Brian Gaynor: Watch out for the Watson factor

Two recent results have highlighted the dangers of investing in companies controlled by Eric Watson.

Eldercare, 57 per cent owned by Watson, reported a loss of $2.8 million for the May year, and RMG, 19 per cent owned by the Auckland businessman, announced a loss of A$72 million for the June year.

In mid-1999 backdoor listing, NZ Petroleum bought the Eldercare group of companies from Watson and David Lowry for $16.3 million. Eldercare had bought 10 retirement villages just before the sale. No details of prices paid by Watson and Lowry were disclosed, but it is understood that they were onselling these assets to the listed company for a large profit.

Eldercare, which had borrowings of $37 million, forecast net earnings of $4.1 million for the 2000 year. It achieved a net profit of $5.6 million, but this included an unrealised $4 million gain on its RMG holding.

In November 2000, the company announced that it was reducing its exposure to the retirement village sector and putting more emphasis on medical and healthcare services.

Eldercare reported a net loss of $8.2 million for the 2001 year. This included a writedown in property values and a loss of $1.3 million on the sale of its RMG stake.

The loss for the May 2002 year included a $2.2 million writedown on the Regents Park development in West Auckland. This was bought from Watson and Lowry in 1999.

Eldercare is on the right track, but it continues to be dogged by the purchase of overpriced assets in 1999 and a high level of debt.

RMG, another backdoor listing, bought 15 Australian and New Zealand debt-collecting agencies for A$79 million in mid-2000. The consideration was A$20 million cash and 296 million RMG shares valued at 20Ac each.

Watson, who played an important role in putting the deal together and owned one of the larger debt-collecting agencies, received 38.4 per cent of the RMG shares issued as part of the transaction.

Little information was provided on the 15 agencies, but it was widely believed that Watson and the other vendors had done extremely well.

RMG forecast net earnings of A$5.9 million for the June 2001 year, but the company reported a net loss of A$10.7 million. Several New Zealand stockbrokers continued to aggressively promote the stock, although it was clear RMG had paid too much for its agencies and was falling well short of its profit projections. The huge loss for the latest year was mainly due to a A$58.8 million goodwill writedown associated with the 2000 purchases.

But RMG also had a $13.8 million operating cash-flow deficit for the 2002 year and it now has a weak balance sheet and a net tangible asset backing of only 0.0035Ac a share.

Watson is a successful businessman, but four of his five listed companies, Advantage, Eldercare, RMG and Strathmore, have performed poorly. Pacific Retail has done much better but it is trading at a huge discount to its peer group because of the "Watson factor".

Fletcher Challenge Forests

One of the more interesting features of the Fletcher Forests special meeting is the voting figures. In summary:

* Only 67.3 per cent of the 2781 million shares were voted.

* Large shareholders (holders of one million or more shares) did not vote 445 million shares and small shareholders did not vote 466 million shares.

* The substantive motion was supported by 70.7 per cent of the shares voted but only 47.5 per cent of the total shares on issue.

* Proxies represented 91.4 per cent of the shares voted with only 8.6 per cent of the voted shares on the floor of the meeting.

* Proxy votes represented 61.5 per cent of the shares on issue.

* Proxies voted 71.7 per cent in favour of the substantive motion, but the resolution received only 59.8 per cent support from the floor.

The final voting figures show that the directors were well and truly defeated when the proxy voting closed, but they continued to promote the deal in the hope of flushing out shares that had not voted by proxy.

This strategy failed because a number of large shareholders did not vote and opposition to the transaction was stronger at the special meeting.

eVentures

The last rites on eVentures will be carried out this morning when shareholders meet to appoint a liquidator. Its directors, particularly Craig Heatley, deserve credit for the way it is being wound up.

eVentures was listed on the NZSE on May 9, 2000, after the issue of 160 million shares to eVentures Partnership (a United States joint venture between Japan's Softbank and epartners) and 40 million shares to Craig Heatley. These 200 million shares were issued at 15c each.

The public was issued 35 million shares at 60c each and Telecom, Todd Capital and The Warehouse 5 million each at the same price. The company was floated in a blaze of cyber-hype, although the Nasdaq technology bubble had burst.

eVentures Partnership wanted out, and in May last year Heatley agreed to buy the joint venture's 160 million shares at 14c each. After considerable controversy, which included the resignation of chairman Dr Roderick Deane, Heatley agreed to sell the 160 million shares back to the company at the price he paid.

Directors announced this year that the company would be put into liquidation and the remaining $31 million cash returned to shareholders. As part of that agreement, Heatley made a 60c a share offer to all registered holders of 10,000 shares or less who subscribed to the initial public offering and still held those shares.

Shareholders accepted in respect of 1,923,000 shares under this offer.

At today's meeting, shareholders will be asked to rubber stamp Heatley's offer to small shareholders and the appointment of a liquidator. If approved a liquidator will be appointed within a few days and the company delisted.

The notice of meeting reveals that eVentures has net tangible assets of 35.6c a share, although a small reduction may have to be made for the settlement of a property lease.

Heatley announced this year that he would donate his overall capital profit - the difference between his 15c a share entry price and the final divvy up minus the cost of buying out small shareholders - to a trust aimed at helping child charities in New Zealand and overseas.

A successful eVentures would have been the preferred outcome, but Heatley's decision to buy out small shareholders and give his profit to charity, estimated at $7 million, means the venture is going out in style.

* Disclosure of interest: Brian Gaynor is an eVentures and Fletcher Challenge Forests shareholder.

* bgaynor@xtra.co.nz