Richard Inder: Hart a victim of his own success

To describe Graeme Hart as a victim is to risk ridicule.

He has an apparently contented family, more money than you can wave a stick at, a mansion in Auckland's eastern suburbs, a huge pleasure boat, a holiday house on Waiheke Island ... and a handsome golden retriever named Walter.

Nevertheless, in the face of scepticism over the prospects for the A$2.55 billion flotation of his transtasman food giant, Goodman Fielder, the adjective may be apt.

Those who have decided not to buy into Goodman - owner of the Molenberg, Meadow Lea, Edmonds, Kiwi and Meadow Fresh brands - reckon the business will offer a sharemarket return not much better than a utility.

Goodman operates in mature markets which will - at best - grow in line with household disposable income. Meanwhile, Hart is not to be trusted. Having made the easy gains, he is moving on.

Both arguments deserve a more thorough examination, especially the latter as it is this - a fear of Hart - that is perhaps having a greater impact on investors' rejection of the float than some would care to admit.

Hart may be in some measure a victim of his success.

The argument is partly rooted in the spectacular deals that he has negotiated with dairy giant Fonterra. Exactly how much he has made is difficult to judge, but the bald facts are: he bought New Zealand Dairy Foods from Fonterra in a deal that values the business at about $310 million: about two years later, he sells most of these assets back to the dairy giant for $754 million.

Under the deal, he was paid with $338 million in cash and $416 million in assets including the Meadow Fresh and Hutton's brands.

Three months after they were acquired these ex-Fonterra assets are to be sold into the new Goodman Fielder for a gross profit of at least $240 million.

In light of such gains, it is no surprise that investors ask: "Why would you buy anything from the man?"

Hart's response is instructive and reasonable.

"People do not want the risk or the rewards that we get," Hart told me this week.

He makes big gains because he took control with a mandate for radical change - a mandate that was simply not available to the prior management.

"We do get companies like Goodman and we take the risks that others will not. And we get those businesses into superior positions and then it is time for us to take our capital to invest in the next higher-risk, higher-reward investment." (Here he was referring to the $3.3 billion he has put on the table to take control of forestry giant Carter Holt Harvey.)

Hart continued: "That does not mean what we are offering to the next party is inferior.

"What it means is that the business is properly positioned for their risk appetite."

Three other factors should be considered.

Goodman has forecast profits for two years into the future. This is more than the 12 months that is required under the securities law.

He could have exited the entire business in the run-up to the float - having reached agreement with a consortium of private equity firms to sell for the price he expects to achieve by floating Goodman Fielder.

Finally, via Burns Philp's commitment to retain a minimum 20 per cent stake in the business until late 2007, Hart will have economic stake of at least A$270 million at least until then.

This is not small beer, even when set against Hart's $2 billion fortune. It seems more than is required to convince investors to buy into the float.

These are not arguments to buy into the float. It is one merely to temper investors' fears that Hart is pulling a swifty.

Meanwhile, shunning Goodman Fielder just because it largely operates in mature markets may be, as Hart says, to squander an opportunity. DB Breweries, now part of the Heineken empire, has grown its earnings by a compounding 10 per cent a year over several years, despite the flat state of traditional beer markets.

It achieved this employing exactly the same strategy that Goodman is counting on - product innovation and driving consumers into higher-value categories.

Hart says no matter what investors think of the market, they are still getting a good deal. Goodman will trade at a multiple of this year's trading profits to enterprise value of 8.3 to 8.5 times.

This is lower than comparable companies such as transtasman brewer Lion Nathan and international food companies such as Danone and Heinz.

As a result, investors may get short-term capital gain as the company trades up to a value similar to its peers.