Brian Gaynor: Punters investing in a Gould mine

George Gould, a member of the blue-blood Christchurch family, is one of the sharemarket's up-and-coming stars. Gould has been involved in a number of listed companies over the past decade, but his purchase of a 10.3 per cent stake in Vertex shows he is moving into top gear and will become an increasingly important figure.

In 1989, Pyne Gould Corporation purchased a 29 per cent stake in Amuri, the struggling listed Christchurch company with interests in motor vehicle distribution, food (Regina), property and apparel. In June 1992, Pyne Gould increased its shareholding to 47 per cent, at an average purchase price of well under 50c a share, and Gould was appointed chief executive five months later.

He gradually sold or closed unprofitable operations and in 1994 began to acquire a shareholding in Wairarapa Electricity.

He bought and sold a 10 per cent stake in Powerco and in 1996 made a successful takeover offer for the Masterton-based utility. Amuri then changed its name to South-Eastern Utilities.

Two years later, Wairarapa Electricity activities were broken up under Max Bradford's electricity reforms. The lines business was sold to Powerco and generating and retail assets to Electricity Corporation.

In March 2001, Pyne Gould completed a successful takeover of South-Eastern Utilities at $1.08 a share. Gould had proven that he could create shareholder value.

In October 2000, he started buying 8.9 million Designer Textiles shares, or 24.7 per cent of the company, at an average price of 28.4c a share. He was later appointed chairman, and Designer Textiles' share price has risen to $1.04.

In 2001, he was the catalyst for the merger between Reid Farmers and Pyne Gould Guinness, a fully-owned subsidiary of Pyne Gould Corporation.

The listed Dunedin-based stock and station-based company, now known as Pyne Gould Guinness, is 55.5 per cent owned by Pyne Gould Corporation and Gould has been managing director since September 2001.

The affable Gould hit the headlines again last week with the purchase of a 10.3 per cent holding in Vertex at $1.46 a share. Vertex's share price has risen to $1.58 since the announcement that Gould had become a large shareholder.

Subsequently he announced that his investment vehicle, Gould Holdings, had raised $6.2 million from 17 outside shareholders and his shareholding had been reduced from 100 to 71.5 per cent.

The company's main assets are 24.7 per cent of Designer Textiles and the 10.3 per cent Vertex stake.

George Gould is well worth following. He represents a new generation of South Island businessmen with an impressive track record, and Designer Textiles and Vertex shareholders will be hoping that he can continue on his winning ways.

Tower power Amid all the hoop-la over Colin Beyer's struggle to remain chairman of Tower, it is important that shareholders do not neglect important issues in the run-up to next month's annual meeting.These include:

* The annual report reveals that Tower had no currency hedge on a net exposure of NZ$564 million in Australian dollars. As the New Zealand dollar has risen from 86.3c to 93.2c against the Australian dollar since September 30, Tower is sitting on a foreign exchange loss of approximately $40 million. Why did Tower, with its huge investment management expertise, not hedge its A$/NZ$ position?

* Tower had intangible assets, expressed as the excess of directors' valuation over the net tangible assets of subsidiaries, of $634 million at September 30. This figure has increased from 45.4 per cent of shareholders' funds at September 30, 1998, to 82.7 per cent. How can investors be sure that these valuations are correct when they have little confidence in how the directors governed the company?

* The recently released annual report revealed the mortality rates for business sold through Tower Life (NZ) were reduced by 15 per cent.

This is important, because Tower now assumes that it has use of policyholders' money for a longer period and it takes to account the expected income derived from these policies on an accrued basis.

The change in mortality rates has had a positive impact on earnings, but this figure has not been revealed.

* The rates of growth assumptions for Tower's unit-linked business have been steadily increased over the past few years. In the September 2002 year, the rates of growth were raised from the 4.6 to 8.4 per cent range to a 8.1 to 8.5 per cent range. This has had a positive impact on earnings, but the figure has not been disclosed.

* Tower has capitalised costs of $66.1 million, mainly from the cost of selling superannuation and insurance products. Has the negative publicity regarding the group's financial position resulted in policy and product redemptions that will require a write-down in the capitalised costs associated with these products?

Due diligence doubts One of the issues raised in the recent report by the Market Surveillance Panel on Tranz Rail is that a number of parties did due diligence on the company in 2001, with a view to purchasing the Wisconsin Central and/or Fay, Richwhite shareholding.

These parties were able to have a detailed look at Tranz Rail's financial and operating activities and, on the basis of that information, decided not to purchase the Wisconsin or Fay, Richwhite stakes. This gave them a decided advantage over investors who did not have access to Tranz Rail's books.

The non-disclosure of the due diligence also advantaged the sellers, because if investors who bought their shares had been aware that a number of parties had done due diligence and walked away, then it is unlikely they would have obtained $3.70 and $3.60 a share.

The Stock Exchange argues that a company's share price would rise, and potential purchasers would be disadvantaged, if listed entities were required to announce that outside parties were doing due diligence. This is true but there are two alternatives:

* If due diligence is approved, the potential purchaser(s) should be given a fixed period to decide if they will proceed to purchase. If they decide not to proceed, the company should announce this to the market. This would lead to a more fully informed market, as purchasers would be aware that a party or parties had had a look at the books and walked away. It would also make a major shareholder think twice about allowing selected parties to do due diligence.

* The preferred situation is for the stock exchange to encourage all companies to have a high level of disclosure, so all potential purchasers have enough information to make an informed decision. The ability of a large shareholder to allow parties to do due diligence when it wants to sell its holding is a disincentive for companies to adopt best practice for disclosure.

* Email Brian Gaynor