Spurned PRG retail bidder turns on broker's dual role

By Deborah Hill Cone

Friday 23rd July 2004

Broker Goldman Sachs JB Were has been accused of a conflict of interest during the intensely competitive process to sell PRG's retail assets because it was acting on two deals involving successful bidder Gresham Private Equity at the same time.

The broking house is promoting a $390 million capital-raising by Gresham Private Equity in Australia in the same week it advised Pacific Retail Group to pick Gresham as the winning bidder to buy its retail chain assets.

It is likely the PRG assets will become the major asset of the Gresham fund.

Grumbling from spurned bidders following the contested sale of a big business such as PRG is par for the course but in this case the fallout seems more bitter than usual.

The other major bidder for PRG, GS Private Equity, said it had raised the issue of what seemed like a potential conflict of interest with JB Were during the sale process.

The concern was that JB Were was in line for substantial fees on the Gresham float so it was in its interest to sell the PRG assets to Gresham, which sources said "was desperate for a deal."

And how did GS Private Equity know its price was not being passed on to its competitor?

"You are asking a valid question. There is no way of ever finding out the answer to that question [but] we have our own views on that point," GS Private Equity investment manager Tomas Chubb said.

He said it "was not a disadvantage" for JB Were to be in the position where it was both an adviser to the vendor in the PRG case and a promoter of a capital raising for the potential buyer.

But JB Were head of investment banking Andrew Barclay said the broker had no conflict of interest as the only party that had the right to raise that allegation was its client PRG and it was happy.

"My job is to get them the best price I can get," Barclay said.

PRG chairman Maurice Kidd said he did not believe JB Were had a conflict.

JB Were said the connection between the two Gresham deals was not close. The firm was one of only four brokers promoting the Gresham fund (although it is listed in the product disclosure statement as arranger and lead manager) and the investment banking operation in New Zealand that handled the PRG sale was run independently of the equity arm in Australia.

"The degrees of separation are formal. Until [the capital raising] was brought to my attention I had no knowledge of it but even if I had it would make no difference," Barclay said.

Gresham paid $138.5 million in a bid for the PRG assets, considered by some sources to be $20 million more than PRG had expected for it, although the official line was that there was only a small margin between the two bidders.

One of the key differences between the bids might have been details of the 10-year commitment to keep a relationship between the retail company and PRG's finance operation. Depending on how this was structured it could transfer millions of dollars in value.

If PRG's finance arm is able to go directly to customers of the retail chains with finance offers it could undercut the retailers' margins by offering to fund purchases with personal loans, rather than using interest-bearing hire-purchase deals that contribute to the retailers' bottom line.

PRG has swiftly built up its finance book by doing this bundling consumers' hire purchase commitments into a single personal loan.

PRG's Kidd said under the Gresham deal there were no material changes to the manner in which PRG's finance group was conducting business with the retail business.

"Both parties are obviously happy with the contract."

Kidd said the Gresham deal was not conditional on management buy-in. Rival bid GS Equity was believed to have done a deal to offer equity to key management.

The $138.5 million raised by the asset sale is expected to be used to pay back $14 million poured into near-dead UK retailer PowerHouse as well as paying off debt.

Retail sources said new data from the UK indicated the state of PowerHouse was worse than PRG had predicted and the company was already drawing up contingency plans of how it could close down the chain.

But Kidd said there were no plans to close PowerHouse.

Meanwhile, holders of PRG capital notes will not be getting their money paid back despite the changing nature of the entity in which they invested. Trustees Executors, the trustee for the capital notes, was not available for comment but it appears the trust deed for the notes does not allow the noteholders to demand their money back.

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