Soros jumps on GPG's Coats-tail
Suppose you had a bowl of muesli and ate it one ingredient at a time - first the oats, then the nuts and then the dried apple until only the raisins were left.
This would be an unusual way to eat muesli. Most muesli consumers like it all mixed up.
Investment company GPG was once a bowl of muesli, but it is fast approaching raisinhood. The question is, will the people who bought muesli be happy to have just raisins?
Or as GPG chairman Rob Campbell puts it: "It's time to stop saying ‘do I want to own GPG?' and to say ‘do I want to own Coats?' That's what investors should be thinking about."
The decision has been a long time coming. GPG has been trying to figure out how to release value from its tangle of investments for at least three years.
The eventual solution - to sell all of its holdings except its wholly owned threadmaker Coats - came with major collateral damage in the boardroom and triggered the end of the company's long association with Sir Ron Brierley.
But the long process is nearly complete. Apart from Coats, just five assets remain for disposal and all are expected to be cashed up in some form or other this year, mostly by June.
For GPG's 17,000-odd New Zealand shareholders, the sales will leave them owning not a Brierley-inspired diversified investor, but a traditional multinational business with more than 70 factories and 20,000 staff.
Its main thing is making thread. Coats is the market leader, supplying thread for clothes and shoes made by the likes of adidas, Abercrombie & Fitch and Marks & Spencer.
It is also the global No 2 in zips and it has a division supplying wool for people who like to knit.
In the year to December, the business had revenue of US$1.6 billion ($1.9 b) and net profit of US$58m, if you don't count a fine it had to pay the European Union for anti-competitive practices before GPG owned it.
It's a big business, clearly, but not an easy one to get a handle on - hence Campbell's keenness to talk about it.
"If you want to burrow down into our preliminary announcements or into the annual report which will come out soon, you can find out quite lot about Coats, but we know most investors don't in practice do that. And they really deserve to have a clear story in their mind about what it is they own.
"We haven't done a good job of selling that story," says Campbell.
We can expect to see a lot more selling of the story this year, some of it by sharebrokers and some of it by a new chairman, most likely based in Europe - the Coats head office is in London, as will be its main stockmarket listing.
"We'll work with that chairman to construct a new board that's appropriate going forward."
By "appropriate" he means suitable for a global company.
"In the first instance . . . most of the shareholders will still be Kiwis, so we expect to have some continuity of board representation, but its focus will inevitably shift to global markets rather than here," says Campbell.
"I think you can probably see the recent appointment of Waldemar Szlezak as part of that."
Szlezak is managing director of private equity at Soros Fund Management in New York and his appointment follows the purchase of a 9 per cent stake in GPG by Soros.
"Soros bought into GPG with a view to Coats," says Campbell.
The purchase will naturally be seen as implying GPG shares are good value. Campbell himself seems to think so. This month he has bought 323,298 shares at prices around 60c.
"Obviously our view is if you take a bundle of cash [from asset sales] over here, and get that, Coats plus the cash is worth a lot more than 69c [a share], otherwise we'd be selling Coats and distributing it as well. Are we right about that? Time will tell."
As Kiwi investors figure out their enthusiasm for Coats, it will be interesting to see how much GPG's shareholder base shifts to the United Kingdom and United States once the transformation takes place.
However, another potential scenario is being talked about that could mean Coats is not the end-game and the value is not at all easy to assess.
The scenario involves £1.9b ($3.5b) of unused tax losses available to GPG.
Of that, most has not been recognised as a deferred tax asset on the balance sheet because there is only an asset insofar as there are profits to offset.
But some say the potential £1.9b figure is so large that it will be extremely attractive to a canny investment fund like, say, Soros, and it could be accessed by ultimately selling Coats to an Asian textile giant and returning GPG to its previous role as a buyer and seller of businesses.
Time will tell whether that idea has any currency. In the meantime investors have some raisins to chew over.
Tim Hunter is deputy editor of the Fairfax Business Bureau.
Sunday Star Times