Blessed are the geeks

Thursday 1st March 2001

If there's one debate that has historians tearing at themselves tooth and claw it's the cause of Europe's 15th century Renaissance. Was it the rediscovery of Greek learning? The flowering of Christendom? The fall of the East? Europe's cultural rebirth keeps them all guessing.

You could say the same about the revival of New Zealand-listed Renaissance Corporation. The technology distributor has lifted itself from a financial dark age four years ago, with its share price languishing below 20c, to become the best--performer on the New Zealand Stock Exchange last year. Calendar year growth in the share price was 148% - if you invested $1000 in the company's shares in January 2000, their value would have risen to $2480 by the year's end. All the while the company has been adding products and customers, and has spun off its e-commerce business, Conduit, for listing on the tech-stock-friendly Singapore Stock -Exchange.

So what's behind the success? Well, the reasons are as debatable as those behind its namesake. Renaissance director Clive Lewis is tempted to interpret the company's history as a planned e-commerce success story - one of the few dot-coms to flourish in these times of e-pestilence. The real reason is probably more -boring. Renaissance's remarkable success evolved simply from its desire to cut costs in its core IT distribution business.

That may sound about as interesting as an undergraduate's ecomonics essay. However, the story of how the former Consolidated Silver Mining, first listed in 1968, became an NZSE star could turn out to be a text-book case for how an "old economy" business should transform into a "clicks-and--mortar" enterprise. When the are written, they won't find a bunch of computer nerds dreaming up something to flog on the internet, says Bruce McKay, DF Mainland's head of research. "It developed from something Renaissance itself needed, and the software is therefore far more robust."

Here's what the books will say.

Reformation

After metamorphosing from mining to sheet metal fabrication and then, by early 1997, to computers, the listed company held the rights to exclusively distribute Apple computers in New Zealand. A reverse takeover by managing director Mal Thompson saw it consolidate a number of smaller computer distribution companies and change its name. Thompson, a 20-year vete-ran of the IT industry, then retired from an executive role.

But by the end of 1997 the company was in trouble, reporting a $2.6 million after-tax loss. Thompson (holding a 20% stake) returned to the helm and the board hired Lewis as financial controller. "We had reducing revenues, margins were being squeezed by competition and costs were going up. That's not a pretty picture. Everything was going wrong," Lewis says.

One of their first steps was to reactivate plans for a business-to-business website for customers, under control of John Hayson (now Conduit's chief executive). The website was a fairly radical step for a traditional distribution company. But it produced -unexpected results, with on-going development including hosting websites for companies wanting to take their business online. Conduit links to back-office systems, so an order placed on any reseller's website or to Renaissance itself goes through a seamless electronic process to automatically generate a dispatch note and invoice for customers.

By late 1999, 14% of business was handled electronically, meaning significant savings on transaction costs. That rose to 40% by the end of last year, after the company dealt out Air New Zealand air points to resellers ordering through the website. It has issued more than 13 million air points in the past year.

After spending about $3 million on its e-commerce initiatives, Renaissance is aiming for 70% of all transactions to be electronic by the year's end. Meanwhile, management has been knocking the rest of the business into shape, notably increasing the range of computer brands on offer and expanding after-sales service.

Looking east

The reformation seems to have worked. In December 1998 a small $249,000 net profit was achieved, rising 76% in 1999 to $439,000. Analysts forecast the 2000 result to be $1.3 million after-tax. Turnover has gone from $107 million in 1998 to $123 million in 1999 and is forecast to be $160 million for the 2000/01 years.

On the e-commerce front, last year Renaissance expanded into other industries and then beyond New Zealand, securing its first customer in Singapore and signing up three in Australia. Renaissance is still Conduit's biggest customer - it has licensed software for its website for 10 years from Conduit, which now owns the intellectual property.

The revival has happened on two fronts, traditional and e-commercial. To unlock its new e-commerce value to share-holders, the company chose to list on the Singapore stock exchange. Just why it went there will also go into the books as an indictment on New Zealand's tech-stock history. For one thing, it's the Singaporeans putting up most of the new dough. Renaissance's major shareholder (30%) is listed Singapore investment company Acma, a company with connections to potential investors and customers. The Development Bank of Singapore (DBS), the largest banking group in Southeast Asia, will invest $6.6 million through a subsidiary for a 16.7% stake in Conduit (diluted to 15% when new shares are issued in the initial public offering). What's more, the Singaporean public is just that much more interested in the tech sector, and is especially enamoured with IPOs.

Conduit is not without challenges, of course. The 25% stake to be offered to the Singapore public will need to be priced well above that paid by the bank in order to scrape through the minimum market capitalisation for a main-board listing. Still, that should take it to $S80 million ($108 million), compared to Renaissance's market cap on the NZSE of just over $49 million, based on the current $1.34 share price.

Listing on the tech-savvy Singapore market also addresses New Zealand's ongoing credibility problem: the Singaporeans say Conduit will sell itself better if it loses the Kiwi connection. "Its very hard for customers to see a piece of software coming out of New Zealand and believe it has all the features and credibility of usage ours has," Lewis says. Conduit has already set up a Singapore office and marketing joint ventures with local partners in Malaysia, Thailand and Hong Kong.

Local problems

The tricky part in all this is distributing Conduit shares to Renaissance shareholders. The restructuring involves a pro rata share buy-back, whereby Renaissance offers shareholders 30% of its Conduit shares in exchange for repurchasing and cancelling the same value of shares in Renaissance. This will occur during the float.

JP Morgan equities analyst David Wallace says it will be more difficult for Conduit shareholders in New Zealand to track the stock once it is Singapore based, as it will be too small to feature on the radar screen of local analysts. At the same time he thinks the listing will add shareholder value. "Will one plus one equal three? I think one plus one is more likely to equal around 2.1."

Renaissance shareholders agreed to two resolutions in early February - okaying the Development Bank purchase and the issuing of options to Hayson and seven other executives in order to lock them in while the company establishes itself in Asia.

Post-listing, Conduit's likely ownership will be DBS with 15%, the Singapore public (25%), Renaissance shareholders who accept the buy-back (up to 30%) and Renaissance (25-30%, with management options of 5% kicking in over the next four years). Renaissance shareholders should participate in the Conduit share buy-back with "their ears pinned back", as they stand to make a substantial premium on listing, considering its growth prospects, says DF Mainland's McKay.

What's left at Renaissance? The bulk of its revenue is in the low margin computer distribution business, but analysts say there is good potential for the company in servicing and selling products into the educational market - where Renaissance has been dominant for the past 15 years.

Renaissance is the New Zealand distributor for RM plc, a United Kingdom market leader in supplying curriculum and administration systems for schools. A New Zealand government-sponsored trial of the system is underway among a cluster of Porirua state schools. The revival is not yet over.

fiona_rotherham@idg.co.nz

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