White knight's formidable mission

By BRIAN GAYNOR

Designer Textiles' annual meeting is usually a docile affair. But this week's event was enlivened by intense questioning of directors, the presence of a big new shareholder and an attempt to sack two directors who were standing for re-election.

The developments mark a twist in the company's history that is frighteningly similar to other listed companies'.

This includes rich pickings for the original promoters, unfulfilled expectations, inadequate disclosure of directors' share transactions, an unsuccessful Australian acquisition and a struggle to compete in an unfriendly economic environment.

But just before the Otara-based company was about to disappear from the investment radar screen, a potential white knight has arrived on the scene.

Designer Textiles (NZ) Ltd was incorporated in November 1992 as the vehicle for a management buyout of fabric manufacturer Bonds (NZ) Ltd from Goodman Fielder (NZ) Ltd. Bonds was delisted from the Stock Exchange in 1978 after being acquired by Goodman Fielder (then known as A. S. Paterson) for $2.2 million.

Designer Textiles bought Bonds for $6.2 million in February 1993. The acquisition was financed by $2.0 million of equity and $4.3 million of debt.

A few months later, the original shareholders invested a further $500,000 in Designer Textiles. This brought their total equity contribution to $2.5 million at an average cost of just 16 cents a share.

In November 1993, the owners of Designer Textiles sold 6.25 million existing shares, or 40 per cent of the company, to the public at $1.25 a share. In other words, their total investment in Designer Textiles cost only $2.5 million, yet they sold 40 per cent for $7.8 million and still held 60 per cent.

The company was listed on the Stock Exchange on December 13, 1993, and started with a roar. Just seven weeks after listing, its shares reached an all-time high of $2.20.

At that point, at least one of the original shareholders began to sell and the share price has been on a downward slide ever since.

In many countries, selling by the original shareholders are prohibited for at least six months after listing.

Although Designer Textiles exceeded its prospectus profit forecasts for the June 1994 and 1995 years, its share price continued to fall.

Reduced tariffs on imported goods, higher interest rates and a rising dollar made imports more competitive and the company struggled.

In 1996, Auckland Knitting Mills was bought from LWR for 4 million new Designer Textiles shares. Brisbane-based Logan Textiles, which makes knitted stretch fabrics for swimwear, was acquired for $17.8 million the same year.

Logan's performance has been extremely disappointing and in its first year of operation the goodwill of $8.8 million associated with the acquisition was written off.

At the 1996 annual meeting held on August 26, directors downgraded their profit projections for the June 1997 year.

Brent Miller, a director of Designer Textiles, sold 334,500 shares just eight days before the profit downgrade announcement.

A number of other directors, or their associates, have sold shares during the past few years, but the details of these transactions have not been disclosed, as required by section 211 of the Companies Act 1993.

In 1997, a Chicago-based investment fund - The Oakmark International Emerging Value Fund - began accumulating a shareholding in Designer Textiles. By year's end it held 17.5 per cent at an average price of more than 80c a share.

The investment was a disaster and Oakmark sold all its holdings for an average realisation of just 29c a share.

Meanwhile, Kerry Harding and his management team have continued to restructure Designer Textiles and make acquisitions. In 1998, Prato Textiles was bought for $3.3 million and in 1999 Mollers Textiles, which makes curtain fabrics, was bought for $10.2 million.

Nothing seemed to work. Analysts deserted the company, it reported a net loss of $121,000 for the June 2000 year and two weeks ago its share price had slumped to just 20c.

But, suddenly, Designer Textiles has sprung into life. In the week ending November 3, its share price surged 9c to 29c on volume of 8.3 million shares.

A Gould family trust issued a number of substantial security holder notices and less than two hours before Designer Textiles' annual meeting on Monday the trust announced it had 7 million shares, or 19.7 per cent of the company.

The Goulds are one of Christchurch's leading families and are the controlling shareholders of Pyne Gould Corporation.

Chairman and managing director Harding opened the meeting by acknowledging the presence of George Gould, a representative of the Gould family. He went on to say that trading conditions were difficult, particularly in New Zealand.

In reply to shareholders, Mr Harding said that the company received almost no benefit from the lower New Zealand dollar. The country had virtually no fine wool spinning capacity and Designer Textiles had to import New Zealand Merino wool from spinners in Japan, Korea or Britain.

It is ironic that the ultimate outcome of our economic reforms is that companies such as Designer Textiles are hurt by either a higher or a lower New Zealand dollar and have to import New Zealand-grown fine wool from overseas spinning mills.

This information cast a pall of gloom over the meeting, as did a dreadful video promoting Prato Textiles' products to customers.

The mood changed when Terry Iggo and Craig Thompson came up for re-election as directors. Both men are former executives of Brierley Investments (BIL) and Mr Iggo was managing director of LWR until 1999.

To complicate matters, CHL New Zealand acquired LWR at the end of 1999 and, as part of the agreement, CHL was granted an option over BIL's 66 per cent LWR shareholding. This option can be exercised during a two-year period but, according to BIL's latest annual report, the Singapore-based investment group is still LWR's largest shareholder.

Two LWR representatives queried the number of proxies lodged, and George Gould demanded a poll on the re-election of both directors.

Mr Gould is also managing director of South Eastern Utilities, which is 50.3 per cent owned by Pyne Gould.

It was quite clear that George Gould and LWR have the same objectives and they both wanted Mr Iggo and Mr Thompson dumped. But during the break for vote counting they refused to outline their plans for Designer Textiles.

Questioned on South Eastern Utilities, which has $67 million in the bank and no long-term debt, Mr Gould gave nothing away. The company was looking for a suitable investment and he was extremely relaxed because it had outperformed the New Zealand sharemarket over the past 12 months.

When the meeting reconvened, Kerry Harding announced that both directors had been re-elected; Mr Iggo by 9.1 to 8.2 million votes and Mr Thompson by 9.2 to 8.2 million. Their respite may be short-lived, though, because more than 3 million shares bought by the Gould family trust were not registered in time for the meeting.

The arrival of a potential white knight is welcome news for Designer Textiles' shareholders, but it is difficult to see what Mr Gould can do to enhance shareholder value. The textile sector has been decimated by the fluctuating dollar and unsympathetic economic policies and its prospects are decidedly uncertain.

South Eastern Utilities shareholders will be disturbed to hear that Mr Gould is spending time on family business before he has found a home for their cash.

If Mr Gould finds it easier to identify investments for his family concerns, then South Eastern Utilities' directors may be best advised to return the $67 million cash to shareholders.

* Disclosure of interest: none.