Allied dangles carrot for investors

BY ROB STOCK

The tantalising prospect of a 100% capital return is once again being raised as the carrot to tempt Hanover debenture holders into voting for a new rescue deal.

Rob Alloway, chief executive of Allied Farmers, says the proposed deal for the NZX-listed finance and rural services company to buy the troubled loan book of Hanover offers the only realistic means of Hanover investors getting back 100 cents in the dollar.

The last time Hanover investors were told something similar was when Hanover was trying to get debenture holders to vote for a moratorium in December last year, though last week they were told that 70 cents was the most they could expect after Hanover confessed to writing off $137 million of bad debts.

Under the deal, which must be approved by investors on both sides, bondholders in Hanover and United Finance would swap their debentures for shares in Allied Farmers.

And although those shares would have uncertain value, Alloway said it would take only a "few cents" movement in Allied Farmers' share price to see their capital restored.

As an 11.55% shareholder, Alloway wants to see the share price rise, and he's keen to sell Hanover's 13,000 bondholders on his vision for Allied Farmers.

"This isn't some rumpety transaction to create some paper company. We have the vision to create a solid rural services and financial services company with plenty of equity and very little debt," he said. "We want to grow a business which is high-performing and delivers equity growth and earnings growth in the future."

That included reinvigorating Allied Farmers' finance company, Allied Nationwide Finance, with Hanover's $50m of "good loans", getting it into the second phase of the government guarantee scheme and lifting its value.

He was also keen to dispel the idea that Hanover owners Mark Hotchin and Eric Watson were getting off the hook. Hanover principals would not be forgiven any personal guarantees, he said, and there would be no special treatment for Hanover's related-party loans. "I'm not a property developer or a finance company guy, but when someone owes us money, we will be coming to get it," Alloway said.

Allied Farmers would be able to slash costs on managing the Hanover loans and management would not be distracted by legal action.

"There's going to be litigation at some point and we don't want any part of it."

He urged Hanover's investors to hold on to their shares if the deal went ahead, because professional investors would be ready to pounce on any share price weakness.

"Unquestionably there would be people who would buy if the share price goes down low," Alloway said. "It would be unwise for people to sell their shares [quickly]."

Cash coming in from the Hanover loans would be paid out in capital distributions or dividends, if Allied Farmers didn't have a better use for it.

"We would expect to get back what we are paying for these assets," he said, though Allied Farmers believed the loans were worth "a few percent" less than Hanover's estimation and that the "shareholder support" package was worth around $40m, not the $96m (including $20m of contingent support in future years) it was touted as being worth when Hanover was trying to sell its moratorium deal.

But if less was collected in from the loans, it would be the Hanover investors who had to take the pain of the losses, not Allied Farmers' existing shareholders, though Alloway said that was no different to the current situation.

"The risk for Hanover and United investors is unchanged."

Allied Farmers has designed a mechanism which would see warrants issued to existing shareholders entitling them to bonus shares should the firm collect less from the Hanover loans than it expects.

Those bonus shares, if any, would be issued around June 2011 to ensure there would be no dilution of current shareholders' stock, though he assured Hanover bondholders the issue would be fair.

"Hanover investors put in $396.2m. If the assets are worth only $250m there will be an adjustment of $146.2m. It protects Allied Farmers shareholders from the risks associated with these assets, and there are a lot of unknowns associated with them."

Alloway did not expect to issue bonus shares but said many of Hanover's loans were second mortgages, meaning the actions of first mortgage-holders posed risks that were hard to quantify.

"Those assets will be converting to cash and it will be a big number, irrespective of what that number will be."

ELECTRICAL ENERGY

"I'm not a money man at all," says Rob Alloway, the architect of Allied Farmers' audacious deal to buy Hanover's property loans.

Alloway acknowledges that Hanover bondholders are sick of money men, but wanted them to know he is no Mark Hotchin or Eric Watson.

Unique among NZX chief executives, Alloway draws no salary, instead relying on gains from his 11.55% Allied Farmers' shareholding.

"Half-million dollar salaries are not uncommon. I have taken my choice to work for nothing to transform the organisation.

"I got involved as an investor in the middle of the year. I wasn't happy with the way the business was performing and have stepped into a leadership role."

Alloway is an electrician who turned businessman when he started importing electrical equipment. He prospered and sold his import business to become a beef farmer.

A four-year management stint with Fonterra followed and in 2006 he became chief executive of large, private engineering business NDA Group.

There are lifestyle differences with Watson and Hotchin too. Alloway might love nice cars – he races Porsches – but in contrast to Hotchin's Paratai Dr mansion, Alloway says he lives in an "ordinary Hamilton house" and "I know how to tag a bull," he adds.

- © Fairfax NZ News