Sir Ron's last hurrah

Tuesday 1st May 2001

Despite his reputation as the Warren Buffett of the South Pacific, Sir Ron Brierley and his company Guinness Peat Group struggle to impress analysts and shareholders at home. Just what's wrong with Sir Ron and friends, asks Fiona Rotherham - and how long will they give themselves to put it right?

A helicopter trailing a huge promotional sign chopped overhead. Television cameras jostled with men in suits. Spectators craned their necks for faces they could recognise. The ground was littered with advertising and promotional junk. Inside, crowds of middle New Zealand buzzed with excitement about the performance they were about to witness, even be a part of. It doesn't get bigger than this, they exclaimed.
We're talking about a David Tua fight, right? Or a Tom Jones concert? Or, please no, a Paul Holmes special?

Nothing so mundane. Reminiscent of the corporate shenanigans of the 1980s, what everyone had come to see was the stoush between corporate giants of yore. The lineup read like a who's who of New Zealand corporate history. In one corner was a consortium backed by Peak Petroleum, an investment firm with roots in über-investor Fay Richwhite. In the other was Shell/Apache, a joint venture between global heavyweights of the energy scene. At stake was Fletcher Energy, the remaining chunk of the Fletcher Challenge empire, now up for sale.

A rumble in the jungle, all right.

And who better to liven up the proceedings than executives from Guinness Peat Group, the investment company of Sir Ron Brierley. To the disappointment of the crowds, Sir Ron wasn't there - but right-hand man Tony Gibbs was. As proceedings began, Gibbs leapt to his feet, theatrically raising a point of order objecting to the validity of the meeting. It was a formal way of firing the first shot, and Gibbs, a confident, charming and cheeky man, could barely contain his grin.

There was a lot at stake. If Gibbs succeeded, Peak would then take weeks to drool over the Fletcher Energy books - by which time, warned Shell, its offer would be taken away. The whole unravelling of Fletcher Challenge, dependent on the sale of Fletcher Energy and planned for months, would be stalled.

As it happened, experienced Fletcher Challenge chairman Roderick Deane deftly fended off the GPG and Peak attacks. With an objection overruled here and a tirade cut short there, Deane guided the historic meeting to its end. Shareholders overwhelmingly accepted the Shell/Apache offer. Peak Petroleum walked away empty-handed.

And GPG? It failed, surely? An unfortunate and costly experiment for Sir Ron and co? In fact, the move had been honed to perfection by Sir Ron: identify undervalued assets, move in with a small share-holding, raise merry hell with the board to add value and, in this case, mount a competing offer to buy the company.

Okay, so Plan A went awry. But GPG had a Plan B. The competing offer had forced Shell to raise the cash component of its original offer from $7.74 per share to $8.23. And GPG, with its 2.8 million shares in Fletcher Energy, was looking at an overall profit estimated at $2.5 million.

No big deal

So it goes for some of the smartest business operators around in New Zealand. Gibbs and GPG Australia boss Gary Weiss had a bit of fun, made a bit of money and lived to fight another day.

But here's a question: did they really add significant value for their own shareholders? Did Plan B lift GPG's profits, impress shareholders and boost the share price? Analysts are saying no.

"The market thinks that GPG is becoming fat and lazy," says JP Morgan retail investment director Arthur Lim. "It's too big now. With 475 million shares on issue, who cares about how much they make out of Fletcher Challenge Energy - it has little impact on [GPG's] net tangible asset backing."

Even the $11 million it made this year on the sale of its 7.3% stake in Montana only amounted to a gain of a few cents per share. No big deal. GPG would have made significantly more hanging out for the $4.65 per share that Lion Nathan eventually offered.

GPG remains one of the most recommended stocks on the New Zealand share market, yet for the last couple of years it has been trading at a significant discount (now 30%) to its net tangible asset backing, or NTA (see "What is NTA?"). The share price has hovered around the $1.50 mark this year, but analysts reckon it should be worth more, somewhere between $2.05 and $2.15. By JP Morgan's calculations, the market NTA has risen from $2.07 to $2.12 per share in the past financial year.

