This article originally appeared in the NZ Herald.

Rubicon, which has over 6,400 shareholders, is one of the most intransigent and stubborn NZX-listed companies. Its performance has been dreadful, both in terms of profitability and sharemarket returns, yet it has had the same chief executive for over 15 years while three of its five non-executive directors, including Hugh Fletcher, were appointed in 2001.

Its autocratic and immovable structure is ironically apt as “Crossing the Rubicon” is a term used to describe a determined course of action. The term originated from Julius Caesar’s march across the Rubicon River in 49BC to initiate a successful three-year war to overthrow Rome’s inept nobility.

In 45BC Caesar declared himself Rome’s dictator for life but was assassinated the following year, mainly because of his autocratic rule.

Most Rubicon shareholders would like to see the end of the company’s autocratic governance. However, its shareholding structure probably means that underperforming chief executive Luke Moriarty effectively has life tenure unless the company is disbanded.

Rubicon, which was Moriarty’s brainchild, was formed in 2001 to facilitate the takeover of Fletcher Challenge Energy by Shell and Apache Corporation. This was yet another takeover where New Zealand investors sold a major listed company to offshore interests at a bargain basement price.

Moriarty joined Fletcher Challenge in 1999 as head of strategy and growth. He had an impressive CV and played a major role in the financial separation of the Fletcher Challenge Group, including the sale of Fletcher Challenge Energy.

As part of the Shell/Apache offer, Fletcher Challenge Energy shareholders received cash and one Rubicon share for every Fletcher Energy share.

Rubicon ended up with a number of Fletcher Energy assets that the Shell/Apache consortium did not want.

It also had the following additional investments:

  • 17.6 per cent of NZX-listed Fletcher Challenge Forests.
  • 31.7 per cent of ArborGen, a United States forest bio-engineering joint-venture.

Rubicon listed on the NZX on March 26, 2001 with Moriarty at the helm.

The company’s prospectus was extremely optimistic, as are most prospectuses. It agued that “Rubicon will be a business developer — providing the industry knowledge, management skills, business and commercial networks, and financial capital needed to develop businesses from ideas and intellectual capital. In order for the benefits from intellectual capital to be delivered innovation must be commercialised. This is the role to be played by Rubicon”.

Rubicon was one of the more high profile listed companies in the early 2000s because of a number of developments including:

  • Guinness Peat Group (GPG) acquired a 19.9 per cent stake in the company and Tony Gibbs and Gary Weiss joined the board.
  • United States-based Perry Corporation purchased 19.8 per cent of Rubicon and became involved in a bitter dispute with GPG that went all the way to the Privy Council.
  • GPG made an unsuccessful takeover offer to raise its Rubicon stake to 50.01 per cent.
  • In 2003 and 2004 Fletcher Challenge Forests sold its entire forest estate and related assets, mainly to offshore interests. The sale proceeds were returned to shareholders, including Rubicon. Fletcher Challenge Forests then changed its name to Tenon, which remains listed on the NZX.
  • In 2004 Rubicon made a successful partial takeover offer for Tenon that raised its holding above 50 per cent.
  • GPG sold its shareholding in 2005 and Gibbs and Weiss are no longer Rubicon directors.

Rubicon is now effectively controlled by a number of New York hedge funds and investment companies.

It has two core investments and activities; a 59.8 per cent stake in Tenon and 31.7 per cent of ArborGen. Moriarty is the chairman of Tenon, which is a timber-based building products company with New Zealand and United States operations. ArborGen produces seedlings for high productivity trees.

The accompanying table illustrates the dreadful performance of Tenon over the past seven years. It has reported total net losses of US$48.0 million while Moriarty has received remuneration of $4.9m and the directors $3.2m.

Rubicon’s NZX value has plunged 53 per cent, from $227.8m to $106.4m, since mid-October 2010 while the benchmark NZX50 Gross Index has surged 120 per cent over the same period.

The situation is even worse when we take into account that Rubicon has raised US$39m worth of new equity during this period, its net asset backing has fallen from US56c to US34c per share and it doesn’t pay a dividend.

Tenon, which derives over 90 per cent of its revenue from North America, reported a loss of US$21m for the June 2016 year. This is mainly due to a US$31m goodwill write down.

This is where the story gets interesting. Tenon announced last year that it had asked Deutsche Bank and Deutsche Craigs to undertake a strategic review of the company. On August 30, almost buried in its June 2016 year result announcement, was the disclosure that Tenon had agreed to sell its North American operation to a North American equity firm for US$110m.

The announcement said that this would allow Tenon to retire all its debt and “will be combined with large shareholder pro-rata return” to Tenon shareholders.

The August 30 release had almost no impact on Rubicon’s share price until yesterday morning when Tenon announced that it would be returning US$71.3m (approximately $100m) to shareholders if the transaction is approved at the company’s annual meeting on November 18.

Immediately following yesterday’s announcement Rubicon’s shareholding in Tenon was worth $97.6m yet Rubicon had a total sharemarket value of just $106.4m.

Why is the sharemarket effectively attributing no value to Rubicon’s ArborGen shareholding?

The problem is that ArborGen has been a huge disappointment and Rubicon’s 2016 annual report had this to say about the joint venture: “Achieving strategic agreement on the growth and funding path for ArborGen moving forward is now the number one agenda item for the Partners. The business objectives are clear, with achieving a break-even/positive EBITDA position being the immediate target to report against.”

ArborGen is still trying to break even more than 15 years after the Rubicon prospectus stated that the commercialisation of this operation was one of its main objectives.

The Rubicon saga reflects two of the worst characteristics of the NZX, namely the sale of some of our major companies to overseas interests at extremely low prices and shareholders’ unwillingness to dump underperforming boards and management.

Fletcher Challenge Energy should not have been sold to the Shell/Apache consortium, the only reason that Rubicon was formed in the first place. Thus, New Zealand investors swapped Fletcher Challenge Energy, which had its origins in the state-owned Petrocorp, for cash and the hugely disappointing Rubicon.

Luke Moriarty has been chief executive since 2001 and Hugh Fletcher, William Hasler and Stephen Kasnet were appointed directors in the same year. The latter two are based in the United States.

There is absolutely no reason why Tenon and Rubicon should both remain listed, particularly if the former sells its United States assets. The ArborGen shareholding should be transferred to Tenon or sold and Rubicon’s Tenon shareholding distributed to Rubicon shareholders on an in species basis. Rubicon should then be liquidated.

It is about time that Rubicon shareholders were taken out of their misery, the company disbanded and for Moriarty to focus on his chairmanship of Tenon, which has a base remuneration of $130,000 per annum. However, this fee should be sliced in half if Tenon sells its United States operations.

Brian Gaynor

Portfolio Manager

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.