Mainfreight - Don Braid

By Jenny Ruth

Thursday 11th September 2003

On Monday, Mainfreight raised its takeover bid for Owens Group from $1.03 a share to $1.10 a share. While the new price is at the lower end of the $1.09 to $1.27 a share valuation by independent expert Deloitte Corporate Finance, it has won a unanimous recommendation from Owens� directors that shareholders accept the offer. The directors and the Owens family have indicated they will accept it for all the shares they own.

Don Braid tells how that came about:
"We�ve sat around and tried to analyse the business in far greater depth, albeit at a distance. We got into a discussion with board members of Owens last week.

We�re very happy and delighted to be able to come out of that with their recommendation.

SC: Given the lack of information you have on Owens and its poor track record, aren�t you worried about what you might be buying?
DB: Where there�s problems, there�s opportunities. What we see are the opportunities presenting themselves in that business. One of the things we will offer the business is a far greater transport focus and a desire to improve the business in not just monetary terms but in terms of the service it delivers and the way it operates for its people.

SC: sharechat reader suggested your bid might have been better received if you�d offered a share swap rather than cash.
DB: We didn�t have any intention of diluting Mainfreight shareholders through this process.

SC: You mean (executive chairman) Bruce Plested didn�t want to be diluted?
DB: He�s at 29%, but there�s still a few others. We took the decision on behalf of all shareholders. We still believe our share is under-valued at current levels � it�s on a PE (price to earnings ratio) of about 11.5% currently. If Owens shareholders wish to continue to be in a transport stock, we would be very delighted if they were to sell us their shares and buy Mainfreight shares with the funds.

SC: Is Owens a "must have" for Mainfreight?
DB: No, it�s not a must have. The opportunity is there. It presented itself and, particularly with the transport market coming into play with the Tranz Rail/Toll Holdings situation, the timing was right for us. In the last couple of years, we�ve been hamstrung by the performance of our Australian operations. Our attention has been focused on that. In the last 12 months in Australian we�ve performed better, although certainly not to our satisfaction, but we�re more comfortable with it now.

SC: You say you�ve got Australia under control, but your losses there are up, not down?
DB: The important thing is revenues. In previous quarters, we�ve seen declining revenues from poor service and disgruntled customers. Now we�re starting to see those revenue lines growing. From our perspective, we�ve restructured and turned the business around and in particular we�ve increased the quality of services. The way we run the business is a far better manner than perhaps we did in the past.

SC: It�s taking a long time?
DB: It�s not an easy country to run a business in. For a long time we looked for too much change. We head-butted a lot. With people and surplus property. We were very aggressive in those first couple of years. We moved very quickly on some of those changes and, in hindsight, I�m pleased that we did, but it certainly didn�t help with the returns. But I think it will give us a better business for the future. It will enable us to have better returns and a better business as we progress down the track.

SC: You missed your last timetable for Australia to break even. Do you have a new one?
DB: We haven�t got one. We�re confident we will continually see improvements over the next five or six quarters. From that, people should take heart that the improvements are coming and that break even�s not far away. We�re very focused on getting the business into profit. We haven�t dismissed it. We�re working hard to ensure that�s the case.

I think it�s important to understand why we�re in Australia. It�s because of freight decisions.

As logistics has changed and the people making the decisions for freight � Our very strong domestic business is now beginning to be determined by freight that comes in from other countries. We must influence the freight flow from Asia and the US into our business in New Zealand and Australia. If you are overseas, you don�t get the opportunity to talk about just New Zealand. You have to talk about Australasia and Australasia is still a very small part of their overall business. We�ve got to be in Australasia. We have a large portion of business between Australia and New Zealand. We�re trying to become a global logistics provider. In revenue terms, our business is nearly 50/50 onshore versus offshore.

SC: Aren�t the margins a lot fatter onshore?
DB: Because we�re seen as being able to offer good value added services in New Zealand, we are able to get better margins. The international margins are certainly a lot more depressed than the domestic margins. The key for us is that we add value across the supply chain spectrum, being able to handle everything that�s needed between Los Angeles and Wellington. We then get better margins overall.

SC: Owens is having trouble in Australia too, so aren�t you buying yourself more problems there?
DB: Their business is a little different to ours. They have an international business and a domestic business which seems to be focused on containers and wharf services. We don�t have any interests in that area in Australia. We will need to review those divisions if we�re successful in the acquisition � I don�t want to sound too cocky about it.

SC: Your relationship with Tranz Rail in the past hasn�t been happy. What�s the outlook (given the Toll Holdings takeover of Tranz Rail)?
DB: We�ve had a frustrating relationship with Tranz Rail. We would like more and improved services across the transport spectrum in New Zealand. We�re still a major user of Tranz Rail, spending in excess of $15 million a year. We believe we could spend a lot more if we could get the services we want.

SC: Have you talked to Toll Holdings about the future?
DB: We�ve had some discussions with Toll. It will depend on what they decide to do and how they decide to run the railways. They seem to understand us better than perhaps some of the decisions that have been made in the past at Tranz Rail. We know the Toll people pretty well. We understand the way they think. We don�t want to move any more freight by road � in our opinion, we move too much freight by road.

SC: What�s happening with the cabotage situation? (Unlike in most countries, coastal shipping in New Zealand is open to all comers)
DB: I think it�s vitally important that we have some kind of regulation on the coast to ensure that we�re attracting freight to a dedicated coastal operator. Right now, it�s very difficult for dedicated coastal operators like Pacifica to survive quite unfair competition. The review�s been ongoing for some time. The lack of decision-making is frustrating a lot of us who are waiting for those decisions. We understand it�s imminent. What that decision will be is anybody�s guess. There hasn�t been a lot of consultation either. We�ve made our views known. Minister (Paul) Swain has been noticeably absent from any discussions with us about it. (Deregulation) takes important tonnages off both rail and the (domestic) coastal operators. That tonnage is incredibly important in making the railway and coastal services viable. I think the Manufacturers Association has got it wrong in worrying what regulation will do to freight prices in New Zealand. I think, overall, we would have a better transport system for manufacturers than we have at the moment. My advice to manufacturers would be to see the bigger picture rather than just worrying about freight rates. Geographically, this country is so difficult to move freight by road. It�s a long, elongated country with difficult terrain and poor roads.

SC: Your bid for Owens has been painted in some quarters as a form of protection from Toll Holdings. I�m not getting that impression from what you�re saying?
DB: I think what people read into the Toll/Mainfreight relationship as being far more competitive than it is. Toll has become a giant in the transport sector in Australia. Mainfreight is still a far more focused niche player. We�re going to compete with Toll, there�s no doubt about that, in certain sectors, but we�re a lot smaller. I think we could be complementary to Toll in the New Zealand market and maybe in Australia too. We could be providers of extremely valuable business to the rail network. It could be to the benefit of both parties.

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