There are a variety of reasons for GPG's disappointing share price, not all of them GPG's fault. The stock fell out of favour a couple of years ago as investors turned from "value stocks" to "growth stocks" in the tech sector and dot-coms. And shareholders, rightly or wrongly, were disgruntled that GPG didn't return the $600 million raised by selling its 49% stake in listed fund manager and insurer Tyndall Australia, choosing instead to plough the money back into new investments. Of this, it's thought GPG has less than $100 million left in the bank, some say as little as $15 million. Ironic, given that GPG's specialty is finding under-valued companies and restructuring them so surplus capital is returned to shareholders. Yet it has point-blank refused to return its own surplus cash to shareholders.

Even worse, analysts criticise the "active investor" for being too inactive - behaving more like a fund manager that sits back and waits to see what happens with its investment than an entrepreneur who goes in, stirs things up and adds value.

"As you get bigger and bigger it gets harder and harder to add sufficient value. If one investment does well it gets cancelled out by another doing poorly. Investors don't see GPG making a whole lot of money," says UBS Warburg analyst Ian Purdy.

As a result, GPG's share price has barely performed any better than the NZSE40 over the past decade. And we all know how poor that looks.

What's good about GPG

Funnily enough, GPG sees things quite differently.

Sitting in GPG's new upmarket boardroom overlooking the Auckland harbour bridge, Tony Gibbs - with that pugnacious manner that stops just short of being rude - jabs his finger at the figures he's had sent over from GPG's number-crunchers in its UK head office. He points to the company's compounded growth rate in the last seven years - around a 22% return on assets. "Now, that's about as good as Berkshire Hathaway," says Gibbs.

Oh really? Berkshire Hathaway is the holding company of billionaire American investor Warren Buffett, who just announced a doubling of profits for the year 2000. Buffett is an investor's pin-up boy, the Don Bradman of Wall Street. This courteous 70-year-old has gained the reputation of being the best in the world. His profitable company is into insurance in a big way - one of Sir Ron's loves - and investing in a whole raft of other companies. According to Fortune magazine, Berkshire's per-share book value (the performance statistic that best describes the success of an insurance company) has grown, on average, by 23.5% a year. There have been a couple of bad years, most notably 1999, but overall Berkshire's per-share results, under Buffet's steady hands, has beaten the total return of the Standard & Poors 500 in all but four of the past 36 years. In that same period, it has gone from about $12 a share to a staggering $64,500 per share as at late March. Compare that to GPG's rise, from 43c in 1991 to $1.50 10 years later.

In a compliment few could live up to, Sir Ron Brierley is described by the UK press as the "Warren Buffett of Down Under". True, Sir Ron shares Buffett's gracious manner and respect for good business. True, like Buffett he has a unique ability to outperform the market. But sadly, GPG just doesn't compare to the Berkshire Hathaway gravy train.

GPG's latest result shows a much reduced net profit - $65.27 million (£18.74 million) for 2000, compared to its record $355 million (£111.95 million) in the 1999 year. That year's profit was boosted by the £95 million sale of Tyndall Australia. Most of the Tyndall proceeds have gone into companies that are yet to show a return in the books but are said to have good unrealised profits - the likes of Dawson International and Coats Viyella in the UK.

To be fair, you shouldn't measure an investment company on its yearly profit or loss. Balance sheet growth over a longer term is more relevant, and JP Morgan's figures show a 13% growth in net assets over the past financial year. In fact, GPG's NTA growth has been strong in all but one year (1994) over the past nine years, outperforming the capital markets in the countries where it invests.

But that hasn't been enough to win the confidence of the market - as the share price shows. Sir Ron admits there are problems. "Arguably, things haven't moved as strongly and as far as one would have ideally hoped since then [1999] but there are things beyond our control. It's a matter of whether the company is genuinely gaining in strength, and I'm quite sure it is."

