Shoeshine - Friendless Trans Tasman board gets a dog

Friday 23rd August 2002

Investors may have dubbed the NZSE's new boss "SuperWeldon" but the Caped Crusader doesn't always move at the speed of light. It's now been three months since Trans Tasman Properties shareholder Garth Christensen complained to the exchange about recent goings on at the company and still not a word.

Compare this with the speed just three weeks with which the exchange responded to a Shareholders' Association complaint about Tranz Rail disclosures.

Perhaps the association's high media profile had something to do with it. Or maybe the exchange is waiting for another heavy-hitter, Guinness Peat Group, to decide whether to make good its threat to sue TTP and its directors.

It's not as though the matter at issue is particularly complicated or hard to research.

TTP is 55% owned by SEA Holdings, the Hong Kong-based vehicle of business baron Jesse Lu.

TTP spent $7.3 million buying a 17.2% stake in Professional Service Brokers (PSB), an obscure Auckland-based "supply chain management and procurement company."

PSB is 32.8%-owned by SEA. Lu sat on its board when TTP acquired its stake, as did TTP managing director Don Fletcher.

Was this, or was it not, a related party transaction requiring TTP shareholders' approval?

Christensen and GPG's Gary Weiss gave the matter a good airing at the annual meeting in May. Fletcher told shareholders he didn't think the deal was related party.

Given how much TTP paid for its PSB shares that's probably a good thing. As Weiss pointed out, if the deal was a related party job needing shareholder approval, TTP's directors may have exposed themselves to legal action from those shareholders.

This is because neither Weiss nor Christensen can see any evidence the PSB shares are worth anything near what TTP paid for them. Christensen in fact thinks they are worth nothing at all.

At TTP's entry price PSB is worth $42.5 million. This is a company that last year lost $154,000. According to its annual report it had a retained earnings deficit of $658,000.

The report was tagged by the auditor, Grant Thornton.

The beancounters noted they were appointed after the June 2000 balance date and were "unable to obtain independent confirmation of the opening balances of the company ... and were unable to satisfy ourselves as to these balances by other audit procedures."

They went on to say the goodwill on the company's books hadn't been amortised for eight years, in contravention of SSAP 8.

In the June 2001 year, had the company properly amortised goodwill, the retained earnings deficit would have been $1.2 million.

So, TTP paid $7.3 million for a 17% stake in a company that seems unable even to keep proper accounting records, which doesn't comply with accounting standards and whose earnings track record over the last nine years has been to blow $1.2 million of its shareholders' money.

How did this come about?

According to TTP, the buy is justified because PSB can "provide added-value services to tenants of the group's buildings."

Shoeshine can't quite get his head around this one.

What possible synergies would a mere 17% stake deliver? TTP's tenants doubtless need all sorts of services but why would they buy them from PSB simply because the landlord owns a stake?

And if TTP really thinks there are synergies between leasing office space to tenants and supplying their other needs, why not buy catering, office supplies business equipment providers and the like?

Whatever the reason for TTP's investment its money sure came in handy for PSB.

Had TTP and others not stumped up for new equity last year's loss would have wiped out PSB's shareholders' funds.

Despite that loss PSB paid out $1 million in dividends. It also redeemed $1 million worth of preference shares and reclassified $500,000 of preference share capital as debt.

At the annual meeting GPG and Christensen barracked TTP's directors on these and other issues.

They managed to extract from John Ferner, one of the two independent directors, an undertaking to get PSB independently valued. Ferner this week told Shoeshine this valuation was "in the process."

Once delivered the board would decide whether to adopt it in TTP's June half-year accounts. If so, would the value of the PSB holding be identified separately in the accounts? That had yet to be decided, Ferner said.

Considering independent appraisers can produce reports on complex deals involving big companies in a couple of weeks if need be, it's clear Ferner hasn't had this high on his priority list.

This may appear to be a small matter for TTP, which has assets of $1.1 billion, almost half of which is debt.

But this is not the first time minorities have crossed swords with the directors over the influence of majority shareholder SEA.

Last year they torpedoed a junk-bonds-for-equity proposal, recomm-
ended by the board, which was effectively a SEA takeover bid at way below net tangible asset value.

In Shoeshine's humble opinion, the Stock Exchange should step in and ensure the board releases not just the PSB valuation figure but the full independent report including the information and assumptions on which the valuer's opinion is based.

Only then will shareholders be able to gauge whether the PSB buy was a wise one and how they should proceed if it wasn't.

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