Winebox winners and losers

By Brian Gaynor

Investment


Revenue Minister Sir William Birch made depressing comments after last week's High Court verdict that overturned key findings in the Winebox inquiry. He claimed that the $12 million spent on the inquiry had been a waste of taxpayers' money.

But Sir William's $12 million calculation is loose change compared with the spoils extracted from the Winebox companies by their major shareholders.

These profits are well documented because the big players in the inquiry - Bank of New Zealand, Brierley Investments, Capital Markets/Fay, Richwhite and European Pacific Investments - have all been listed on the stock exchange.

While individual shareholders have lost money in all these companies, individuals particularly Sir Michael Fay and David Richwhite, have walked away with big profits.

A sizable portion of these profits were leveraged from tax avoidance deals investigated in the Winebox inquiry.

The story begins on September 24, 1986, when European Pacific Investments (EPI) was incorporated in Luxembourg. Its directors were Mr Richwhite (chairman), Paul Collins, David Lloyd and Francis Hoogewerf of Luxembourg. Mr Lloyd was responsible for convincing the Cook Islands Government to establish a tax haven.

On December 4, 1986, EPI increased its capital from 100 to 25,000,000 shares and Brierley Investments (BIL) and Capital Markets were issued 12.5 million shares each at 200USc (390c) per share. Sir Michael and Mr Richwhite were the principal shareholders of Capital Markets.

A few days later the original shareholders sold seven million shares to BNZ for 885c per share, 500c above the original issue price. Later that month BIL and Capital Markets sold a further four million shares to the New Zealand public at $11.85 a share.

Investors were attracted by the prospect of "an international network combining trustee and banking services" and were told that "to date, activities have been based in the Cook Islands." In other words EPI was established as a tax avoidance company.

Within a month, BIL and Capital Markets had a realised profit of $67 million from the partial sale of their EPI investment. After these share sales BNZ, BIL and Capital Markets all owned 28 per cent of EPI and the public 16 per cent.

EPI was listed on the stock exchange on January 6, 1987, and quickly reached a record high of $40. The euphoria was shortlived as the New Zealand Government took steps to close tax loopholes.

These tax law changes had a negative impact on EPI's profitability and share price. In October 1989, Mr Lloyd acquired shareholdings of the BNZ, Capital Markets and public for US255c a share.

The offer was above the original price paid by founding shareholders but well below the price paid by BNZ and public shareholders.

The outcome of EPI's three-year listing was:
\EE EPI's minority shareholders lost $30 million.
\EE BNZ lost $32 million.
\EE Capital Markets made a profit of $36 million.

BNZ was also a big participant in the Winebox inquiry.

In February 1987, 103 million new BNZ shares were issued to the public at 175c each.

Two years later the bank had to be recapitalised - because of bad decisions similar to the EPI investment - and new shares were issued at 70c each. These were issued on the basis of seven new shares for every existing 10 shares.

The Government gave Capital Markets an entitlement to 428.6 million new shares and the company controlled by Sir Michael and Mr Richwhite acquired a 30.4 per cent holding in BNZ at a cost of $300 million.

After a second recapitalisation of the bank in 1990, which involved Capital Markets but not the public shareholders, National Australia Bank made a successful takeover offer at 80c a share.

The outcome at BNZ was:
\EE BNZ's minority shareholders lost $91 million.
\EE Capital Markets made a profit of $41 million.

The next controversial transaction was the $225 million acquisition of Fay, Richwhite's merchant banking operation by Capital Markets in mid-1990. Before the announcement, Capital Markets share price was 106c.

The takeover documents showed that the combined operating earnings of Capital Markets and Fay, Richwhite peaked at $91.8 million in 1987/88.

This was the year when most of the Winebox deals were initiated and just before the Government began closing tax loopholes.

Although many of the tax deals were structured so that income would flow to Fay, Richwhite for a number of years, it was obvious that the deals were one-off and they could not be sustained. This was confirmed by subsequent results which showed that the combined operating profit of the Capital Markets and Fay, Richwhite banking activities plunged from $91.8 million in 1987/88 to just $4.2 million in the June 1994 year.

The sharp decline in earnings had little impact on Sir Michael and Mr Richwhite as they had already received $225 million from the listed company.

After the acquisition, Capital Markets changed its name to Fay, Richwhite and by early 1995 its share price had sunk to 33c. The private interests of Fay, Richwhite made a takeover offer at 80c a share and the independent appraisal report concluded that the merchant bank, which had cost $225 million in 1990, was worth only $25 million to $35 million five years later.

On the basis of this assessment, and Fay, Richwhite's original 68 per cent holding in Capital Markets, the outcome of the merchant bank transaction was that:
\EE Capital Markets' minority shareholders lost $62 million.
\EE Sir Michael and Mr Richwhite made a profit of $62 million.

Before the acquisition Fay, Richwhite had obtained a significant shareholding in the newly privatised Tranz Rail. Fay, Richwhite's minority shareholders obtained no benefit from this acquisition because of the pathetic performance of the merchant banking operations.

Twelve months after Fay, Richwhite was delisted, a 25 per cent shareholding in Tranz Rail was sold to the public. The outcome of this share sale means:
\EE Tranz Rail's minority shareholders sit on a loss of $94 million.
\EE Sir Michael and Mr Richwhite and his family interests have an unrealised profit of $96 million.

Finally there is Telecom. In June 1990 - after Capital Markets' $225 million acquisition of the Fay, Richwhite merchant bank - the Government sold Telecom to a consortium of bidders which included Fay, Richwhite.

The transaction had the hallmarks of a merchant banking operation as Fay, Richwhite initially received 5.5 million Telecom shares - which appeared to be in lieu of a merchant banking fee - and an option to purchase a further 112 million shares at 181c per share.

The deal was particularly attractive because Fay, Richwhite was able to sell 87.5 million Telecom shares at 382c each when they exercised the option in September 1993. Because of this there was no need to front up with any cash.

As the two merchant bankers decided to keep the Telecom shares for themselves the outcome of the 117.5 million shareholding meant:
\EE Fay, Richwhite's minority shareholders received nothing.
\EE Sir Michael and Mr Richwhite realised a profit of $274 million.

Minority shareholders have not made a single dollar out of any of these five transactions yet the Fay, Richwhite interests have always come out on the winning side.

The combined loss of minority shareholders is $277 million while the Fay, Richwhite interests have made a profit of $509 million.

These figures confirm two basic facts about the commercial scene in New Zealand:
\EE The tax avoidance business has been extremely lucrative for a number of individuals.
\EE Some company directors have insufficient regard for minority shareholders.

It is time for Sir William Birch and other politicians to stop worrying about a few million dollars and look at the wider picture.

Confidence in our equity market will continue to erode as long as governments accept the argument, advocated by Business Roundtable and the stock exchange, that regulation is unnecessary.

This argument is based on the premise that regulation is a cost burden on business, individual shareholders are freeloaders and large shareholders should receive a disproportionate share of the spoils because they make the greatest contribution to the country's wellbeing.