Gaynor: Back door portal to poor returns

By BRIAN GAYNOR

One of the most interesting phenomena of the New Zealand sharemarket is the backdoor listing. They are usually greeted with a great deal of enthusiasm but very few are a long-term success. The poor performance of Force Corporation is a good example.

There was a huge number of these listings in the 1980s but, with the exception of Montana, none survived. Montana was originally a listed vehicle distributor and financier called Allied Group. It changed its name to Collingwood Holdings and then Corporate Investments and came under the control of Peter Masfen. Mr Masfen backed Montana Wines into the listed company in 1987.

None of the recent backdoor listings have been very successful. E-Force and Roller International have gone bust and most of the rest are trading below 10 cents a share. The only recent examples showing any degree of ballast are Eldercare, New Zealand Experience and Southern Capital. Southern Capital has received institutional backing and AXA Asia Pacific recently raised its shareholding from 10.9 per cent to 12.2 per cent.

It is not surprising that these listings do not perform well over the longer term. Most companies with good growth prospects and a positive attitude towards disclosure will list after a conventional share float. This process subjects them to scrutiny from the broking community and professional investors.

A backdoor listing does not require a high level of disclosure and is subject to far less scrutiny. A listing profile has less information and legal clout than an investment statement and prospectus.

The most positive aspect of this form of listing is that it offers shareholders of the existing stock exchange entity an opportunity to exit at a higher price. The problem is determining the correct time to sell, because the trend is for the share price to rise and then fall after investors have had time to assess the new business. The initial share-price surge is normally based on sharebrokers' hype and the small size of the backdoor vehicle. The new business is usually in a fashionable sector and investors rush in regardless of its substance or quality. For the astute investor this offers a good opportunity to sell all or part of their shareholdings.

Tourism Holdings

The recently released Tourism Holdings annual report highlights the hazards of investing in Australia.

In November 1999 the company bought the Britz motor homes businesses in New Zealand, Australia and South Africa. Britz had 1550 vehicles in Australia, 680 in New Zealand and just 100 in South Africa.

The purchase price was $62 million. In addition Tourism Holdings took over all Britz vehicle purchasing and leasing obligations, amounting to $104 million. To help fund the purchase the company raised $39.5 million through a one-for-three rights issue at $2.15 a share.

Directors had a particularly optimistic view of the acquisition. Net profit was forecast to increase from $6.7 million in the June 1999 year to $17.8 million in 2000 and $26.8 million in 2001. Chairman Graham Sinclair told shareholders the board believed the acquisition would improve earnings and increase shareholder value.

The South African operation was sold for $9.6 million in May 2000 and Tourism Holdings reported a net profit of $14.8 million for the June 2000 year, $3 million below forecast.

The result for the June 2001 year was even worse, a net profit of $13 million compared with the forecast of $26.8 million.

New Zealand operating profit increased from $27.9 million to $32 million, but across the Tasman it went from $14.5 million to $6.8 million.

The Australian operations were adversely affected by the Olympics, the introduction of GST, a difficult used motor homes market and higher fuel, tyre, motor vehicle parts and fleet replacement costs.

Tourism Holdings also caught the Ansett disease - it incurred high repair and maintenance costs due to its ageing fleet.

The annual report, printed before the United States terrorist attacks, is optimistic.

But the outlook is now extremely uncertain, particularly as the group is committed to a new fleet of 1100 predominantly Mercedes vehicles.

Shareholders will be keen to receive an updated account of trading conditions and forward orders when the group's annual general meeting is held in Auckland on November 13.

Lion Nathan

Lion Nathan and Kirin Brewery issued a strange media release last month that contained a letter of understanding between the two.

Kirin is a leading Japanese brewer that bought 45 per cent of Lion under controversial circumstances in 1998.

The purchase price was $5.40 a share.

The letter of understanding is extremely bland and sets no specific goals for Lion Nathan. Kirin says it is happy with Lion's strategy, has no intention of becoming a majority shareholder and will consult directors if it decides to reduce its holding.

The media release concludes with the following joint statement: "Over the last three and a half years, an excellent relationship has developed between Kirin and Lion. The original principles provided a useful framework for both parties and has delivered real benefits for both Kirin and Lion.

"The recommitment to these principles will ensure that Lion Nathan remains well positioned to deliver excellent returns for all of its shareholders."

From an outside perspective it is difficult to determine what Kirin has contributed to Lion Nathan, particularly as the Sydney-based brewer has struggled to keep up with Fosters since 1998.

The letter of understanding would be much more meaningful if it laid out specific areas where Kirin could assist Lion to expand its market penetration and earnings.

* bgaynor@xtra.co.nz