Brian Gaynor: Activists shake up sharemarket

Simon Botherway's most effective work is often below the surface and out of the media spotlight. File Picture / Glenn Jeffrey

Investor activism has had a major impact on the New Zealand sharemarket over the past 40 years.

Ron Brierley was the country's first and most effective activist, followed by several 1980s copycats, including Allan Hawkins, Colin Reynolds and Bruce Judge.

In the past decade Tony Gibbs has come to the fore, along with Bruce Sheppard of the Shareholders' Association and Simon Botherway of Brook Asset Management. Much of their agitation has benefited a wide range of investors, although several activists have struck specific deals for themselves.

Botherway's recent success with Kiwi Income Property Trust is an example of the former, whereas John Powell's agreement with Trans Tasman Properties illustrates that some activists are able to arrange their own exclusive deals.

Ron Brierley's activism started in mid-1961 when he made a script bid for Otago Farmers Co-operative Association of New Zealand Ltd. The bid was unsuccessful, but Otago Farmers revised its shareholder discount policy and its share price rose.

Like most investor activists, Brierley was not welcomed by the business establishment. The Wellingtonian was also severely criticised by the Auckland media.

He made numerous unsuccessful attempts to list Brierley Investments until the extremely conservative NZ Stock Exchange finally capitulated and the investment company listed on March 2, 1970.

The rest, as they say, is history. Brierley's activism changed the face of corporate New Zealand. Over the next decade and a-half he raided and restructured a swag of hopelessly run listed and unlisted companies.

Investors quickly realised that investor activism was rewarding, and by the end of 1985 Brierley Investments had more than 50,000 shareholders and was the country's largest listed company. It was more than twice the size of Fletcher Challenge in market capitalisation, and almost three times bigger than NZ Forest Products. .

Success encouraged others to follow, and most of the high-flying investment companies of the 1980s started off as investor activists.

But these often end up like African revolutionaries. They overthrow ineffective directors and management only to become even more inept and excessive themselves.

Many of our corporate activists had private jets, huge pay packets, expensive art on office walls and unlimited use of corporate credit.

They also ended up owning 100 per cent of large companies, and we discovered that they were better activists than managers. Brierley Investments, Equiticorp, Chase Corporation and Judge Corporation all floundered because they moved to being corporate managers, and they weren't particularly good at this.

In the early 1990s Guinness Peat Group emerged from the ashes with Ron Brierley, Tony Gibbs and Gary Weiss at the helm.

GPG has been a classic activist and its involvement in Tower and Rubicon are perfect examples how this approach can create wealth for all shareholders.

But GPG is slowly changing to being a manager. The group's December 2004 annual report shows that Coats plc, now 100 per cent owned, represented 31 per cent of total assets, compared with 12.4 per cent a year earlier.

GPG's next largest investment is Turners & Growers, which represented just 6.1 per cent of group assets at the end of last year.

Thistle Hotels, which was a major contributor to Brierley Investments' demise, represented 33.8 per cent of group assets when Paul Collins and most of his management team were given the boot in 1998.

Although GPG will continue to be an activist, its future is much more dependent on its stewardship of Coats, the huge British-based international thread manufacturer.

There are no signs yet of private jets at GPG, but its executives are extremely well paid, and Ron Brierley, who is the non-executive chairman, has a more limited role since the group became more management orientated.

Brierley is still an activist and GPG's involvement with Farm Pride Foods in Australia is more his style than Coats.

GPG acquired 19.9 per cent of the Victorian-based egg producer, but was refused a board seat. It then requisitioned a special meeting to approve its board nomination, but Farm Pride capitulated last week, accepted the GPG nominee and the meeting was cancelled.

In the meantime Farm Pride's share price has more than doubled. The only trouble with this is that the ASX listed company has a market value of only A$22 million, compared with GPG's NZ$2 billion, and is far too small for the investment company to be involved with.

This highlights one of the major problems facing listed activists - the most interesting plays are often small companies, and as investment companies grow they are forced to move away from their specific area of expertise and become managers.

Bruce Sheppard and Simon Botherway haven't this problem, as they don't have to keep growing and growing to justify a high share price and meet investor expectations.

Sheppard and Botherway have received considerable media attention, but their most effective work is often below the surface and out of the media spotlight.

Botherway's recent agitation against Angus McNaughton and Kiwi Income Property Trust is a good example of this.

Botherway was concerned that the $538 million Sylvia Park development was proceeding with an anticipated yield of 7 per cent, whereas the trust had indicated at a shareholder meeting in January that it was looking for a 9.5 per cent yield on new investments.

The trust dismissed Botherway's concerns until he threatened to call a special meeting of unit-holders with the following main resolutions:

1) Chairman Sean Wareing to step down and be replaced by an independent chairman.

2) Management fees to be waived on Sylvia Park until the development achieved a yield of 8 per cent on the completion cost.

3) The project management fee paid to the management company to be reduced from 3 to 1.5 per cent.

Although Botherway didn't get everything he asked for, the trust announced on July 13 that the management fee would not kick in until the the development yielded 7.5 per cent, and the project management fee would be the lower of 3 per cent or total costs.

Botherway's activism has pushed more risk back to the management company, which can only benefit unit-holders in the longer term.

John Powell's successful agitation against Trans Tasman Properties has fewer obvious benefits to all shareholders.

Powell, who has been a constant thorn in the side of the property company, has struck a deal where he will sell property worth up to $11.66 million to Trans Tasman and the company will buy back all his 14.3 million shares (representing 2.4 per cent of the company) at 40c each.

In addition, Trans Tasman will make a $2.5 million development contribution to a local charitable community trust and Powell will not acquire any shares for two years.

The outcome of Powell's activism has been unusually self-serving, as he has struck a deal that is specific to himself, and the company will make a donation of $2.5 million to a charity in his locale when it hasn't paid a dividend since 1998.

The activism of Brierley, Gibbs, Sheppard and Botherway has contributed hugely to the sharemarket. It is just as well their type of activism has been far more prevalent than the sort of deal struck between Powell and Trans Tasman Properties.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.