A clean break from Australia

TIM HUNTER
Last updated 05:00 15/12/2013
Tom Nickels
CHRIS SKELTON/Fairfax NZ
SAFE AND SOUND: Transpacific boss Tom Nickels has highlighted the company’s steady earnings profile to potential investors.

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The statement was blunt, for a corporate. ASX-listed Transpacific Industries "is looking to divest its New Zealand waste management business in order to allow for greater focus on growth opportunities in Australia".

If Transpacific's New Zealand boss Tom Nickels is worried about being cut loose, he isn't showing it.

"Looking at the portfolio the best way to fund the growth opportunities in Australia was to divest the New Zealand division. That's not a negative reflection of the New Zealand division. We like to think we're the best division."

Just back from a four-day roadshow to brief local institutions about the business, Nickels has the pitch down pat, but he's an old hand at this sort of thing.

"I've been fortunate to have had some great roles in big companies, so I've played the role of all sides of transactions like this at various points in my career and I know the process reasonably well.

"I've bought, I've sold, and I've been sold."

Nickels, an Australian, arrived in New Zealand 20 years ago to work with building materials firm James Hardie Industries. The secondment was supposed to be for just three years but he found the place congenial and stuck around.

"Even more than that, three months ago the family all became New Zealand citizens so I've now got two teams to barrack for in most sports. It's been a very good place to live and bring up your family and to work."

After stints at Fletcher Forests and leadership roles at Carter Holt Harvey and Chubb, Nickels was headhunted to join Transpacific in early 2008 and almost immediately had to grapple with the grip of recession. He still regards managing the business through that period of economic decline as one of his biggest challenges, but the Canterbury earthquakes hammered home the value of the humble waste management business.

"I can remember going down to Christchurch the day after both major [earthquake] events to support our people there, going out into the field and the streets were full of liquefaction, very challenging road conditions.

"Our trucks were out there picking up the wheelie bins, many of which were very hard to access because of the liquefaction. Our office staff were physically walking the streets bringing the wheelie bins out into the centre of the road so the trucks could pick them up."

Talking to the people of the city as they got on with their lives amid the devastation, it was obvious that having a functional clean-up operation going on was an important morale booster.

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"Christchurch is our second largest operation in New Zealand, so a very significant part of our business, and the two major earthquake events generated a lot of waste.

"Not only did it generate some real challenges operationally but of course as our second largest branch we've got 300 employees in Christchurch and they were dealing with all the same living challenges as everybody else down there.

"We were operating on extended hours skeleton shifts despite the fact that our people were living in such challenging conditions. They were still coming in and doing an unbelievable job for us and ultimately the people of Christchurch.

"It really reinforced to us in our company that the services we provide are just as much a part of the fundamental infrastructure of a city as the water, the power and the sewerage."

That word, "infrastructure", will be one of the big selling points as TPI touts itself to potential investors.

In his presentation document released to the NZX, Nickels highlights the earnings profile of the NZ business. It shows a stable operating profit over the last three years of between $107 million and $112m, with 2014 forecast to be $110m. Revenue over the same years varies from $367m to $385m.

The money is the product of a simple process, says Nickels.

"We collect material with a fleet of specialist trucks, we take it to various processing plants - whether transfer stations which are aggregation points, or recycling plants which are disaggregation points - or liquid treatment facilities. We sell the commodities and recyclables we can recover, and the residual goes down to trade waste if it's a liquid, or to a landfill.

"The key to this industry is having the full value chain."

The figures underline the view of TPI as an infrastructure provider delivering reliable profits year after year - just the sort of thing some investors look for.

While private equity firms are seen as a natural buyer for the business, there is speculation listed infrastructure fund Infratil is interested. Nickels won't name potential buyers and insists the board has yet to decide on the best sale process, but his comments imply Infratil is in the mix.

"We have been talking to various interested parties," he says, "both potential trade players and specialist infrastructure funds and such like, and gauging their interest. It's fair to say there's quite a bit of interest. This is a very good business."

The roadshow last month opened up a sharemarket float as another option - why talk to institutions unless you wanted to test their appetite for buying shares? But market talk so far sees an initial public offer as TPI's least preferred divestment path. Whichever type of buyer emerges, analysts see a likely price of about $850m to $1 billion, which would probably make it one of the biggest deals of the year. Nickels says the timing of any transaction is "most likely the first half of next year."

There is the niggle of a tax problem though. The Inland Revenue is investigating TPI's use of mandatory convertible notes - a hybrid security used to channel related party finance from TPI Australia to its New Zealand subsidiary.

The company's New Zealand accounts describe the notes as being issued in 2006, before Nickels arrived, with a face value of $180m and an interest rate of 9.2 per cent.

At the 2012 balance date the MCNs appear to have helped eliminate any tax payable on TPI's $9.9m pre-tax profit. Details of the tax dispute have not been disclosed, but the issues may be similar to the IRD's challenge of optional convertible notes used by trans-Tasman firms such as Alesco and Telstra.

Nickels clearly does not relish discussing tax matters but he does explain that whatever the outcome buyers should not be concerned - if any tax liability emerges, TPI in Australia will cover it.

Rather than tax, Nickels describes himself as someone who "tends to focus on the business, on nurturing the business and our customers. "I set high standards. I expect people to deliver on those standards. I probably ask more of myself than anybody else."

More than anything though, he has focused on safety. "You're always, if you're wise, very careful not to make comparisons to where you've been before, but when I came here our safety performance wasn't as good as it needed to be. So it really has been somewhat of a crusade and I'm tremendously proud of the progress that has been made here.

"Knowing our employees go home each night safely, it sounds like a cliché but it's true, it is the most important thing."

- Sunday Star Times

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