This article originally appeared in the NZ Herald.


The poor performance of Veritas Investments, which owns the Mad Butcher retail chain, is another clear warning that backdoor listings can be high risk. The vast majority of these NZX listings have failed to meet expectations, even though they are now subject to far more regulation and disclosure than they were in the past.


Backdoor listings have a legitimate role in the NZX but they can be dangerous and there are a number of lessons to be learned from the Veritas experience.


The Veritas story began in May 2004, when Salvus Strategic Investments issued a prospectus to raise up to $50 million from the public at $1.00 a share. Salvus’ objective was to use the money to invest in a diversified portfolio of mainly NZX-listed small companies.


The company raised only $20.1m.


One of the problems with listed investment companies is that investors, rather than the promoters, pay the IPO costs.


Thus, the new company had just under $19.5m to invest due to the IPO costs of nearly $0.7m.


To compensate for this, Salvus offered one free warrant for every ordinary share. The warrants could be converted into ordinary shares at $1.00 each in March 2007 and March 2008.


The company’s main shareholder was Allan Hubbard’s Hubbard Churcher Trust Management, with a 13.8 per cent stake.


Salvus listed on the NZX on July 8, 2004 and its first net asset value (NAV), which was dated eight days later, was $0.9682 per $1.00 share. The 3.2 per cent NAV discount to the IPO price reflected the issue costs.


As at June 30, 2005, the end of the company’s first financial year, its fully diluted NAV was $1.01, its share price $0.89 and warrant price $0.15. The portfolio’s largest shareholdings were Hallenstein Glasson, Provenco, Methven, Abano Healthcare, 42 Below and Mainfreight.


The company’s share price continued to languish and only 0.6 million of the 20.2m warrants were converted into ordinary shares at $1.00 each before they expired in March 2008.


In early 2011 the Salvus board decided to investigate steps to realise the company’s assets and return capital to shareholders.


A number of proposals were examined and directors presented shareholders with the following options at a special meeting on October 19, 2011:

  1. Vote in favour of the sale of the investment portfolio, the return of capital to shareholders and the delisting of the company. 
  2. Vote in favour of the sale of the investment portfolio, the return of capital to shareholders and the company remaining a listed shell.


If both these proposals were rejected, the company would continue to operate an NZX small company portfolio.


Shareholders voted in support of the first option and $0.826 per share of cash was returned to shareholders in the following two months.


However, Simon Wallace, Mark Darrow and Tim Cook were elected as directors at the annual meeting on December 23, 2011 and the existing directors resigned at the end of proceedings.


The new board, chaired by Darrow, announced that the company would remain listed and would look to facilitate a backdoor listing. Wallace was appointed managing director and the company announced it would change its name to Veritas Investments.


On December 20, 2012 Veritas announced that it would acquire the Mad Butcher business, which was “a proven and iconic New Zealand business that has performed strongly over many years, but more importantly offers opportunities for growth”.


The purchase price was $40m, with the owner Michael Morton receiving $20m in cash and $20m worth of Veritas shares.


Shortly after this announcement Wallace resigned his Veritas positions.


The Mad Butcher was established by Sir Peter Leitch in 1971 when he purchased a Mangere butchery called Rosella Meats.


In 2001 Michael Morton acquired a 15 per cent stake in the company and a further 15 per cent in 2003. He purchased the remaining 70 per cent from Sir Peter in 2007. At the time of the Veritas acquisition, the Mad Butcher had 36 stores — 34 franchisees and 2 company owned — and had identified 34 territories suitable for new stores.


The Veritas shares were to be issued to Morton at $1.30 each and the company also raised $25.0m through the issue of 19.23m shares to the public at $1.30 each.


The Mad Butcher purchase was completed on May 8, 2013 and Veritas made a number of additional acquisitions:

  • In December 2013 it acquired 50 per cent of Kiwi Pacific Foods, a manufacturer and supplier of meat patties, for $2.8m in cash plus $0.6m of Veritas shares issued at $1.38 each.
  • In September 2014 it purchased the Nosh Food Market business for $1.77m cash.
  • In November 2014 Veritas acquired The Better Bar Company for $29.1m, comprising $22.4m of cash and $6.7m worth of Veritas shares at $1.12 each. The Better Bar Company operated 11 bars in Auckland and Hamilton.


Acquisitions can be a high risk strategy and purchasing four companies over a two-year period is challenging, particularly as there were no clear synergies between them.


The wheels began to fall off in early 2015, when media reports indicated that a number of Mad Butcher franchisees were experiencing financial difficulties. Veritas chairman Mark Darrow resigned in June.


In September, Kiwi Pacific Foods lost its supply contract with Burger King and Veritas’ performance for the December 2015 quarter was disappointing because of problems with five Mad Butcher stores, Nosh’s continuing underperformance, Kiwi Pacific Foods’ problems and the underperformance of three Hamilton bars acquired through The Better Bar Company.


Subsequently, it was decided to wind up Kiwi Pacific Foods.


Veritas’ share price has been severely impacted by the disappointing performance of the four acquisitions. It closed the 2014 year at $1.25, the 2015 year at $0.48 and hit a low of $0.15 on Thursday.


It has subsequently recovered to $0.23 but has a sharemarket value of only $10.0m compared with the purchase price of just over $74m for the four purchases.


Ironically, the original Salvus shareholders invested $20.1m in the company and received over 80 per cent of their capital back, while Veritas shareholders have invested $25m but these shares are worth less than 20 per cent of their issued price.


In my view Veritas has made a number of mistakes including:

  • It purchased too many assets with little or no synergies.
  • It paid too much for these acquisitions. The total cost was $74.3m but Veritas reported earnings before interest, tax, depreciation and amortisation (ebitda) of only $7.4m for the June 2016 year.
  • Veritas shareholders carried too much of the risk because the vendors of the four acquired companies received $47.0m in cash and only $27.3m worth of Veritas shares.
  • As a consequence, the listed company had total borrowing of $33.3m as at June 30, 2016.
  • The good news is that earlier this month the company announced that ANZ Bank “has renewed the group’s existing banking facilities and provides for a rescheduling of the debt obligations and a reduction in debt repayments”.


Yesterday the company released ebitda guidance of between $7.4m and $8.0m for the June 2017 year and underlying net profit after tax guidance from continuing operations of between $3.0m and $3.6m for the same period.


Veritas has a long way to go but shareholders would be happy with underlying net earnings in the $3.0m-$3.6m range for the current year.


Brian Gaynor

Portfolio Manager


Disclosure of interest: Brian Gaynor was a director of Salvus Strategic Investments between March 23, 2010 and December 23, 2011. Milford Funds Ltd was a 16.9 per cent shareholder in Salvus Strategic Investments on behalf of clients between March 2010 and March 2012 but no longer holds any shares in the company.

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.