX trade at a discount to net tangible asset backing unless these assets generate positive cash flows.

This was the situation with Dairy Brands - later known as Duncan Saville's FinMedia - and is a feature of the current sharemarket that many NZ Farming Systems Uruguay shareholders, who didn't accept the Olam offer, have failed to comprehend.

Finally, AMP NZ Office Property Trust's unit-holders' meeting was one of the best in a long, long time because the issues were debated in a cool and rational manner and it was chaired superbly by Craig Stobo.

Unit-holders were asked to approve the transformation of the trust into a company and changes to the management company's ordinary and performance fees.

Representatives from the ACC, New Zealand Superannuation Fund, Shareholders' Association, BT and ING asked quality questions and debated the pros and cons of the resolutions.

The main issue was the external management contract and the absence of a termination date or performance review for the manager, whereas under the trust structure the manager could be removed by a 75 per cent majority of unit-holders, by the trustee or by the High Court.

Stobo argued that the latter was true in theory but not in practice, so investors would be no worse under the company structure.

Unit-holders approved the transaction but a number of institutions, particularly the ACC, voted against the deal because it didn't go far enough.

It is an improvement on the trust structure but it effectively increases the value of the management contract because it is now in perpetuity, whereas the manager could have been dismissed under the trust structure.

If the management contract is internalised at some future date, shareholders will probably have to pay a higher consideration to the manager than under the old trust structure.

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