The O'Brien Column: Windfall investors chase sinking pool of local equity investments

Friday 18th May 2001

The current rash of full and partial takeover activity could have adverse effects on New Zealand equity investment.

There is an old theory that offers for all or part of a listed company frees up funds for reinvestment in the sharemarket.

While that view has some merit, local investors have to decide how they will reinvest in a shrinking market.

The New Zealand market is lopsided in two respects. A few large companies dominate the list and they are under actual or effective control of other companies, often based overseas.

Various offers currently under way for bits of large and medium-sized companies will, if successful, reduce the pool of equity securities even further.

A fair proportion of New Zealand listed companies have a small capital base, are unsuitable for institutional investment and may also be of no interest to private investors.

Taking an arbitrary cutoff point of companies with fewer than 50 million shares on issue, there were 44 groups in that category this week and several of them had one or two dominant shareholders.

Some of the companies are well known names on the New Zealand investment scene, while others are more obscure, particularly among the technology-based sectors.

The 44 included Advantage Group, Arthur Barnett, Broadway (which is about to have a 1:3 renounceable issue at 25c each), Dairy Brands, Designer Textiles, Ebos, Hellaby Holdings, Mr Chips, National Property Trust, Northland Port, New Zealand Refining, PDL Holdings, Pure New Zealand, Richmond (recently listed), Scott Technology, Shotover Jet (under the control of Ngai Tahu Holdings), Vending Technologies and Williams & Kettle.

There were 25 others but that list is indicative of the current situation.

With the exception of New Zealand Refining, which sells at the highest price of any New Zealand company, the groups with fewer than 50 million shares also have relatively low market capitalisations.

At the other end of the Stock Exchange list we have Telecom with 1.76 billion shares on issue and a market capitalisation of $11 billion at the end of last week.

That market capitalisation accounted for about 20% of the total New Zealand market.

Telecom's shares have good liquidity but there is obviously a limit on how many of those shares institutions and individuals can, or should, hold in their portfolios.

The other very big companies are under control, namely Carter Holt Harvey, Brierley Investments, Contact Energy, Independent Newspapers, Lion Nathan and Natural Gas Corporation.

Back in the happy, but weird, days before the 1987 crash the exchange list had 250 companies, although a good number were soon to prove they were rubbish, a point many observers had suspected for some time.

The New Zealand market is also thin in terms of its range of industry sectors.

Our resource sector (minerals, oil and gas) is almost non-existent, unlike Australia where investors have a choice of many companies involved in productive mining of a sizeable range of metallic ores.

The New Zealand technology-based sector is also negligible in relation to those of other countries, despite the recent hype associated with our listed technology and e-commerce stocks.

Financial services has only on sizeable New Zealand-based company in Tower Corporation.

Anyone wanting to acquire share in a bank has to take a position in an overseas-based organisation, usually in Australia.

A similar situation applies to the other listed insurance/financial services companies, irrespective of the fact that AMP and Axa Asia Pacific have New Zealand listings.

The New Zealand market has a core of forestry-linked groups, primary produce and rural services companies, ports, electric power producers and distributors (many under overseas control) retailers, property, and the usual range of general services.

Each of those sectors has fewer representatives than their overseas counter parts and the ranks are shrinking almost daily in terms of the number of shares available for public trading.

It seems any investors getting windfall money from the current corporate partial or full takeover activity will be chasing a diminishing pool of local equities.

Other options are to put the cash in diversified managed funds, in fixed interest securities (at relatively low rates), property, or on a big spendup.

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