There are many who would like to agree. When Sir Ron took the company over from Brierley Investments in 1991, it had shareholder funds of just under $90 million (£40 million). Assets have now grown to $1 billion. Less than 10% - almost $100 million - are New Zealand assets, with around 65% in the UK and 27% in Australia. However 25,000 of its 29,000 shareholders are Kiwis, many of them members of Sir Ron's "private army" - investors who have followed the veteran from Industrial Equities and BIL because of his ability to outperform the market.

And GPG has some attractive features. It has virtually no debt, apart from bank debt facilities of around £50 million in the UK, used intermittently. It has a tiny staff of just 14.

The three big dealmakers are Gibbs in New Zealand, Gary Weiss in Australia and Blake Nixon in the UK. They are overseen by Sir Ron, who doesn't receive any payment, neither salary nor director's fees. His interests - as the major single shareholder in GPG - are therefore aligned with other shareholders' desires to lift the share price.

Sir Ron's influence is evident in GPG's Auckland offices. The boardroom walls are festooned with cartoons of him and his team's past corporate deals. There's a really good photograph (just after the acrimonious BIL annual meeting two years ago) of a smiling Sir Ron sitting on the steps sharing a cup of tea with Sir Selwyn Cushing, now BIL chairman.

Another attractive feature is the communication and trust between the top executives, all Kiwis who have previously worked either at Industrial Equity or BIL. "There's an understanding about how we do things that is very difficult to put down in a corporate document. It is all about looking for the undervalue," Gibbs says.

Although Sir Ron says GPG follows the investment strategy he pioneered at BIL and IEL, Gibbs says times have changed. While you can still pick up companies for a lot less than they are worth, he now has to spend time "corporate babysitting" them, to improve their value. Sir Ron disagrees, saying that if you notice the strategy changing, "go sell your stock quick".

It's the old-fashioned GPG way to never risk the balance sheet on any one deal. "We're able to do a big deal, make a big mistake and not blow ourselves up," Gibbs says.

Losing too much

There is plenty to like about GPG, but also plenty to worry about. The most obvious failure, making investors question GPG's abilities, is its unsuccessful assault on Tower Corporation, despite 20 sessions in the High Court, Court of Appeal and Privy Council. GPG wanted to stop Tower's demutualisation and combine it with Tyndall Australia, which it half-owned, in a listed public company. It eventually gave up in the face of determined opposition from Tower, and sold off Tyndall to Royal & SunAlliance.

Neither Tower nor GPG have disclosed their court costs but let's face it, QCs don't come cheap. GPG's costs would have been higher than Tower's, says Tower managing director James Boonzaier. "I guess they thought they could make a huge amount of money from the scheme. They would have if we had gone ahead with the deal, but on this occasion they failed." He says that with some satisfaction. GPG never actually received the legal bill, however - it is understood that Tyndall picked up the tab.

Mining company Otter Gold, where GPG has ended up as a 44% shareholder, was another failure. "I think GPG had an agenda for Otter that has not produced value for them, and it's hard to see how it has produced value for Otter," says former chair Tony Frankham. GPG had hoped to unwind Otter Gold's cross-shareholdings after ousting former chair Tony Radford in an acrimonious battle. GPG ended up underwriting last year's cash issue when no alternative could be found for the company's cash-flow squeeze. It has been an unhappy experience, with the share price dropping to 24c last month.

Former British Salt owner Staveley Industries, which GPG has now wholly taken over, has been another difficult and unrewarding investment. "We had trouble getting our hands on this one but it's coming right now," says Gibbs.

Communication problem

Part of GPG's problem is that shareholder attention zeroes in on its New Zealand takeovers, which are small fry compared to its overseas deals. Take Enza, for example. GPG and FR Partners made headline news in New Zealand last year when they took a core holding in the monopoly apple marketer Enza, by buying shares at prices around a third of their value. The two investment companies paid around $12 million for 36% of Enza's 20 million shares (GPG has 19%), while an independent Grant Samuel valuation suggested the shares were worth between $35 million and $41.9 million. But the company was in a worse position than it thought, and so far the performance has been less than satisfactory. It was a big deal for New Zealand - controversial because of the marketer's monopoly status and the fears it raised among other grower groups - but peanuts by world standards.

