Richard Inder: Disclosure looks threadbare

On the carpet

The reputation of the Feltex board led by chairman Tim Saunders is not improving with age.

This week, the beleaguered carpet manufacturer revised its June-year earnings for the third time in four months.

The $1 million upgrade sparked some relief for investors and the shares, floated last year at $1.70, rose from 58c to 64c.

However, the relief is probably unfounded. This third stab was an obligation under the NZX continuous disclosure rules that require the company to update the market if there is a material change in its prospects.

Coming just over a month after the manufacturer issued its second profit warning, which itself was produced just 10 days before the end of its financial year, it makes a mockery of the company's financial reporting.

And the upgrade is only half the story. Investors should feel more than a little concerned about Feltex's handling of merger talks with carpetmaker Godfrey Hirst.

Godfrey Hirst, Feltex's largest rival, bought a 5.8 stake in the company just a week after the June profit warning. A week later, the board met Godfrey Hirst and, after "constructive" discussions, decided to discuss the matter at the July board meeting.

Then, on Thursday, after more than three weeks with the proposal on the table, the Feltex board magnanimously pronounced it had decided to ask Godfrey Hirst for financial information comparable to the publicly available information on itself.

It is no wonder Godfrey Hirst financial director Jim Walsh this week declared his company was looking for Feltex "to start seriously exploring the merger opportunity". (This is corporate shorthand for "get with it, guys".)

The company's handling of the merger talks looks hamfisted. That it took three weeks for the board to ask for such information at a time of crisis for the company is astonishing.

It would seem incumbent on the Feltex board to despatch merger discussions as quickly as possible, if only to remove the distraction from the equation.

Meanwhile, Feltex said any proposal from Godfrey Hirst should "create value in excess of alternative opportunities that it is considering or evaluating".

But Feltex told this columnist that it had no alternatives on the table and that it had not initiated any process to solicit bids from other players.

Feltex is, therefore, limiting its chances of testing any proposal that Godfrey Hirst puts forward. It is also pursuing a restructuring that may or may not be in line with the plans of any acquirer.

NZX gloom

It is easy to be gloomy about the prospects for the New Zealand equity market in spite of the benchmark NZSX-50 hitting new records this week.

The exchange's half-year earnings wrote the problems large. Trading activity over the past three months has declined sharply and the collapse of Access Brokerage threatens to be a drag on earnings for some time.

More profoundly, the loss of a number of big companies is undermining the market. NZX has given an indication of the likely damage from this - the most serious of problems.

The recent delisting of Ports of Auckland following Auckland Regional Holdings buy-out will deprive the company of about $50,000 in annual trading and listing fees. The loss of Carter Holt, up for sale now majority shareholder International Paper has decided to review its continued ownership, would deprive the NZX of about $150,000 a year.

On annual net profits of just over $3 million, these are substantial sums - but that is only half the story.

Since the start of the year, the exchange has lost eight companies including rural services group Williams & Kettle, packaging group Vertex, former publisher INL, the Nuhaka Farm Forestry Fund, transport group Owens, the New Zealand listing of Westpac, Urbus Properties, and Ports of Auckland. These companies had a combined market value of $4.8 billion when they were delisted.

On the other side of the ledger, the exchange has seen only three listings of note: labour hire company Allied Workforce, property financier Avon Investments and media group Jasons Travel Media, with a combined market value of $58.6 million.

The odds on Carter Holt slipping away are high. Other departures in the wind could include retirement homes operator Metlifecare, fast food operator Restaurant Brands, Toll Holdings, gas pipelines group NGC, forests products group Tenon and possibly even market stars Fisher & Paykel Appliances and Fisher & Paykel Healthcare.

These losses, if they occur, are unlikely to be matched by the impending arrivals, which so far include energy supply company Vector and possibly wireless internet service provider Woosh.

The loss of a large company not only cuts NZX's earnings; it also deprives the market of a source of the revenue needed to underwrite the infrastructure necessary for capital raising and mergers and acquisitions.

If the trend continues unabated, banks and large investors will inevitably question whether the cost of maintaining a presence in New Zealand is worth the trouble. NZX will be relegated to a New Zealand focused small-company market.

Any firm of size and scale will cross the Tasman and raise cash on the much deeper ASX.

This would be a tragedy. Deprived of these market professionals and their ready source of funds, New Zealand companies would find the already difficult task of raising capital all the more difficult. The economy, reliant on innovative export-oriented companies as guarantors of future prosperity, will suffer.

There is, however, some cause for hope.

Privatisations and the listing of agricultural co-operatives such as dairy giant Fonterra could provide some relief.

Transtasman companies that would not make it into the ASX's S&P 200 index could conceivably be sold the benefits of joining the NZSX-15 benchmark index. (Fletcher Building chief executive Ralph Water, for one, waxes lyrical on the benefits its standing in the New Zealand market gives it in overseas markets).

Finally, the NZX under Mark Weldon's direction has made great strides in lifting its profile. But there is still much work to do.