Ambition Caesar's undoing

00:28, Jun 05 2012

Like a Caesar addressing his murderous senators, the white-haired old warhorse stood before his shareholders and reminded them of past glories.

They had entrusted him with a dollar and he had returned it tenfold, yet still they sought to vote him down, the ingrates.

It didn't end well for Caesar, of course, who suffered the unkindest cut as Brutus plunged the dagger. In the words of Mark Antony: "Ingratitude, more strong than traitors' arms, quite vanquished him: then burst his mighty heart."

Fortunately for Sir Ron Brierley, expatriate ex-chairman of GPG, the outcome was less terminal as shareholders voted to keep him on the board by a razor-thin margin – 50.75 per cent versus 49.25.

As corporate theatre, GPG's annual meeting at Auckland's Eden Park last Thursday was a pretty good show, and Brierley's soliloquy probably won the day. But a vote of confidence it was not.

In the course of his speech Brierley invoked the blustering figure of disgraced tycoon Robert Maxwell, one of several obstacles he had to overcome in taking over GPG, and reminded shareholders of GPG's involvement with Australian insurer Tyndall, a deal that generated a profit of 100 million (then about NZ$300m) when GPG sold out in 1999.

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"They were the glory days of GPG," he said.

Just so, hence shareholders' increasing anxiousness as the glory receded ever further into the past.

Yet for all his talk of achievements, Brierley revealed a remarkably thin skin in a testy exchange with Shareholders Association chairman John Hawkins.

Criticised for his apparently patchy attendance at board meetings, Brierley angrily dismissed Hawkins' understanding of boardroom protocol. "Thank you for the baseless slur," he hissed, "you don't have the knowledge."

Brierley said he had barely missed a single meeting in 20 years, and the patchy attendance noted in the annual report was merely a few missed telephone hookups for routine paperwork signoffs.

Chalkie can see why Brierley might have bridled at the criticism, but Hawkins was entitled to raise it.

It is not easy for shareholders to stand up and question management at an annual meeting. Directors are paid to supervise the company on behalf of shareholders and are answerable to them at AGMs, yet the setup often elevates directors on a stage and positions shareholders as subjects craving indulgence.

This requires directors to be patient and courteous – and they almost always are – so Brierley's bullying sets a poor example.

It's also worth mentioning, in passing, that well-placed sources say that in GPG's heyday, board meetings tended to coincide with fine-dining experiences in various global locations, so attendance probably wasn't much of a chore.

Anyway, after a lot of hoohah, GPG is working through a programme of selling off assets and returning capital to shareholders. This year, for example, it has sold 11 assets, including Turners & Growers and CSR, bringing total realisations since January 2011 to 246m (about NZ$500m), 32 per cent of its portfolio.

Of the remainder, the biggest single asset is multinational threadmaker Coats, owned 100 per cent by GPG with a book value of 150m. The next largest holding is its 34 per cent of Kiwi insurer Tower, valued at 73m.

Coats is therefore of great significance to GPG, and currently virtually unsaleable owing to its big British defined-benefit pension scheme, in deficit by 161m. (There is a US one as well but that's in surplus.)

The plan is, therefore, to sell everything until just Coats is left, so GPG shareholders essentially morph into owners of Coats.

That being the case, Chalkie has been interested to hear some divergent views on whether shareholders should look forward to the idea.

On the plus side, he hasn't heard a bad word about Coats CEO Paul Forman. The good words include "brilliant", "very able" and "outstanding". Forman is based at the Coats head office in Britain and wasn't at the AGM this year. He did appear last year however, when he had been in the job about 18 months, and found time to visit 71 of its 73 factories – the Pakistan plant one of the omissions, for obvious reasons.

When GPG took Coats over, he said, "I'd have given it an `A' grade for market position and a `C' for where its factories were located, its use of capital and its ability to grow sales."

Revenue had flat-lined for 15 years, so the only way to grow profit was to cut costs, "which is not sustainable".

The company did have strong market shares and a global footprint – Coats thread was in one in five garments and 75 million cars, said Forman.

As well as thread, the Coats industrial division makes zips under the Opti brand, although it is a distant second in the market behind YKK.

Coats also has a crafts division supplying yarns and sewing accessories for the DIY market.

For further background, Chalkie is indebted to textile consultant John Walker, a former director of Li & Fung and Unifi Asia.

Still on the positives, Coats has good relationships with clothing and footwear brands such as Nike and Ralph Lauren. The aim is to ensure brand owners specify Coats thread in manufacturing their products – with thread contributing barely 1-to-2 per cent of the cost of a garment, brands can lose more from low-quality thread than they gain from lower cost.

But more could be done by targeting sales more effectively. Coats is big in Nike shoes but not in Nike clothing, which may be partly down to a lack of sales staff.

And Coats is big in products exported from China but not in that country's domestic market, where 60 per cent of locally made garments are sold. In one area of Fujian alone there are major sports brand manufacturers such as 361 Degrees, Anta and Xstep. A Coats thread specification on their products could add tens of millions in revenue.

But more than that, Coats could give itself a leg-up in China by acquiring a local player, preferably one with its own spinning capability. Much of the yarn Coats winds and dyes in China – the company's biggest global plant is in Shenzhen – is imported from India, which adds cost and eats margin.

The right Chinese acquisition would lower costs and support Coats facilities throughout Asia. Such measures might give Coats a boost, but should GPG shareholders look upon it with enthusiasm?

After all, net equity in the business shrank from US$510.8m in 2010 to US$248.2m last year (awkwardly, Coats reports in US dollars, GPG reports in sterling and shareholders are mainly in New Zealand).

Investment manager Matt Goodson of BT Funds, which owns some GPG stock, sees Coats as a sound business generating good free cash flow. Last year, for example, net operating cashflow was US$73.3m, up from US$38.7m in 2010.

Meanwhile the problem of its pension liabilities, the cause of the equity decline, looks worse than it is because record-low bond yields in Britain are skewing the actuarial calculations.

The alternative view goes something like this: Coats is a complicated business operating in a highly cost-conscious commoditised market, with no opportunity to grow margins. Having moved manufacturing to China, Coats is finding its customers migrating to yet lower cost areas such as Vietnam, giving Coats some difficult decisions, given the capital intensity of the business, on whether to shift with them.

As one profesional investor who doesn't own GPG tells it: "Of all the businesses in this market, [Coats is] probably the one you'd least want to inherit ... It's just a living hell."

Coats may have an edge on quality, he says, "but how good do you need thread to be?"

Chalkie reckons the latter view on Coats is more common, but there is a price at which commodity businesses with good cashflow are attractive, and the negative view could help achieve it.

GPG shares are currently trading at a big discount to net assets – 49c versus about 76c at March 31.

As the asset realisation programme rolls on, Coats will emerge from the GPG fog and investors will get a clearer picture of what it looks like. A final ruling on a potential 110m (NZ$181m) fine, imposed by the EU for anti-competitive activities before GPG bought in, will be known on June 27.

Still, the picture won't look as good as Brierley would have hoped eight years ago.

When GPG completed its Coats acquisition in 2004 the cost was given as 226.1m, so there's been little to show for all the costly restructuring since.

No wonder shareholders, who were told GPG would never let a single big investment dominate its fortunes, feel let down.

Like Caesar, Brierley's ambition was his undoing.

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

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