Gaynor: Bendon big test for Watson

By BRIAN GAYNOR

Pacific Retail's acquisition of Bendon will test Eric Watson's business acumen and Peter Halkett's management expertise.

Last October, Andersen released an independent appraisal report, in response to a takeover bid by Watson for Pacific Retail, which contained several optimistic forecasts for the retail group. These were compiled by Halkett (pictured left with Phil Newland of Pacific Retail's majority owner Cullen Investments) and his Pacific Retail management team.

The Andersen report revealed that Pacific Retail was forecasting a pre-tax profit of $22.8 million for the March 2002 year and $29.7 million for the following year. The forecasts were based on a strong contribution from Pacific Retail Finance and the full benefits of the 1997 merger of Noel Leeming and Bond & Bond.

These projections represented earnings a share of 30c and 39c for this year and the next respectively.

Bendon's forecasts, which were contained in the Grant Samuel report released in February, are far more modest. Next year's predictions expect no further losses in the UK and sales growth in Australia and New Zealand of just over 3 and 4 per cent respectively. These sales targets will be difficult to achieve because of the under-performance of Bendon's two largest customers, Farmers and Coles Myer.

The acquisition will cost Pacific Retail $59 million and will be financed by a $20 million rights issue, $21 million of borrowings and about $18 million of surplus cash held by Bendon.

The takeover will have a negative impact on Pacific Retail's earnings for the next year based on the appraisal report forecasts. The group's earnings a share post-acquisition are forecast at 35c compared with 39c without Bendon.

The challenge for Halkett and his team is to produce a net profit of $24.5 million, or 40c a share, for the next year. If not, there will be a strong argument that the Bendon acquisition was wealth-destroying instead of wealth-creating.

GENESIS RESEARCH

Jim Watson, Genesis chief executive, told last week's annual meeting that there were three main reasons his company's share price had fallen well below its $6 a share issue price in September 2000.

First, the biotechnology industry in New Zealand is small and does not attract much investor interest.

Secondly, the phase-two trials of the psoriasis drug PVAC were delayed because of manufacturing problems in the United States. Lastly, the market has put no value on the company's huge research pipeline.

Watson added that the world was full of biotech companies with huge storage banks of genes. The most important issue for every company was to turn these gene banks into commercial products.

PVAC, Genesis' first potential commercial product, will begin its phase-two trials for the United States Food and Drug Administration this month or in early May. It will be 12 months before the full results are known.

The final trials will take a further 12-18 months and it will be late 2004 before PVAC's viability is known.

PVAC's timetable demonstrates that investors should adopt a long-term approach. The company's share price will respond to a successful phase-two trial, or any positive developments with its other products, but it will take time before the company is generating regular income from inhouse products.

The good news is that Genesis had $47.9 million, or $1.84 a share, in the bank at the end of December.

NZ RUGBY FOOTBALL UNION

The recently released NZRFU annual report had two interesting related-party disclosures:

* Simpson Grierson was paid $703,820 for legal services. Rob Fisher is a director of the NZRFU and a partner of the law firm.

* Infinity Solutions was paid $514,240 for services provided. Murray McCaw is chairman of the NZRFU and was chief executive of Infinity until December 31.

* Disclosure of interest: Brian Gaynor is a Pacific Retail shareholder.

* bgaynor@xtra.co.nz