Billionaire's ethos more about cutting than creating

17:00, Jul 08 2014

You can tell a lot about a person from the type of superyacht they own.

Russian tycoon Andrey Melnichenko, for example, clearly has panache. His Philippe Starck-designed superyacht suggests the menace of dreadnought battleship with minimalist lemon squeezer aesthetic.

New Zealand's Graeme Hart, on the other hand, projects a pragmatic lack of flair. Both his superyachts, Ulysses and the Whatsitsname under construction, have the style of a Ukrainian fishing vessel adapted for icebreaking duties.

Chalkie reckons it's all of a piece with Hart's preference for unglamorous industries like margarine, tinfoil and motor vehicle filters. Bread and butter, or possibly dripping. Nouvelle cuisine, nein danke.

This is fine. Somebody has to make margarine and tinfoil. However, the hard part with this stuff is its presentation as the sort of sexy growth business someone might want to pay you further billions for.

Hart made a good fist of it with Goodman Fielder, a literal bread and butter company he sold to the public in late 2005. But the food giant, whose brands such as Freya's, Edmonds and Tararua are household names, is now headed back to private ownership after years of disappointing performance.


To quote the most basic of numbers, Hart bought the company in 2003 for A$1.85 a share and sold it in a public offer two years later for A$2 a share. The current takeover bid from Singaporean palm oil trader Wilmar International and Bermudan-registered, Hong Kong-listed investment company First Pacific is A67.5c a share.

There have been several asset transactions over those years, but it's fair to say Goodman Fielder has been a fizzer.

Even its management seem tired of it all. When Wilmar and First Pacific made their first approach at A65c a share, the board said it "materially undervalues Goodman Fielder and is opportunistic".

Two weeks later the bid was raised to A70c a share and the board unanimously recommended shareholders accept. There then followed four weeks of due diligence in which the bidders got to sample Goodman Fielder's financial ingredients, but they must have disliked the taste because they managed to talk the board down to a price of A67.5c, valuing the company at A$1.32 billion.

It's a far cry from the optimism of a decade ago when Hart appeared to have big plans with the purchase of Goodman Fielder and NZ Dairy Foods.

In early 2003 columnist Brian Gaynor, who now runs successful fund manager Milford Asset Management, wrote: "Hart is young enough to create a major international food giant."

He was, but he didn't. On the contrary, Chalkie reckons Hart's instincts are more utilitarian than visionary.

His handling of milk processor and distributor NZ Dairy Foods was outstandingly profitable for himself but didn't appear to involve much constructive investment.

The process through which Goodman Fielder acquired NZ Dairy Foods was complicated, but as far as Chalkie can make out it went something like this:

Hart's Rank Group bought Dairy Foods through a takeover in 2002 for $245m, triggered by the sale of half of the business by Fonterra as a condition of the giant dairy co-op's creation.

In 2005 Rank and Fonterra agreed an asset swap deal in which Fonterra bought back Anchor branded milk and dairy products, while Dairy Foods acquired fresh milk, yoghurt and meats businesses, with distribution networks, from Fonterra.

There was a difference in value of the assets amounting to $310m, which was paid in cash by Fonterra to Dairy Foods.

So it looks like Rank's $245m purchase turned into a milk, cheese and meats business plus $310m in cash.

Rank then sold Dairy Foods into Goodman Fielder as part of the IPO deal, having, as the independent report at the time noted, "made a significant number of changes to the business such as staff reductions and plant closures".

The sale price of Dairy Foods to Goodman Fielder was later settled at $869.6m.

Hats off to Hart for trousering a humungous gain, adding to pockets bulging from the $1.1b divestment of Goodman Fielder's snacks businesses Uncle Tobys. The sale of former Goodman Fielder snacks business Bluebird squeezed in a further $245m late in 2006.

But the people who bought Goodman Fielder have found gains elusive.

Goodman Fielder's IPO prospectus forecasted earnings before interest and tax for 2006 and 2007 of A$355.6m and A$405.6m respectively.

As it turned out, the company beat the 2006 target, missed the 2007 target and never reached such earnings levels again. In 2008 ebit was A$151.4m, less than half the 2006 figure, and the best earnings figure since then was A$233m in 2012.

Granted, Goodman Fielder is affected by commodity prices for wheat and milk that can put pressure on its margins, but the long-term pattern of earnings makes a mockery of the optimistic comments in its 2005 prospectus about "strong and profitable growth" through "leveraging leading brands and category positions".

Chalkie reckons seeing the word leverage used as a verb should have warned us there were corporate robots in the vicinity. Maybe they are still around.

In accepting the takeover bid last week Goodman Fielder said: "It provides an opportunity to further leverage our strong consumer food brands in Australia and New Zealand to grow our business across the Asian region."

After all that brand leverage it's amazing Goodman Fielder hasn't grown like, say, huge American food group General Mills, marketer of consumer brands such as Yoplait, Cheerios, Nature Valley and Old El Paso.

In early 2006 the US firm had a share price of about US$25. In 2014 the shares are trading well north of US$50.

Goodman Fielder shares rose until mid-2007 but have been going backwards most of the time since then. Hart's company Burns Philp, the vendor in the IPO, sold its last 20 per cent of Goodman Fielder in October 2007 for A$2.12 a share.

Chalkie reckons the outcome points to Goodman Fielder being in no shape to meet the expectations built into its IPO price. Rather than "leveraging leading brands", it was focused on cutting costs and managing its hefty debt burden.

The desperation of those cost-cutting efforts was apparent in the company's 2011 attempt to trim payments to the night van drivers delivering bread to supermarkets by up to 26 per cent.

In Chalkie's view these people were employees in all but name, having agreed to become self-employed contractors on terms dictated by Goodman Fielder. Slashing their income looks like the act of a corporate bully picking on the vulnerable to save a few bucks.

To be fair, Goodman Fielder has invested to some extent in its production facilities and in its brand portfolio, and its management have tried hard to get back on the front foot. It's also hard to hold Hart responsible for how the company has performed in the years since he owned it.

However, Chalkie can't help feeling that if Hart was more of a creator than a cutter, Goodman Fielder might have had a healthier run as a listed company. And New Zealand's only billionaire might have had a cooler superyacht.

Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.