Debts mount in richest Kiwi's daring deal

BY TIM HUNTER

Last updated 05:00 29/08/2010

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Photo: James Brickwood

Graeme Hart

For sale: Hart's yacht Ulysses has an asking price of $US49 million.

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There was a plaintive note to the analyst's voice. An hour into a conference call with two executives from Graeme Hart's huge packaging company Reynolds Group, Andrew Lowe of Limestone Advisers in London wound up with a comment on a planned "roadshow" to promote the latest deal.

"It'd be good to see someone from the sponsor," he said. "It would be good to see Graeme Hart, actually, to be fair, given you've done about 6 billion [of] bonds.

"So if we could see him, that would be appreciated. Just thought I'd feed that one back."

It was a telling moment. So elusive is the New Zealander, not even the people who lend him enormous sums of money get to see him.

Yet Hart's desire for privacy is becoming more of an issue with every billion he borrows. Almost to a man, analysts on the mid-August conference call were concerned with the security of their bonds as Reynolds mounted another audacious takeover.

Their alarm is understandable. Reynolds, already deeply in debt, this month agreed to buy Pactiv Corporation, a listed American packaging business, for $US4.42b in cash. The purchase will be funded almost entirely with debt. Of the remainder, the secrecy surrounding Hart's myriad interests leaves room for considerable doubt about whether it too is borrowed.

The numbers are eye-watering. Despite its size – Reynolds' various packaging businesses employ about 15,000 people at 67 sites around the world – its debts are so big that on paper its shares, the part owned by Hart, are worthless.

At June 30, Reynolds had debts of 4.68b and equity of negative 25.6 million. In the six months to June, it lost 103.3m as interest payments swallowed up the considerable profits generated from the business.

Piling the Pactiv acquisition on top of this tower of debt, said Standard & Poor's, was "very aggressive".

"We believe that the impact of this acquisition on Reynolds' financial risk profile will be strongly negative," it said, and placed Reynolds' lowly B+ credit rating on negative watch.

Others with an interest in Reynolds expressed themselves less formally.

"This is completely outrageous," a Reynolds bond investor told Debtwire. "They are effectively managing to [execute] this transaction with almost no equity."

At this point, anyone with a large mortgage will understand the position. Sure, debt may be just another form of finance, but it is unforgiving. Repayments must be made, no matter if this month the car broke down, the dog had an operation and the insurance premium went up.

With such huge debts, Reynolds is particularly vulnerable to unexpected events – an economic downturn, for example, could depress consumer demand and therefore reduce sales for packaging.

Normally, companies getting into trouble like that will tap shareholders for an equity injection, as Nuplex and Fisher & Paykel did last year, for example.

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So surely Hart, said by Forbes magazine to be worth $US5.3b, could chip in if Reynolds found itself a bit short?

It's difficult to know.

It's been more than 20 years since Hart emerged as a businessman with an eye for a bargain and a stomach for big deals. After snapping up the Government Printing Office for a bargain $23m in 1989, his acquisitions have grown in size and complexity, from Burns Philp to NZ Dairy Foods, Goodman Fielder, Carter Holt Harvey and the packaging companies that became Reynolds Group.

Those who have brushed against him over the years all prefer to comment off the record and all say the same thing – Hart is a genius.

"He's a very, very big financial gambler," said one, "but he's a bloody good businessman."

"He's such a high energy guy, such a clear thinker, and obviously phenomenally ballsy," said another. "He's just on a different level, really."

But while his deals have brought the trappings of wealth, Hart has revealed little inclination to show off. Visitors to his clifftop mansion in Auckland's Glendowie, bought in 1993, find themselves driving through relatively dowdy streets before chancing on its short, discreet driveway, marked by a single masonry gatepost with a convenient tube for newspaper deliveries. Property records show he didn't pay off the mortgage until 2007.

He has a yacht – the 59m Ulysses, built for him in America in 2003 – whose design shows a preference for function over form. It's not known if Hart borrowed to buy Ulysses, but if there was debt involved it could be paid off soon. In July, Ulysses was put up for sale with an asking price of $US49m.

For his corporate offices, Hart has shunned new shiny glass towers in favour of older, lower rent premises on Auckland's Quay St, with no exterior sign of the vast operation controlled within. Information about the network of businesses Hart controls is scarce. Rank Group, for example, one of the companies close to the apex of the organisation, reveals nothing of its financial status save that its assets are pledged as collateral to giant investment bank Credit Suisse, Hart's longstanding funding partner.

So how much debt does he really carry?

"I would love to know," said one senior financial executive. "He bought a bunch of assets at the very top of the market and he did it all with borrowed money – and they're all consumer-based assets that you would think would be finding life a bit difficult, except for his amazing restructuring skills."

Yet, with no equity left in Reynolds, surrounded by evidence of debt's dangers in wrecked property developers and pooped private equity players, Hart is doing his biggest leveraged buyout so far.

Why?

His US-based right-hand man Tom Degnan put it in straightforward terms.

Buying Pactiv, he said, was opportunistic. Rank had known it was a perfect fit for Reynolds and, when it was put "in play" by another bidder, the move was made.

"Pactiv ticks all our boxes," he told analysts on the conference call. "Stable, dependable market shares, recession resistant, significant competitive advantage, and a culture of cost saving. There's not a better fit for our current... business. The combination of the two will create a real packaging powerhouse," he said.

Amazingly, while Reynolds will need $US5b of new debt to buy Pactiv, the company has yet to finalise those loan deals. All the finance is coming from existing facilities. With Credit Suisse acting as financial adviser to Pactiv, the deal looks to reprise relationships from Hart's Carter Holt acquisition five years ago. On that occasion, Credit Suisse put up a short-term $3.4b debt facility to fund Hart's purchase, while advising Carter Holt's half-owner, International Paper, on the sale of its stake.

For investment banks, said one market source at the time, those deals are "valhalla" – heaven. No wonder analysts want Hart, the man who makes heaven happen, to turn up to roadshows.

HART'S BIG DEALS

1989 Govt Printing Office $23m

1991 Whitcoulls $7m

1997 Burns Philp $291m

2002 NZ Dairy Foods $245m

2002 Goodman Fielder $2.4b

2005 Carter Holt Harvey $3.3b

2007 SIG $3.2b

2008 Reynolds $US2.7b

2010 Pactiv Corporation $US4.4b

REYNOLDS GROUP

Headquartered: Auckland