Compare Enza to GPG's 16% stake in international car dealer Inchcape, one of its single biggest assets at a cost of £37 million. GPG has been labelled a troublemaker in the British press after its demands for the motor dealer to be broken up and $343 million immediately returned to shareholders. GPG holds undeclared stakes in other UK car dealers, Ryland, Quicks and Perry, which could potentially benefit from Inchape's dealerships being sold off to rivals. The story hasn't hit New Zealand papers, yet its potential impact on GPG's net asset backing is a lot higher than Enza's will ever be.

GPG's communication problems also extend to the nature of its business. It's well known as a share market activist in the UK, yet labelled inactive at home. It stirred up the London Stock Exchange, in which it holds less than a 1% stake, by trying to derail the proposed mega-merger with Deutsche Börse. It's had bloody battles that led to a boardroom sweep-out at the once mighty textiles firm Coats Viyella, in which is has a 12% stake (costing £38 million), and it upset British beer drinkers by mounting three assaults on the family-owned Young Brewery, in which it has a 7.8% shareholding. After grabbing a toe-hold (over 5%, worth £18 million) in hotels company De Vere, it is continuing with a bid to demerger the company's leisure operations, despite the resounding defeat of its proposals at a recent shareholder meeting. And in Australia it hasn't given up on Brickworks, in which it bought a 10% stake for £20 million, despite last year's foiled takeover offer.

Sir Ron says that without a first-round "knock-out", these shareholder initiatives are invariably characterised as failures by the media and analysts. "But this is a necessary part of the process, where sensible and supportable proposals to enhance shareholder value are seldom unrewarded in the longer run."

GPG needs to improve its investor relations so shareholders here better understand what they're doing elsewhere, analysts say. Fair point, Sir Ron concedes. We'll aim to do better, he says, but adds that part of being raider means not saying very much.

Shareholders aren't helped by a placid media either. Critical stories are rare in New Zealand, thanks to Tony Gibbs' ability to schmooze the business press.

Too fat

The upshot of GPG's perceived failures and its lagging share price is beautifully ironic. As an investor in undervalued companies, and as an undervalued company itself, GPG now fits the same category as its victims. "The break-up value is more than the share price but the market is not prepared to pay for it. Sometimes it is hard to see why not," says DF Mainland head of research Bruce McKay. "But it does have a difficult story to get across."

Some analysts argue that GPG would be better off downsizing and handing investors back a big chunk of cash. Sir Ron disagrees, saying: "We're making the funds work more effectively than if we simply hand back relatively small amounts to individual investors. If we gave them the money back I reckon they'd be looking around for a new GPG to put it right back into."

So, what can shareholders expect?

The company made a fairly half-hearted attempt to do something about the share price last year, with a fiendishly complicated share buy-back and issue of convertible notes. It was not well supported by investors.

Gibbs says they're concentrating on lifting profits more than share performance. He forecasts GPG getting bigger in the next few years, but would be surprised if it was still around in 10 years. After all, at 63 Sir Ron is no longer a spring chicken, and Weiss and Gibbs both have other extensive business interests.

Sir Ron has often been quoted as saying there will be an optimum time to end GPG. The question is in the timing. Sir Ron, as he is wont to do, uses the Brierleys analogy: investors would be a hell of a lot better off if they had cashed up the company back in 1986. Using that hard-won experience with BIL, Sir Ron reckons there will come a time where there is no point letting GPG get bigger and bigger, but "that's easy to say and not so easy to identify".

The other factor to consider is obviously when the team has had enough. Ten years would be a fair estimate, Sir Ron says. Halve that and you're probably closer, analysts say. He and the team still have a point to prove, but they don't want to take too long doing it. For investors, it won't be soon enough.

Fiona Rotherham
fiona@unlimited.net.nz

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