Elders defends disclosure of Watson 'family ties'

By Deborah Hill Cone

Friday 1st February 2002

An established finance company comes under scrutiny over related-party deals

Hanover Group yesterday defended the level of related-party lending in subsidiary finance company Elders Finance, part of Eric Watson's complex web of interests.

A National Business Review investigation has found the disclosure rules in Elders' trust deed do not catch all of the deals between Elders and companies which are part of "Eric's empire."

The Elders Finance prospectus does show that 19.97% of Elders Finance's outstanding loans were with related parties at June last year.

Related-party deals included transactions with Plaza Developments. Cullen Investments, Customhouse Investments - companies linked to Elders' owners Mr Watson and Mark Hotchin - as well as with subsidiary companies such as Nationwide Holdings.

Hanover Group chief executive Kerry Finnigan, a former director of blue-chip property company Bayleys, said he did not think that was a high level of related-party lending.

"We are quite controlled in terms of what we can and can't do.

"In terms of the prospectus it's fully compliant with financial reporting standards and the trust deed."

One of the reasons it is important for related-party transactions to be disclosed is that members of the public invest their money with Elders, and therefore are entitled to know how big an exposure the company has to Mr Watson's empire.

Mr Watson's main vehicle, Cullen Investments, which he wholly owns, has current charges owing to the American Reinsurance Company and to BNP Equities (Australia) - not to Elders.

And Mr Finnigan said there was no way Mr Watson could use Elders Finance to fund his own ventures unless they fitted the commercial criteria for a loan - just like any other punter.

"Just because we're owned by Eric doesn't mean he comes along and dishes his hand in. It's not his bank as such, he's just an investor in the company," Mr Finnigan said.

For example, Elders was not interested in financing the Bendon transaction, Mr Finnigan said.

On January 18, Pacific Retail Group, 73% owned by Eric Watson, announced it would make a full takeover offer for Bendon at $1.90 per share.

"Eric would have to get approval to do that - approval from the other shareholder and director [Mark Hotchin]. He'd have to get my approval. He'd have to get the trustee's approval and it would have to be on normal commercial terms and secured to the satisfaction of the trustee.

"There are a lot of hoops and loops that he has got to go through before he can grab any money out of this company."

But the rules to declare related party transactions do not catch all of the deals between Elders and companies which are part of "Eric's empire."

NBR inquiries found the luxury Matarangi beachfront development, which is partly owned by Mr Watson, has borrowed money from Elders without being declared as a related-party transaction.

Companies Office records show Matarangi Beach Estates has three charges over it securing loans to Elders, on April 15, 1999, August 29, 2001 and October 8, 2001. It also has debt to ASB Bank and Bank of New Zealand.

The Matarangi Beach Estates company is owned by Sonal Holdings, a company which is partly owned by Foreshore Investments, wholly owned by Mr Watson along with his accountant Rick Johnston, of Brown Woolley Graham (now rebranded as Grant Thornton). Another Matarangi company, Matarangi Links, also has an Elders charge over it - it is 80% owned by Mr Watson's Foreshore Investments.

Elders' 50% shareholder, Mark Hotchin, said the Matarangi Links charge was just a guarantee and no money had been lent to that company. The Matarangi transaction was not considered material due to the low 15% shareholding. It would have been reported if that had been over 20%, Mr Hotchin said.

The Elders trust deed defines a related company as any subsidiary of the parent, including an associated company.

Elders also uses its own criteria to judge whether it was a material transaction.

Elders Finance chief executive Paul Cropp said trustee Guardian Trust also checked which deals needed to be disclosed and tended to take a conservative view.

Mr Hotchin was a shareholder in Sonal Holdings before selling it to property developer Greg Wilkinson's Wilkinson Investments two years ago but is now planning to buy it back.

"There is a proposal to buy it back and when that happens if that loan is still there it would become a related party," Mr Hotchin said.

Elders also holds a debenture over Mr Wilkinson's property business, Axis Property Group, a company which until recently Mr Watson was negotiating to buy.

The two parties had last year prepared a draft agreement to merge their property interests but Mr Wilkinson decided before the deal was concluded that he wanted to do his own thing.

Matarangi Beach Estates, a Coromandel resort development, was promoted by former All Black captain Sean Fitzpatrick and has been offered as a prize for subscribers to IT Media's New Zealand Business Times. IT Media, part of shaky lossmaking company Wilson Neill, is another company that has borrowed money from Elders.

Mr Hotchin said the Matarangi development was about 65% sold and had been a very successful development.

"It went through coincidentally a period for the last two years where it was slower but I think that was the economy more than anything else," Mr Hotchin said.

Mr Wilkinson said he had no animosity about the deal.

"They have been pretty fair about the transaction,"he said.

Meanwhile, Mr Watson has invested more money, but not from Elders, into his Auckland viaduct restaurant, formerly known as Finz Restaurant & Oyster Bar but now rebranded as the Soul Bar. Hospitality sources said Mr Watson had spent $4 million on the restaurant so far, not including an estimated $1.2 million contributed by Lion Breweries to pay for the latest makeover. Lion subsidiary New Zealand Breweries has a charge over the Finz company, as well as loans from UDC.

Companies Office records show the restaurant is owned by Mr Watson's company Cullen Investments as well as his good buddy, league star Matthew Ridge.

Other shareholders are Mr Watson's regular corporate pals - Mr Hotchin, Mr Wilkinson and former Advantage chairman Evan Christian.

Another Auckland viaduct restaurant with a Watson connection, MJs, pays rent to Mr Watson as his interests own the Sebel building in which it leases space.

MJs in 2000 borrowed $1.1 million from Elders Finance, but financial statements show it is no longer outstanding.

Plaza Developments, the Watson company behind the Sebel development, also borrowed money from Elders - $6.4 million in 2000, now fully paid off according to Elders' financial statements.

Associates say Mr Watson has a new protégé - 32-year-old accountant William Gibson who used to handle Mr Watson's accounts at Brown Woolley Graham.

He has made Mr Gibson a director of a Cullen Investments company, Apartment 3401.

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