Feltex a timely reminder
These are good times for investors. The NZX50 has climbed almost 50 per cent in the last two years, the economy is growing well, new companies are coming to market and confidence is high.
The long-awaited Feltex lawsuit could not have arrived in court at a better time. Whatever its outcome, it should remind us to keep our feet on the ground.
When carpet maker Feltex collapsed into receivership in 2006 it was a devastating blow for thousands of investors, many of whom had bought shares in its initial public offer two years earlier. More than $200 million was destroyed in the process.
Those losses triggered the class-action lawsuit that kicked off at Wellington High Court last Monday. The claim involves about 3600 shareholders seeking $185m in damages from Feltex's directors Tim Saunders, Sam Magill, John Feeney, Craig Horrocks, Peter Hunter, Peter Thomas and Joan Withers, along with IPO advisers First NZ Capital and Forsyth Barr, and the company's previous owner Credit Suisse First Boston Asian Merchant Partners LP and IPO promoter Credit Suisse Private Equity.
Essentially, the investors say Feltex's offer documents gave a misleadingly optimistic view of the company's position and those involved in the IPO knew this was so.
The defendants deny the claim.
Time has dulled the shock of Feltex's failure and it is incredible to think it has taken this long to bring a claim to court, but there's a valuable reality check in looking back at how it was sold.
Feltex was a household name in carpets when it revealed its IPO plans in May 2004 - in business since 1920 and a top player in the Australasian market.
Its owner, an overseas private equity fund run by Credit Suisse, had bought it for $19.4m in 1996 from British conglomerate BTR. In typical private equity fashion, Credit Suisse then bought the Australian unit of giant American carpet maker Shaw Industries for $114m in 2000, financed mainly by debt. It looks like Shaw's Aussie outfit was the weakest link, because a few months later Shaw agreed to a takeover by Berkshire Hathaway, legendary investor Warren Buffett's investment company.
The 2004 prospectus said Feltex and Shaw had combined into a better business, with lower costs, better supply chain management and lean manufacturing techniques.
"Feltex now has the infrastructure, manufacturing capacity, cost base and marketing strategies in place to capitalise on market opportunities and support further revenue and earnings growth," it said.
The shares were offered on the premise that in 2005 earnings would grow 13 per cent and dividends would provide a yield of 8.6-9.6 per cent.
It was an attractive income prospect for retail investors and they bought into the deal, paying $243m for 143 million shares at $1.70 a share.
What shareholders got in 2005 was a profit warning, a slumping share price, the axing of the CEO and a breach of debt covenants, although the latter was not disclosed at the time.
In late 2006 receivers sold the business to rival carpet maker Godfrey Hirst for A$117m, almost enough to cover Feltex's debt to ANZ of A$120m. Shareholders got zip.
There were many aspects of Feltex's decline that angered investors once the extent of its problems became obvious and the court case is likely to air quite a few of them.
My view at the time was that the collapse was incompatible with the picture painted by the prospectus and that shareholders were rightly furious. Outside of the finance company debacle, Feltex was one of the most disgraceful corporate failures this century.
While we will have to see what facts emerge from the hearing, for me a big lesson from Feltex was to pay close attention to the vendor in an IPO.
Feltex was being sold holus bolus by foreign private equity interests closely associated with investment bank Credit Suisse, so the vendor had no interest in the ongoing health of the business.
Since then private equity exits in New Zealand have tended to involve selling only a percentage and holding a meaningful stake for a year or two post IPO. That gives the vendor some continuing skin in the game and aligns their interests with those of the new shareholders to a great extent.
Beyond that, we have learned that the warm fuzzies expressed in offer documents count for nothing and that big stockbroking firms selling a float don't necessarily have a clue what they're doing.
If we bear these lessons in mind we can enjoy the blossoming sharemarket in the proper low-key, calculating manner.
It is fantastic to see companies and capital returning to the NZX. We don't want to spoil it with another Feltex.
Tim Hunter is the deputy editor of the Fairfax Business Bureau.
Sunday Star Times