The O'Brien Column: Gaggle of companies juggles the equity and debt balance

Friday 11th May 2001

Investors are seeing another of the regular waves of corporate activity that have either direct or indirect effects on listed companies.

It is probably only coincidence that these matters come in bunches, particularly as some of the recent one were foreshadowed months ago, but they indicate nothing is static in the business world.

Carpet manufacturer Cavalier Corporation and corporate dairy farmer Tasman Agriculture have announced substantial distributions to shareholders, publisher Independent Newspapers plans to increase its shareholdings in Sky Network Television and Californian tomato processor SK Foods is to be the majority shareholder in food processor Cedenco.

The Cavalier Corporation and Tasman Agriculture developments were signaled last year, when the companies said they were assessing their financial structures.

Cavalier proposes returning $25 million to shareholders by way of a High Court-approved return of capital and cancellation of shares.

The proposal involves the cancellation of one in every eight shares and payment of $5.60 for each share cancelled. Cavalier said that would result in the cancellation of about 4.5 million shares and leave about 31.49 million shares on completion of the transaction.

The company said last year the closure of its wool trading business, E Lichtenstein, and restructuring wool-scouring activities would release about $40 million of underperforming capital and leave Cavalier essentially debt-free.

It expects to be virtually debt-free in two to three months.

Term debt was $16.05 million in the group's report for the six months ended December, when shareholders' equity was 70.2% of the book value of total assets.

Complete debt retirement would raise the ratio even higher and lead to a probably undesirable capital structure so the company's decision to repay capital and replace it with interest-bearing debt made sense. It also benefits shareholders, as does the Tasman Agriculture intention to distribute $107.27 million.

The Tasman Agriculture proposal would be a taxable special dividend and the repurchase of two shares for every five held on May 11 at $1.47 a share payment to be made on June 14.

Total consideration for the share repurchase would be $31.96 million and the special dividend payment, also to be made on June 14, would be $45.31 million, on the basis of 43c a share.

Those transactions are also tied to Brierley Investments' sale of its 66.1% holding in Tasman Agriculture to Dairy Holdings and a subsequent on- sale of one-third of those shares to Southern Capital.

That means the amount payable to smaller shareholders, and possibly available for reinvestment in the sharemarket, will be considerably less than the overall $107 million payout.

Tasman Agriculture had unconditionally sold 39 of its New Zealand dairy farms at April 23 for a total of $133.73 million, of which $127.41 million is due on June 2 and $6.12 million on June 1, 2002.

The company said total farm sales to April 23 were worth 22% more than May 31, 2000, valuations.

Group term liabilities were $114.75 million in the statement of financial position for the six months ended November but the group did not include the amounts due for farm sales in the half-year result.

Share buybacks and distributions such as those of Cavalier Corporation and Tasman Agriculture are designed to promote the efficient use of capital.

Running a company on the basis of shareholders' equity alone with no current or term debt is an inefficient use of capital, due to the tax situation.

The trick is to get the balance right between equity and debt. Worldwide corporate history is bursting with examples of companies that got the balance wrong either in total, or with an unsuitable mix of short-term and long-term debt.

Every receivership, including recent ones among New Zealand listed companies, results from inability to meet debt obligations and the unwillingness of lenders to make restructuring arrangements.

The efficient use of equity and debt was seen in INL's proposal, subject to shareholder approval, to increase its holding in Sky Network Television to an eventual 66.25% holding through a mixture of issuing INL shares for the Todd family's Todd Capital shares in Sky and financing the purchase of other Sky shares by raising more debt.

INL's debt position in the accounts for the period ended December 31 was comfortably within generally acceptable boundaries for a commercial/
industrial company.

The ability to account Sky's tax losses against INL's profits was given as one reason for the publisher going to 66.25% of the former company, but the introduction of revamped takeover law in July could possibly have been a factor in the scheme, apart from the overall prospects for Sky's operational development

SK Foods' deal on Cedenco shares seemed more a basic investment and operational transaction than a capital-efficiency one, although the US company obviously looked at rates of return on its investment in the Gisborne-based company.

Small shareholders miss out on the $1.52 a share paid for BIL's holding, a matter that could upset some.

There is nothing new in "pass-the-parcel" deals, particularly when two parties are overseas-based.

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