By Jenny Ruth
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Friday 4th June 2004 |
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StoreFund is aiming to raise up to $30 million to create a fund to invest in retail businesses. It will also issue 30 million options exerciseable at $1 between the end of June 2006 and the end of June 2008. Its first investment, financed by the issue, is to pay $21.188 million for the 17 store BBQ Factory retail chain. It will be managed by North Head Management whose three principals are Wayne Walden, former Farmers Deka managing director and currently chairman of the Maori Television Service among other directorships, Garry Bluett, who was Farmers' chief financial officer, and Leigh Davis of Jump Capital, previously with Fay Richwhite.
ShareChat: Why are the issue costs ($2.31 million or 7.7 cents of each dollar invested) so high compared with other recent issuers?
StoreFund director Wayne Walden: I don't think the others have got underwriting costs. Colville (whose up to $75 million issue is expected to cost $1.5 million) doesn't have underwriting costs.
SC: Even discounting the underwriting costs ($325,000), your costs are still high.
WW: The other thing we've had to do which Colville and the others haven't had is all the due dilligence costs. We've had to do due dilligence on the BBQ Factory. There are some quite hefty costs in that.
SC: Why is the issue underwritten to $20 million when the minimum to be raised is $25 million?
WW: We do have the ability to put shares to the vendor (4.9 million shares). We don't see that happening. The $25 million will be there.
SC: What if you don't get to $20 million and put the shares to the vendor, where does the remaining $100,000 come from?
WW: We would quite easily make that up. We've never seen that as being an issue.
SC: Do you think it's likely you will issue shares to the vendor?
WW: We don't know at this stage. It's still fairly early. Early indications are there's a good deal of interest. Certainly, the feedback is quite good. We're dealing with a very strong brand here. The 10% yield is certainly an attraction. The option also seems to have some attraction. The difference with this business is that we're going to the float with an asset in hand.
SC: Isn't your 100% dividend payout policy illogical, given your growth aspirations?
WW: These are earnings from the operating companies. What we're saying is that if you take the BBQ Factory, if its in need of some capital to expand - those stores are extremely cheap to fit out, about $50,000 per store - we would have a 12 month plan. Let's says we want to open X number of stores. We would be able to clearly estimate how much that would be and that money would be dedicated to the roll out. Anything else would come up to StoreFund for distribution. The intention is to make further acquisitions on the basis of new capital being raised.
SC: So the company will be growing through rights issues?
WW: Yes, that seems to be the logical way. You may find we will also do a mix of share placements. It will depend on each deal at the time. Whether or not it's a straight cash issue or whether it's a combination of shares and cash to be raised.
SC: By keeping each business you invest in separate, aren't you forgoing economies of scale?
WW: I guess if one buys a business that was identical, one could argue that. One of the key characteristics, the key drivers in these sorts of specialty store businesses is for management to own the brand. In my experience, particularly in Farmers Deka, (it's important) to ensure that continues to happen. The intention is certainly to run those businesses on a solo basis so that essentially they're stand-alone. We don't want to have any cross-collateralisation of the assets. We believe for specialty store businesses that's the best operating approach.
SC: The prospectus says you can take stakes as small as 20%. What's the point of owning such small, non-controlling stakes?
WW: Clearly we would only be doing that if we get appropriate board representation. The other scenario, hypothetically, could be where a company came to us which was private and ultimately wanted to IPO (initial public offer) but wasn't at a point to IPO at the moment. We take a stake and give them capital which will allow them to grow and provide them with assistance to prepare their business's internal structures and reporting procedures etc. There will be circumstance like that and we want to allow for them if they present themselves.
SC: Do you have any other investments under consideration at the moment?
WW: We've been focused on the BBQ Factory. That due dilligence was a huge one. We've completed that. The next stage is the IPO. That's a huge task. It's fair to say there have been a number of calls to us. We've said at this stage, let's get this process put to bed. Then we will turn our attention in some detail to what businesses might be available to us.
SC: Do you have a minimum or maximum amount of money set for each investment?
DW: It really depends if the investment is great. At the end of the day, it comes back to ensuring the appropriate returns are going to be there. If we're able to buy at attractive multiples and we believe the market would run with it, we would buy it. On the other hand, we don't want to be involved in a whole host of very small businesses. We're very much active managers. We're on the board of our portfolio companies. We're providing, not so much operational advice, but we're certainly there providing strategic advice on how to grow revenues and profits.
