Britomart wheeler-dealer runs out of gas

By BRIAN GAYNOR

Jihong Lu's bankruptcy should finally close the books on the original $1.8 billion Britomart development. This will save Auckland ratepayers millions of dollars.

The Britomart project was a potential gold mine for Mr Lu but it turned out to be another unsuccessful project for the controversial businessman. He projected the image of a successful international businessman with more than $6 billion under his management, yet he was declared bankrupt over a mere $3.05 million.

Mr Lu was born in Wuhan, central China, in January 1964. A talented musician, he came to New Zealand in 1985 to study music at Auckland and Victoria universities.

But his interests turned to business and investment and, after a short period back in China, he returned to New Zealand as managing director of Minmetals, a Chinese Government-owned organisation.

He left Minmetals because of personality clashes, and went on to develop other business interests including a shareholding in an English language school, the Auckland Institute of Studies. Like many of Mr Lu's business partnerships, this ended in acrimony.

Meanwhile, by the mid-1990s, the Auckland City Council had accumulated most of the properties in the Britomart area. Its objective was to establish an underground bus and rail transport centre and 11 large, above-ground buildings containing hotels, apartments and commercial office space.

The city council scoured the world for a developer but received little interest because of the huge risks associated with the project.

Finally, it struck a deal on its own doorstep with Mr Lu. Under an agreement signed on December 20, 1996, Jihong Lu and associates agreed to buy all the Britomart properties and their development rights from the city council for $56 million. The purchase was conditional on resource consent having been granted.

The deal with Mr Lu was quite extraordinary because he had no experience with big commercial developments, never mind a $1.8 billion project that would have a huge impact on Auckland City.

In mid-1997, Pacific Capital Assets agreed to buy the Britomart properties and development rights from Mr Lu and his associates for $126 million. In other words, on the same day that Mr Lu received the Britomart assets from Auckland City for $56 million, he would on-sell them to Pacific Capital Assets for $126 million.

Pacific Capital Assets granted Mr Lu 70 million $1 shares as consideration for his $70 million profit.

A condition of the Pacific Capital float was that the company would buy back the public shareholding (65 million shares partly paid to 50c) if resource consents for the Britomart project had not been received by June 30, 1998.

When the resource consent was not received by the due date, Pacific Capital bought back the public shareholding at 50c a share. At the same time Savoy Equities, formerly known as Parapine Timber and Counterpoint Equities, made a takeover bid for Pacific Capital and thus became the designated owner and developer of the Britomart project.

Mr Lu owned 51 per cent of Savoy Equities at the time of the Pacific Capital Assets acquisition.

The original design was modified and resource consents were finally received in May 1999. But discussions between Mr Lu and the council were fractious and Mayor Christine Fletcher finally pulled the plug on the original Britomart project last November.

She claimed Savoy was unable to provide funding for the project within the agreed timeframe.

Savoy believes this termination was unlawful and it has been preparing a claim for substantial costs and damages.

Whether the challenge goes ahead will depend on Savoy's ability to guarantee security of costs to the court's satisfaction. Savoy's financial position has been weakened by decisions made under Mr Lu's stewardship. These include:

Buying 75 per cent of Dairy Brands at an average cost of 42c a share and selling out at 33c a share;

Becoming involved in a $US310 million ($780 million) highway project in China and a development at Parkes Airport in New South Wales that came to nothing;

Spending $3.5 million last year on a 47.5 per cent shareholding in a highly geared company that owns the Hyatt Regency Hotel in Auckland. Last month, this interest was sold for shares in Hudson Pacific that are now worth $A2.6 million ($3.3 million) on the Australian Stock Exchange.

As at last December 31, two companies associated with Mr Lu still owed Savoy $1.85 million in relation to the 1997 Pacific Capital Assets float. These debts were due in August 1998.

Mr Lu's business empire has been steadily disintegrating since the beginning of the year. Six Savoy Equities directors - Garrick Wells, Judith Collins, Tsang Jat Meng, Robert Tan, Robert Challinor and Mr Lu (when bankrupt) - have resigned.

The company's shares have been consolidated one for 10 and yesterday's closing price was 12c, compared to the year's high of 100c (adjusted for the consolidation).

Its market capitalisation is now just $7 million.

There is continuing confusion over Mr Lu's Savoy shareholding. Chief executive Kerry Haycock said on Wednesday that Mr Lu's beneficial interest in Savoy Equities was only 19.6 per cent, yet the latest annual report showed he owned 30 per cent and no substantial-security shareholders notice has been issued since that date.

Mr Lu's overseas business interests have also turned sour.

According to media reports from the Philippines, Mr Lu's private company, Savoy Group, invested $US10 million in the listed gaming group BW Resources and he was also chairman of the company.

BW's share price soared from 2 pesos (10c) at the beginning of 1999 to a peak of 107 pesos on October 11 last year when Macau casino czar Stanley Ho replaced Mr Lu as chairman. Mr Lu remained as deputy chairman and indicated that Savoy would invest a further $US40 million in BW.

Subsequently, BW's share price collapsed and it is now worth less than 1 peso.

The company's share-trading activity has been the subject of a major insider-trading scandal that nearly closed the Philippines Stock Exchange and led to an outflow of foreign investment funds.

The scandal also plays an important role in the current impeachment proceedings against Philippine President Joseph Estrada.

Although Mr Lu is not implicated in the insider-trading scandal, media reports quote him as making optimistic predictions that have not been fulfilled.

In March, a Hong Kong-listed telecommunications equipment maker, Team Concepts, issued a prospectus for the sale of 1 billion shares at 10HKc (30c) a share to Mr Lu's private interests. The issue gave Mr Lu a 69 per cent interest in the company, which has subsequently changed its name to Savoy Concepts.

According to the prospectus, Mr Lu became an executive director of Savoy Concepts and will live in Hong Kong for as long as required for the proper management of the company.

It also made the following statement regarding Mr Lu's private interests: "Approximately $US2.5 billion ($6.3 billion) investments is under Savoy's management currently on behalf of independent institutions or corporations."

Savoy Concepts' share price rose to 37c after the placement but it has since fallen back to the original placement price of 10c.

Mr Lu's investment relationship with another Asian country finally led to his bankruptcy.

In 1997, he sold a 15 per cent shareholding in the Auckland-based telecommunications company SmarTel to the listed Malaysian group MESB Berhad. As part of the agreement he granted MESB an option over a further 36 per cent of SmarTel. MESB paid a deposit on this option but its execution was conditional on the receipt of Malaysian regulatory approvals.

These approvals were not received and MESB reclaimed the 4.7 million Malaysian ringgit ($3.05 million) deposit. The New Zealand courts have found in favour of MESB.

SmarTel no longer trades and Mr Lu was declared bankrupt on November 8 for failing to meet that $3.05 million obligation to MESB.

His bankruptcy was the end result of a long line of controversial and inept business decisions.

Savoy Equities shareholders may be facing a bleak future but Auckland ratepayers are extremely fortunate that Mr Lu is no longer involved in the Britomart project.