By Phil Boeyen, ShareChat Business News Editor
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Friday 9th March 2001 |
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Like the Fletcher separation, the aim of the F&P restructuring is maximising shareholder value, and one of the reasons, the company says, is because international financial markets value Healthcare and Appliance companies in completely different ways.
"Your board believes it is appropriate that we create stand-alone Healthcare and Appliance companies that can attract investors who understand the merits of their respective operations, their technology and their future growth prospects," it told shareholders in December.
The Healthcare division will be known as Fisher & Paykel Healthcare Corporation and the Whiteware and Finance divisions are to be amalgamated into a company called Fisher & Paykel Appliances Holdings.
Under plans unveiled late last year, 20% of the Healthcare business will be offered to US investors through a public offering.
F&P shareholders will directly hold 60% of Healthcare and will also get a cash payment from some of the proceeds of the US sale, with the rest of the cash going to the company. The remaining 20% of Healthcare will be owned by Appliances Holdings.
Shareholders will own 100% of Appliances Holdings will be able to separately trade shares in both companies.
The Healthcare division is expected to trade on the NZSE, ASX and Nasdaq, while Appliances Holdings will trade on the NZSE and ASX.
The first official word on a potential separation was made public in June last year when the company announced that, three months earlier, it commissioned Deutsche Bank to undertake a strategic review of its three operations - Whiteware, Healthcare and Finance.
In terms of getting its house in order for the separation, however, the story goes back further than that.
While the company made steady profits of around $36-37 million in 1997 and 1998, the figure took a tumble in March 1999 when the company reeled from more than $30 million in abnormal restructuring expenses.
These included the sales of its Cellnet mobile services and Panasonic consumer electronics division, restructuring of Whiteware, cutting 300 staff from its continuing businesses, a downsizing freight consolidation and transportation operations and disposal of surplus property.
The provision also included the cost of exiting its under-performing finance business in Australia.
That first slice at getting the company back on track appeared to provide instant results. In the half-year to the end of September 1999 F&P reported a profit of $24 million, well up on the previous year's $18 million.
But the dust didn't settle there. In December that year it phased down its loss-making programmable controller division and in March 2000 closed its Australian finance company and sold its mobility scooter business.
Leaner and cleaner, the company then reported a profit of more than $54 million in March 2000.
The Healthcare division was undoubtedly the standout of this result.
On assets employed of $93 million its revenue hit $143 million in the 2000 financial year, with operating earnings of $51 million. Over 90% of revenue came from lucrative overseas sales.
The full-year result was followed by a strong half-year to the end of September 2000, when Healthcare earnings grew to $28.5 million, up more than 20% on the previous year.
Healthcare's product range focuses on three main areas.
The main driver of earnings is clinical humidifiers, accounting for around 50% of earnings.
The second is an expansion of the humidifier market, aimed at those suffering from obstructed sleep apnea (OSA). These products pump out a continuous supply of air at a designated pressure, helping those suffering from OSA to sleep better.
The expansion into this field is a great example of product extension. It also highlights the value of synergies between the F&P divisions, as one of the humidifier models uses a motor that was developed by the company for use in a dishwasher.
The CPAP (continuous positive airway pressure) humidifiers account for 30% of Healthcare's business.
Another area the Healthcare division is moving into is infant warming products, which grew by 55% in the last reported half-year to make up 6% of the division's revenues.
Last year the Healthcare production moved into a new $30 million facility which doubled the size of its manufacturing area and offers increased productivity potential.
That aside, the pure joy of the Healthcare division has to be its ability to make a buck.
F&P describes it as highly profitable, partly thanks to a relatively simple manufacturing process comprising mainly electronic sub-assembly and plastics. This has enabled the division to produce an enviable operating margin of more than 35%.
But if Healthcare is the bright young thing at Fisher & Paykel, its Whiteware division is lumbering to keep up.
Despite such innovative products as its DishDrawer dishwasher, and recent marketing coups like exporting refrigerators to Japan, the division is definitely trading in Healthcare's shadow.
Earnings from operations were only $38.6 million in the 2000 financial year, on assets employed of over $520 million. Half-year earnings to the end of September 2000 were just $9.7 million - down more than a third on the previous half-year result.
Whiteware's operating margins also look positively ill compared with Healthcare, at just 3%.
F&P blamed the poor interim result on a number of factors - unrealistic price competition from imports, increased input costs because of the low dollar, and exports not benefiting from the lower dollar because of currency cover.
Taking the bull by the horns it moved quickly to reorganise the Whiteware division, changing it from a divisional structure to a centralised structure, shedding 200 staff and saving $9 million a year along the way.
It also cut back capital expenditure plans by 30% to $25 million a year for the next three years, and vowed to focus on reducing material input and operating costs.
Whether these changes bear fruit will be known when the company issues its full-year results for the year to the end of March. That's also when the company plans another update on the separation plans.
Until then, though, F&P spokesman, Richard Blundell, isn't giving away much further information about the separation process than has already been made public.
"It's a logical step to the completion of the restructuring process we started several years ago," he reiterates.
Asked whether there is some concern that investors will ditch Appliances shares in favour of the growth Healthcare company once the split is made, Mr Blundell is also circumspect and says that will be up to investors.
"It will depend on the point in time of both companies' life cycles."
It will, of course, also depend on what price shares in both companies end up trading at, but Mr Blundell says the company is constrained from talking about pricing details because of Healthcare's planned Nasdaq listing.
Analysts too say it is too early to talk about share prices for the post-split stocks because the exact structure of the separate companies, and figures such as debt levels, have not yet been made public.
What does appear clear for New Zealand investors is that future shareholder value is going to be dependent on what US investors are prepared to pay when the company seeks its IPO there for 20% of the Healthcare business.
That in turn may rely on how well the company and its advisors can sell the Fisher & Paykel brand to the US financial markets.
Certainly the split in two has been welcomed by the NZ market, which has re-rated the share price by more than a dollar since the separation announcement. But although it has the backing of most analysts and fund managers, not everyone welcomed the news with open arms.
Not long after the announcement ratings agency Standard & Poor's immediately placed Fisher & Paykel on negative creditwatch.
The agency says its concerns are with the Appliances division because of its more narrow focus on the mature and highly competitive Australasian whitegoods market, and the potential loss of access to the Healthcare division's growing cash flow and US dollar revenues.
It also claimed there is uncertainty on Appliances' financial policy given heightened operating risks in the Australasian whitegoods industry, particularly Australia.
The agency says competition in the Australian whitegoods market, which accounts for about 60% of the Appliance division's unit sales, continues to intensify.
That means even further pressure on margins. Plus, if Australian retail results elsewhere are anything to go by, it would be surprising if the division isn't hit in the second half with the combined depressive effect of GST and the Olympics.
When F&P delivers its full year result it will be interesting to see if it has managed to ratch up margins in the Whiteware side of the business or if Healthcare has once again taken its corporate cousin to the cleaners.
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