Brian Gaynor: Behind the winning ways of Graeme Hart

The rise and rise and rise of Graeme Hart has been one of the big business stories of the past few years. Hart has been extraordinarily successful yet he has managed to avoid wide scrutiny.

Where did he begin? Why has he been so successful? Is he lucky or is he an extremely astute businessman?

Hart first appeared on the public scene on January 27, 1987, when the Rank Group lodged its initial public offering (IPO) prospectus. Graeme Hamilton, who was associated with several failed companies after the October 1987 sharemarket crash, was chairman and Hart and Iain MacGibbon were the other directors.

There is no doubt that Hart, who was 31 at the time, was the driving force behind Rank.

Rank had two main objectives:

* To raise $2.75 million from the public through the issue of shares at $1 each.

* To buy two businesses from Hart, Pacific Rental (mainly Carlton Party Hire) and Vella Investments (a cash management and sharemarket investor), for $4.25 million. Consideration for these assets was 3 million $1 Rank shares and $1.25 million cash. Hart also bought an additional 1.55 million Rank shares at $1 and a further 1.2 million, in partnership with MacGibbon, were partly paid to 1c.

Rank's long-term plan was to acquire established companies, businesses or assets after detailed research and analysis.

Consistent with the pre-crash era there was little information on the companies acquired and the purchase prices seemed to favour the vendor rather than the listed company.

Rank listed on March 9, 1987, and was quickly lost among the big-name players of the time. Its shares traded briefly at $1 but finished the year at 30c.

Hart was probably fortunate that he listed towards the end of the sharemarket boom because, based on his subsequent audacious acquisitions, he could have been one of the big risk takers and victims of the 1980s boom and bust.

But Hart was quick to learn from the sharemarket crash.

He battened down the hatches and sold Pacific Rental in December 1988. This left Rank with a net tangible asset backing of $1.03 a share and no debt. (At an extraordinary general meeting in June 1989 shareholders agreed that Hart and MacGibbon could defer payment on their partly paid shares from June 1989 to June 1993).

Rank's next big move was the purchase of the Government Printing Office for $23 million.

The acquisition was due to be settled on January 31, 1990, but payment was delayed five months.

This had a positive impact on Rank because it had control of Government Printing for five months before it had to pay for the company.

The sale attracted considerable controversy.

Fay Richwhite valued the company at $71 million and it had a book value of $44 million, $21 million above Rank's purchase price.

A select committee inquiry into the sale concluded it had been poorly handled. A Herald editorial said "taxpayers are entitled to feel aggrieved about the way this asset sale was handled".

Hart took advantage of the botched process.

He isn't the only businessman to have benefited from the Government's poorly conceived and badly run asset sales programme.

Government Printing had a huge impact on Rank's earnings and share price. Net profit rose from just $1.1 million in the 1989 year to $10.4 million in 1991 and Rank became one of the sharemarket's best performers.

On September 27, 1991, shareholders approved the purchase of Whitcoulls from Brierley Investments for $71.2 million and Rank changed its name to Whitcoulls.

Hart was on a roll and in July 1993 Wiljef, Microtronix and Inca Products were acquired for $16 million. In November 1993 Croxley Collins Olympic was purchased for $50 million, London Bookshops for $20 million and Angus & Robertson Bookworld in Australia for $41 million. The Australian book retailer never achieved its expected returns.

Rank's share price kept soaring and the company had a 10-for-one share split in 1993.

In February 1996 Hart, who owned 64.5 per cent of the company, made an offer to Rank's minority shareholders at $2.32 a share. Grant Samuel valued the company at between $2.70 and $2.96 a share and concluded the offer was not fair. The assessment included a valuation range for Government Printing between $42.9 million and $46.8 million.

The independent directors unanimously recommended that shareholders reject the offer but some institutions accepted. Hart reached 90.8 per cent and moved to compulsory acquisition. Under Stock Exchange rules at the time a separate analysis was required to determine the compulsory acquisition price. Arthur Andersen determined that $2.54 was the appropriate compulsory acquisition price. That valued Whitcoulls at $302 million.

Shortly afterwards Hart onsold Whitcoulls to Blue Star for a profit. Whitcoulls, including Angus & Robertson Bookworld, was sold to WH Smith, the leading UK retailer, in 2001.

Although Hart had some luck, as most successful businesspeople do, he demonstrated remarkable skills in turning Rank from a small company that raised just $2.75 million from the public into a $300 million Australasian retail/printing group.

In the process he made a profit in excess of $200 million.

In June 1997 Hart took a complete change in direction when he purchased a 19.9 per cent shareholding in Australian food conglomerate Burns Philp for A$2.50 a share. His total outlay was A$260 million.

Three months later Burns Philp's share price had fallen below A$1 following a very poor result, a huge asset write-down and the passing of the final dividend for the June 1997 year. In just four months the value of Hart's investment plunged to A$100 million and a few months later it had dropped below A$50 million.

The New Zealand businessman had little option but to roll up his sleeves and make a full-time commitment to his Australian investment. Burns Philp has made a strong recovery and he has played a major role in this process. The company reported a net profit of A$146.2 million for the June 2002 year compared with a loss of A$285.4 million in 1998.

Hart has also managed to negotiate favourable deals that have left him with a 57 per cent fully diluted holding in Burns Philp, worth A$617 million after taking into account the cost of exercising his options.

Hart expanded his empire again last year when he purchased New Zealand Dairy Foods for close to $250 million.

He was able to buy the company below assessed value because Fonterra was forced to sell its 50 per cent holding as part of the Kiwi/Dairy Group merger and the Commerce Commission turned down an application from National Foods.

Burns Philp's $2.2 billion bid for Goodman Fielder is Hart's most ambitious project to date.

Whatever the outcome of this offer we have not heard the last of Graeme Hart.

He has been one of the few pre-1987 sharemarket crash non-property entrepreneurs to not only have survived but also prospered.

He has had a little luck but most of his high-risk acquisitions have been carefully thought out and, most importantly, he has been able to correct his mistakes without incurring major long-term damage to himself.

Hart is young enough to create a major international food giant and the combination of Burns Philp, Goodman Fielder and New Zealand Dairy Foods is a good start.

What are the chances of Fonterra opening its share registry and allowing Hart to take a shareholding and bring a non-farming perspective to the giant dairy group?

* Email Brian Gaynor