Goldman prepares to bail out - but don't mention Skellerup

Friday 22nd March 2002

Down at Viking Pacific Holdings a textbook example of the turnaround-practitioner's art has been quietly under way.

The work is pretty much completed and, although not exactly a beauteous thing, will shortly be put on public display.

Whether anybody will want to buy it is another matter. But those who remember the company's birth agonies would hardly recognise the sturdy brute it is today.

If Viking finds its way on to the Stock Exchange's boards again it will be the third time it has, in some form or other, been listed.

The first time, those with long memories will recall, it was called Skellerup Industries. In 1987 it was taken over by Brierley Investments, which refloated it in 1993 as a "Baby Brierley."

In 1996 its managing director, Murray Bolton, became frustrated with the market's valuation. He put together Maine Investments with New York investment bank Goldman Sachs and in 1996 took the company private in a $520 million leveraged buyout.

Part of the finance was stumped up by members of the public who subscribed to a bond issue. Bolton pushed the deal through late that year.

Only four months later it started to become clear the group's cashflows weren't sufficient to fund the mountain of debt they had to service. In market trading the yield on the bonds began to climb steeply.

Bolton and Goldman kept a tight lid on information, pumped in a further $60 million of equity, and crossed their fingers. It wasn't enough.

The bond yield climbed to 60% as two subsidiaries went into receivership. In May 1998 Maine conceded the group would have to be broken up into a "good company/bad company" structure and offered to swap the bonds for good company shares in a deal worth, for the bondholders, about 5c in the dollar.

The bondholders weren't best pleased and Shoeshine and his colleagues had a great old time attending meetings at which Goldman's expe nsively upholstered frontmen, Stephen Shaffron and James Gaffney, tried to keep their Masters of the Universe composure while being pelted with abuse.

But the bondholders didn't have much choice other than going along with the plan. Viking Pacific was born in July that year after a further equity raising.

Sir Selwyn Cushing was brought in as chairman and he recruited a couple of seasoned managers, Donald Stewart and Andrew Powers, as chief executive and chief financial officer respectively.

In December 1998 the company had shareholders' funds of $61 million and bank debt of $122 million.

The half-year had produced revenue of $175 million and a net profit of $1.5 million. Operating cash flow was $1.2 million.

The board and management rolled up their sleeves and got to work.

The company had more than 20 operating subsidiaries, even after the bad company assets had been taken out.

Those that weren't paying their way were weeded out. The earners were subjected to rigorous cost controls and the company's cashflows went into debt repayment.

Three years later the work, as already noted, is pretty much complete.

At the December balance date shareholders' funds were $95 million and bank debt was $53 million. Half-year revenue was $176 million and the net profit was $6.3 million. Operating cash flow was $4 million

In short, the company is now back on its feet with solid cashflow and profitability and downright conservative gearing.

Now it's time for Goldman, which holds 83% of the shares, to find an exit route and put its unhappy South Sea Bubble experience behind it.

The fact it is selling need not concern potential buyers. Equity investment isn't Goldman's business and it never wanted to be a shareholder in the first place.

The question is, who's going to buy its shares? One option is for it to buy out the 850-odd minority shareholders, who include Peter Masfen, Rangatira and a ragtag bunch of former bondholders.

Then it could shop around for a trade buyer. But who would want Viking's somewhat motley assortment of 11 manufacturing subsidiaries is far from clear.

Option two is a sharemarket listing. But it's no more clear why institutional investors and/or Joe Blow public would be keen to take Goldman's 53 million shares off its hands.

Profitable assets will, of course, always find a buyer at the right price so the question for Goldman and its advisers is where to pitch the offer.

At a net tangible asset backing of $1.36 a share the company's 73 million shares are worth $99.3 million.

The two top executives hold share options exercisable at $1.50 for the "A"s and $2 for the "B"s. They can exercise these if a "realisation event," such as a listing, takes place and the shares trade at or above those prices for 20 consecutive days.

At $1.50 Viking is worth $109 million and at $2 it's worth $146 million. That puts it right in the range of "free float" values at which sharebrokers think companies can make a useful addition to the stock exchange list.

At $2, if full year earnings match the first half, it would be on an undemanding price-to-earnings ratio of 11 times.

Sir Selwyn would say only that Viking was "investigating opportunities" but conceded it was looking at listing when the September 11 terrorist attacks messed things up last year.

If Goldman gets out at $2 it will still have lost a barrel-load of the money it pumped into Maine, not least because of the collapse since of the New Zealand dollar. But at least its Viking experience shows investment bankers do know something about putting a company on a sound financial footing.

Comments from our readers

No comments yet