The Shoeshine Column: Opportunity knocks, Eric answers the door

Friday 28th September 2001

Never let it be said investment king Eric Watson doesn't know a bargain when he sees one. Watson's 176c a share take-out bid for Pacific Retail Group is a bit of blatant opportunism but even so it's highly likely to succeed.

Watson's Cullen Investments appeared on the share register two years ago, buying 74% from Scotland's Murray Investments and former executives Sir Roger Bhatnagar and Greg Lancaster. It sold 8.6% and 3.3% respectively to Watson's buddies Mark Hotchin and Nick Gordon. Cullen now has 63%.

The second-largest holder is Axa Asia Pacific with 10.8%. Watson will presumably have canvassed the support of his mates and of Axa for his 176c offer so it's a pretty safe bet he already has his foot on 86.1% of the shares.

So he needs only 4.3%, or 1.94 million shares, to get to 90% and go to compulsory acquisition.

Before he can do that, however, PRG has to commission and circulate an independent appraisal report. These tend to be rubber-stamp jobs, particularly when companies, such as PRG, are out of the limelight.

What with the preponderance of Watson's mates on the PRG board the company found itself a bit embarrassed for independent directors. The only man who fitted the description was Richard Reilly so PRG was forced yesterday to dragoon lawyer Jock Irvine to take care of the minority shareholders.

Appraisal reports tend unavoidably to take greater account of the knowns - previous profit and share-price performance - than they do of more ethereal factors such as possible future performance.

Minority holders would do better to listen to their sharebrokers.

PRG owns 80 Noel Leeming, Bond & Bond, and Computer City appliance retail stores and the Pacific Retail Finance hire purchase finance arm.

Earlier this year it bought the Living & Giving Giftware stores and plans to take them nationwide. A few weeks ago it launched the first Big Byte computer store in Christchurch, again with national ambitions.

The weakness of its share price in recent years owes as much to the stewardship skills of Watson's Cullen Investments as it does to any inherent flaw in the company's business model or markets.

In a research note sent to clients this week UBS Warburg's Malcolm Davidson said the offer was "opportunistic in the light of weakness in sentiment from terrorist activities offshore."

UBS values PRG at 200c. One of the reasons for the poor performance of the share price has been the lack of dividends.

"We believe a major reason for the 'no dividend' policy ... has been driven by the majority shareholder's desire for a more attractive take-out level," the broker says.

Several other factors can be laid at Cullen's door.

Watson's recent performance in the listed sector has, as far as minority shareholders are concerned, been something of a disaster.

The failure of the Flying Pig e-tailing venture further tarnished Watson's "Midas touch" image. PRG's operating performance has been weak for several years.

The government's imposition, at Fisher & Paykel's request, of anti-dumping duties on Korean whiteware imports, hasn't helped sentiment.

And, with revenues generated entirely within New Zealand, growth prospects have been reliant on consumer confidence and overall economic growth, which haven't been sparkling of late.

But most of these factors no longer apply.

PRG is avoiding the price effects of the new duties by sourcing Korean-branded appliances from other Asian markets. As new chief executive Peter Halkett pointed out at the time of the March-year profit result the duties "will have no commercial impact."

The abnormal write-offs that chequered previous years' results have all been worked through and 2002 is seen as the first year in which the company will turn in a "clean" income statement.

Analysts see Halkett as a steady pair of hands with a back-to-basics approach that should bear fruit before too long.

Under his leadership a number of promising changes and new directions have been introduced.

New Zealand lacks a nationwide full-service player in the SME (small to medium enterprise) and home computer market.

Big Byte, with its "in-store solutions centres" and "PC clinics" has the potential to fill the gap.

The Living and Giving chain has high margins and strong cashflows. Four new stores are planned around the country before year's end.

Other basic business-improvement measures include stronger category management concentrating on growth, rather than replacement, lines, centralising group processes such as human resources and advertising, and trials of the "contracted store management" model employed successfully by retailers such as Harvey Norman and Foodstuffs.

Last but not least, Halkett is looking to expand Pacific Retail Finance's activities to third parties, allowing other retailers to offer hire purchase finance to their customers.

This division will be of particular interest to Watson, who has long been eyeing opportunities in the finance area.

Watson recently reorganised his sprawling investment empire into two groups - Logan Investments, which holds his privately owned companies, and Cullen, holding publicly listed companies in which he has a stake.

What he does with his private companies is his own business.

But if he wants ever to regain the confidence of the public capital markets he is going to have to give a bit more respect to outside shareholders.

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