SC: On page 17 of the prospectus you say you will "at least seek disclosure" of financial details. Isn't it foolhardy to invest in anything if you don't have such information?
WW: Clearly, if we buy something that's 100%, it will be fully disclosed. That would be conditional on the owners selling. We're possibly going to have to go and raise most of it. Let's say you've got a situation where it may well be 20% or 50%. We will be attempting to allow as full as disclosure as possible in our books. There could possibly be some difficulty. The private company may not be comfortable with the levels of disclosure we would like. We're going to have to assess that at the time. For instance, if someone says to us, you can have 20% of our company but we're not going to allow you to disclose any of the numbers, the private owner may say, we're not happy with you telling the market what we're earning, we probably wouldn't do the deal. Certainly, it's going to have to be top line revenue and it will probably have to be EBIT (earnings before interest and tax).
SC: You mean you will always know these details but you may not always be able to disclose them?
WW: Yes. With 100% companies, it isn't a problem.
SC: Why were you unable to provide KPMG with sufficient information on BBQ Factory to get an unqualified audit opinion for the 2003 financial year?
WW: Those are the accounts which would be essentially to the account of Roger Richwhite. The 2004 audit is an unqualified opinion. There were some issues, from memory, that centred around stock. There was an issue there that related to the valuation of an amount of stock - spare parts which, I understand, at the end of the discussions, wasn't material. They had a view and the company had another view. There were two opposing opinions as to how the value of spare parts should be assessed. Our focus has been on 2004. (KPMG's audit report on 2003 said: "We were unable to satisfy ourselves as to these balances by other audit procedures. Any misstatement of these balances would affect the financial performance for the year ended 30 June, 2003."
SC: You mentioned Roger Richwhite. Is he BBQ Factory's owner and is he David Richwhite's brother?
WW: Yes. I think you're right.
SC: Was that how you found BBQ Factory, through Leigh Davis' connections to the Richwhites?
WW: No, not at all. I've known Leigh Davis for a long time - 20 years.
SC: Given the importance of Chris George to BBQ Factory, isn't the award of 50,000 options to him rather meagre?
WW: He's passionate about this business. He's been involved in it since 1986. Chris George has been running the business for six or seven years - the owner's been essentially an investor. Certainly, he's delighted that the business is going into this structure. A lot of growth hasn't been possible for whatever reason under private ownership. He's keen about driving BBQ Factory to new levels. We don't see a problem there. He's also been incentivised in terms of management performance packages. It's just one part of a detailed remuneration package. The guy wants to stay in the business.
SC: Isn't your own retail experience at Farmers, given its struggle to perform and the belated decision to close Deka, rather patchy?
WW: The Deka issue was essentially a business that was viewed as a possible platform to launch into the whole pharmaceuticals area. That was essentially one of the reasons it was kept in place. The deregulation of the pharmaceutical industry just didn't occur, so clearly it made sense to go back and focus on a single brand.
SC: But didn't Farmers struggle too?
WW: The year before we got involved, it was losing money. We took it up to about $50 million EBIT over the period of our time there. We formulated a strategy that allowed it to get into bigger boxes. That whole strategy was put together while Garry and I were at Farmers, particularly with Westfield.
SC: Why would a retail investor choose this fund rather than another?
WW: Essentially most managed funds invest in public equities. If you talked about timing, the question has been asked, are we at the top of the cycle with a lot of investment companies so why would you invest now. The key difference with our fund is what you're buying here is businesses that would be bought in the private equity market. We will be buying them at very good value - that's evidenced with the purchase of BBQ Factory - and you also get diversity. (At the moment), if you want a retail stock, you have to buy one of the listed companies. Their performance generally doesn't reflect what's actually happening in the retail sector. One only has to look at the category perfomances in the March quarter - there was 2.6% retail growth, annualised that's 8%. Retail growth is still fairly strong out there. You then start to look at a lot of the sectors themselves. They've got double-digit growth coming through. The specialty store sector tends to grow at a much stronger rate than the aggregate for the overall sector. What we're offering is the ability to get involved with a managed fund where the managers are going to be actively involved in managing the investments in the portfolio.
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