Brian Gaynor: Huge Tasman gap offers KiwiSavers little choice - Milford Asset

Brian Gaynor: Huge Tasman gap offers KiwiSavers little choice

18 Mar, 2017

Categories: Brian Gaynor, News

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This article originally appeared in the NZ Herald.

KiwiSaver is a fantastic long-term superannuation scheme but it has one major drawback: the scheme’s funds have limited domestic investment opportunities.

This is a significant drawback for members because there are clear advantages, particularly from a tax point of view, to investing in NZX-listed companies.

The below table, which shows the 15 largest listed NZX and ASX companies nearly 20 years ago, clearly illustrates this point.

Only four of the largest listed NZX companies in 1997 – Telecom (now called Spark), Fletcher Challenge Building, Fletcher Challenge Forests (now called Tenon) and Air New Zealand – remain listed on the domestic exchange.

The total value of these 15 companies, including takeover valuations, has increased by only 23 per cent – from $37.6 billion to $46.4b since the end of 1997.

The latest Spark figure includes Chorus’ current market value as it was demerged from the telco in 2011.

By contrast, 12 of the 15 largest ASX companies at the end of 1997 remain listed across the Tasman and the total value of all 15 companies, including their takeover value, has soared 237 per cent – from A$216.8b to A$730.8b.

What happened to the 11 NZX companies that are no longer listed on the NZX and why have New Zealand-listed companies been unable to create significant long-term shareholder value?

  • Carter Holt Harvey was acquired by Graeme Hart in 2006 at a valuation of $3.6b, $1b below its 1997 value.
  • Brierley Investments was worth only $1.4b when it delisted from the NZX in June 2014. It is now called GL Limited and is listed on the Singapore Stock Exchange with a $1.1b market value.
  • Lion Nathan was taken over by Japanese company Kirin for $6.1b, Power New Zealand and Natural Gas Corporation were both acquired by Vector for $1.5b each and Ports of Auckland was purchased by the Auckland Regional Council for $0.9b.
  • Fletcher Challenge Energy was sold to Shell and Apache Corporation for $4.6b and Fletcher Challenge Paper to Norwegian company Norske Skog for $5b. Fletcher Challenge Building is now Fletcher Building, although it is a different legal entity, while Fletcher Challenge Forests has become the NZX-listed Tenon.
  • The Independent Newspapers (INL) story is complicated because the company first sold its publishing business to the ASX-listed Fairfax for $1.2b and later merged with Sky TV in a deal worth around $3.3b to INL shareholders.
  • Wilson & Horton was purchased for $1.1b by an Irish-based company in 1998.
  • Tranz Rail was acquired by Australia’s Toll Holdings for $0.6b in 2007 and its core business is now New Zealand Government owned after the rail company’s failed privatisation.

The first major difference between the NZX and ASX is the banks. Heartland, which has a market value of $0.8b, is the only listed NZX bank while the four major Australian banks have a market value of A$438.8b ($482.7b), compared with only A$81.0b two decades ago.

These four Australian banks have accounted for 70 per cent of the increase in value of the 15 largest ASX companies since 1997.

New Zealand has contributed to this by selling Bank of New Zealand and ASB to National Australia Bank and CBA respectively, at bargain basement prices.

Two of our major problems are that we sell some of our best companies while most of our listed companies make poor offshore acquisitions, with Carter Holt Harvey, Brierley Investments, the Fletcher Challenge companies and Air New Zealand being good examples of this.

 

Carter Holt purchased a 50 per cent stake in the largest Chilean forest products company and had huge problems selling this holding.

Brierley Investments failed to understand the UK takeover rules and was forced to make an offer for a major British hotel group, which made a significant contribution to its subsequent problems.

The Fletcher Challenge group of companies made a large number of unsuccessful debt-funded overseas acquisitions, while Air New Zealand purchased Ansett Australia and had to be bailed out by the New Zealand Government.

The Warehouse, which was the 16th largest NZX company in December 1997, purchased Australian discount retail chains and has never fully recovered, with its market value rising from $0.7b to only $0.8b since the end of 1997.

The recent demise of Pumpkin Patch was also due to a flawed offshore acquisition strategy.

There have been a small number of successful offshore purchases but mistakes are still being made, as illustrated by Fletcher Building’s high priced acquisition of Australia’s Crane Group.

Fletcher Building established the following criteria for overseas acquisitions when it was established in 2001:

  1. The acquired company must be number one or two in terms of market share.
  2. It must have a sustainable, good industry structure.
  3. It must have good local management that will remain with the company.
  4. The purchase price should allow Fletcher Building to earn its cost of capital within three years.

It is highly unlikely that Fletcher Building’s foreign purchases have met these criteria and the same could be said for a high percentage of offshore acquisitions by NZX-listed entities.

Another big difference between the NZX and ASX is that the two acquired ASX companies, Coles Myer and Western Mining, were purchased by the Australian companies Wesfarmers and BHP respectively, while five of the NZX companies were bought by overseas interests.

In addition, the INL and Coles Myer acquisitions had majority scrip components but the Sky TV share price has fallen sharply since it purchased INL while Wesfarmers’ share price has risen since it bought Coles Myer.

News Corporation has moved to the Nasdaq exchange in the US but it is still controlled by the Murdoch family, while GL Limited (formerly Brierley Investments) has minimal New Zealand involvement.

Another problem for New Zealand investors is the heavy-handed approach of regulators.
Telstra’s market value has increased from A$13.8b to A$56.5b since 1997 but Spark’s value, including Chorus, has declined from $14.8b to $8.1b.

These performances have been influenced by regulators on both sides of the Tasman.

The Commerce Commission’s recent decision to reject the Sky TV/Vodafone NZ merger is a clear example of its tough approach towards domestically owned companies, as is its preliminary decision to reject the proposed merger between NZME and Fairfax NZ.

NZME and Fairfax NZ are essentially the same companies as Wilson & Horton and Independent Newspapers at the end of 1997.

NZME, which has a current market value of $0.2b, is proposing to acquire Fairfax NZ for nearly $0.2b, giving the merged company an estimated value of just $0.4b.

This compares with their combined value of $2.1b 20 years ago.

How can the commission seriously believe that a merger creating a $0.4b company will reduce the availability of news content when it will be up against the likes of Facebook and Google, which have a combined market value of US$999b ($1.431 trillion)?

The clear lesson from the past 20 years is that KiwiSaver members should be demanding far better performances from our listed companies in terms of board governance, management capabilities and offshore acquisition strategies.

It would also be extremely helpful if Wellington regulators adopted a more balanced approach towards the interests of consumers and domestic shareholders, the latter including 2.7 million KiwiSaver members.

Brian Gaynor

Portfolio Manager

Disclosure of interest: Milford Funds Ltd holds shares in most of the companies mentioned in this article, and included in the table, on behalf of clients.

Disclaimer: This article originally appeared in the NZ Herald and is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so should not be viewed as investment or financial advice. If you require financial advice we recommend that you speak to an Authorised Financial Adviser.

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