Gaynor: Time catches up with '80s darlings

By BRIAN GAYNOR

The problems at Air New Zealand signal the end of the investment company phenomenon in New Zealand.

Although their dominance has waned in recent years this small group of companies, with Brierley Investments (BIL) to the fore, have had a huge influence on the country's business sector.

They had a positive impact in their early days and were able to gain control of a large number of New Zealand's biggest companies because of our light-handed regulatory environment.

Since the mid-1980s, these investment groups have had a negative influence on the economy because most of them had neither the industry nor management expertise to effectively monitor their vast empires.

Air New Zealand's plight is the final, tragic legacy of the investment company phenomenon.

The airline's problems are partly due to BIL's lack of industry experience and the investment company's desire to put its own interests ahead of all other shareholders.

The operating environment was ideal for proactive investment companies in the 1960s and 1970s.

Many listed companies were poorly managed, their assets under-utilised and share prices low.

BIL came to the fore by acquiring shareholdings in underperforming companies and forcing directors to rationalise their activities and sell surplus assets.

This strategy created considerable wealth for BIL's shareholders because asset prices, particularly property, were rising and companies usually made huge profits on their asset sales.

The milieu became more competitive in the 1980s as a large number of other investment companies, including Equiticorp and Chase, copied BIL's successful strategy.

Share prices were rising and investment companies were forced to pay higher entry prices.

As a result, they changed tack and began buying controlling stakes in companies with a view to creating value through better management or flicking them on at a higher price.

In 1987, the sharemarket was awash in investment companies with 54 listed companies officially classified in this sector. Equiticorp either controlled or had large shareholdings in Feltex, Fisher & Paykel and New Zealand Steel while Chase owned Farmers Trading and a large number of other New Zealand companies.

But investment companies had a flawed business model and most of them were wiped out by the 1987 sharemarket crash. BIL survived because it had built up considerable reserves over the previous 26 years.

As the accompanying table shows, BIL accumulated a wide range of shareholdings across many different industries, helped by a plentiful supply of capital and lax takeover rules. BIL became the master of the sharemarket raid, grabbing a 20 to 30 per cent controlling interest on the floor of the Stock Exchange within a matter of minutes.

Supporters of these lax takeover rules claimed that they made it easier to get rid of inefficient managers.

But the opposite was often true; investment companies could obtain a controlling stake in companies that operated in areas where they had no management or industry expertise.

The ability to gain control at 20 to 30 per cent, and not be required to make a full bid to all shareholders, allowed BIL to spread its wings into a wide range of industries. By 1990, it was hopelessly overstretched. It had investments in more than 20 different industries in New Zealand and large holdings in Australia, United States and Britain.

BIL has always had a relaxed attitude towards corporate governance. In 1990, the group had nine directors and only two, Sir Roger Douglas and stockbroker Bryan Johnson, were non-executive appointments. BIL's management also dominated the boards of most of its controlled companies.

BIL had several notable successes, including Sky City, but it made a terrible mess of some companies. While under its control DB Group (formerly Magnum Corporation) invested in Wilson Neill, Austotel, Countdown, J Rattray and numerous other activities in Australia and New Zealand. These were disasters and had to be written down by $426 million.

The light-handed takeover rules allowed investment companies to accumulate a huge amount of corporate control even when they had no particular management or industry expertise.

This development has been partly responsible for the poor performance of the New Zealand business sector.

The influence of the investment company is still with us today. GPG and FR Partners obtained a controlling interest in Enza, yet these two parties have almost no experience of the apple industry.

BIL's involvement with Air New Zealand began in 1989 when the Qantas consortium (BIL 65 per cent, Qantas 20 per cent, Japan Air Lines and American Airlines 7.5 per cent each) bought the national carrier for $660 million, or $2.36 a share.

Six months later BIL sold a 25 per cent shareholding to the public at $2.40 a share and 5 per cent to staff at $2.16 a share.

At the time of the public float, Air New Zealand had nine directors, including four from BIL, two representing Qantas and one from Japan Airlines.

Japan Airlines sold out in 1994 and its board representative resigned. In May 1995, the two Qantas directors stepped down and were replaced by two Australian independent directors nominated by Qantas. The two new appointees had no direct experience of the airline industry and one of these, John Curtis, is still on the Air New Zealand board.

Qantas sold its holding for $3.80 a share in March 1997, realising a profit of more than $120 million. Air New Zealand was left with no cornerstone airline shareholder and no outside director with airline experience. In the meantime, BIL had failed to take advantage of the worldwide sharemarket boom and its empire was crumbling. Bob Matthew and Paul Collins resigned in May 1998 and their successors, Sir Roger Douglas and Sir Selwyn Cushing, began to sell assets and repay debt.

BIL's desire to sell assets and repay debt has been a contributing factor to Air New Zealand's problems.

When Singapore Airlines made an offer to buy 50 per cent of Ansett, BIL spotted an opportunity to sell out of Air New Zealand. Sir Selwyn vetoed the sale to the Singapore carrier and Air New Zealand bought the 50 per cent Ansett stake.

Singapore Airlines then took an indirect interest in Ansett by purchasing 25 per cent of Air New Zealand, 16.9 per cent from BIL at $3 a share.

BIL had achieved part of its ambition by selling 16.9 per cent of Air New Zealand and reducing its holding from 47.2 to 30.3 per cent. It is doubtful if Singapore Airlines would have bought any of BIL's Air New Zealand shares had it been able to acquire 50 per cent of Ansett.

The rest is history. The Ansett investment has been a disaster and BIL, Singapore Airlines and minority shareholders have suffered huge losses as a result. Air New Zealand's problems signal the end of the investment company era.

* bgaynor@xtra.co.nz