Gaynor: Dilemma for GPG investors

By BRIAN GAYNOR

GPG creates a dilemma for long-term investors. It announced an excellent net profit for last year and has a strong balance sheet.

But the group has an unsatisfactory board lineup and most companies with this structure have failed to sustain their performance long term.

On Friday, the London-based investment group announced a net profit of £47.6 million ($156 million) for last year compared with £18.7 million ($61.2 million) for 2000.

The company has a strong balance sheet with £164 million ($537.51 million) in cash, but chairman Sir Ron Brierley warned that "it is unlikely the 2001 result will be repeated in 2002".

Sir Ron took a swipe at the increase in corporate governance requirements and the need to produce "pages and pages of superfluous dross [in the annual report] which is utterly meaningless but, nevertheless, expensive to compile". This may be true but many of these rules are British requirements and it was Sir Ron who decided to use a British-based backdoor vehicle to list his investment company interests.

On its board structure, GPG is one of the few companies that is dominated by management and does not have a rotational board policy.

The board comprises four executive directors - Sir Ron, Blake Nixon, Tony Gibbs and Gary Weiss - and one non-executive director, Trevor Beyer.

Beyer also receives fees from GPG for non-director activities.

GPG has 25,900 New Zealand shareholders and they have no reason to complain about its performance so far.

But they could feel much more secure about its long-term prospects if the board contained some strong non-executive directors.

Takeovers Code

Last week's conference on the Takeovers Code backed the new regime. Ten speakers, including Stock Exchange managing director Bill Foster, who had been a fierce opponent of the code, said the new regulations were working well and had helped improve investor confidence in the exchange.

But conference participants suggested that several features of the code could be improved.

These include:

* That the panel should be more willing to help market participants interpret aspects of the code. This is important because New Zealand does not have a black-letter law code.

* The requirement to have two independent reports, one to assess the merit of the offer and the other to assess the fairness between different classes of securities, is inappropriate. Both assessments should be in one report.

* The code should apply to trusts as well as limited liability companies, as the takeover provisions of the NZSE listing rules still apply to these entities.

* The panel's website should contain information on every offer made under the code. All important documents, especially the independent reports and target company statements, should be available online.

* Offerors should be required to announce the results of a bid. In the failed bid for Contact Energy the total amount of acceptances received by Edison Mission was not disclosed.

* The offeror should be required to send information to the Stock Exchange as well as the target company. Under the present regime, the bidder is required to send information only to the target company and there can be a delay before the exchange is informed.

* Chris de Boer, a former executive of the London Takeovers Panel and chairman of the Hong Kong Takeovers Panel, said the definition of associate and related parties would be a fertile area for lawyers in New Zealand. This area had to be tightened up.

* New Zealand directors should be wary of "no shop" covenants where potential offerors ask the directors of the target company not to look for competitive bids for a certain time. Bendon's directors admitted they did not look for alternative bids when the Hugo Venter/AMP consortium made its initial offer to buy the operating assets of the company.

* Michael Lorimer of Grant Samuel said a 100 per cent offer must represent full underlying value. It was inappropriate for Andersen to apply a 30 per cent discount for "the illiquid nature and lack of control for the minority shareholding" in its valuation of Pacific Retail. This valuation was prepared to help shareholders assess the merits of Eric Watson's $1.76 a share offer.

Amanda Smith, senior investment manager of ING (NZ), formerly Armstrong Jones, said the code was a positive development for the New Zealand sharemarket, especially after the Lion Nathan/Kirin debacle in 1998.

It provided certainty, fairness and made independent directors more accountable.

Although the code may require some minor adjustments the new regulations had been accepted by market participants.

Small Companies

It must be extremely frustrating being a small company on the Stock Exchange as brokers, analysts and institutions pay less attention to the small firms.

GDC Communications, Vending Technologies and Wellington Drive Technologies were once high-flyers but they have lost institutional support.

The Genesis Research and Development annual report revealed that the New Zealand Central Securities Depository, the registered holder for most of the big institutions, held 28.8 per cent of the company compared with 33.7 per cent last year.

The good news for Genesis is that the total number of shareholders has increased from 1638 to 2326.

The lack of interest in small companies is surprising because this group has substantially outperformed the large companies over the past few years.

Since the end of 1997, the Small Companies Capital Index has risen 31.2 per cent whereas the NZSE-40 Capital Index has fallen 10.5 per cent.

Over the same period, the Small Companies Gross Index increased by 87.8 per cent compared with the NZSE Gross Index rising just 17.4 per cent.

Brokers should be making a far bigger commitment to the small company sector and fund managers should establish more dedicated funds for this part of the market.

The problem is that small company-oriented fund managers tend to hold on to their winners as they get bigger, and then spend less time looking for the next small company star.

That is poor planning because the small company sector has offered, and has the potential to offer, the best returns to investors.

Takeovers code

* Disclosure of interest: Brian Gaynor is a GPG shareholder.

* bgaynor@xtra.co.nz