Brian Gaynor: Smart Hart shows how to walk on water

It was an amazing week for the NZX. Vector listed on Monday at a big premium to its $2.38 issue price and then, on Wednesday, came a huge surprise: a small company called Rank Group made a $3.27 billion bid for Carter Holt Harvey after agreeing to buy International Paper's 50.5 per cent stake at $2.50 a share.

Graeme Hart owns all 6.4 million Rank Group shares and is the company's only director.

The banks must have huge confidence in Hart to be prepared to lend him most of the $3.27 billion. To offer that amount, without requiring him to do due diligence indicates they believe he walks on water.

Hart does walk on water in the sense that he is substantially bigger in New Zealand than Bill Gates is in the United States.

Hart's $3.27 billion Carter Holt bid represents 5 per cent of the market's total value of $65 billion. Even if he buys only half of the forestry giant, which is more than likely, his purchase price will be 2.5 per cent of the market's total value.

By comparison, Gates 1.02 billion Microsoft shares are worth US$27.4 billion ($39.32 billion) or just 0.17 per cent of the total value of the New York and Nasdaq stock exchanges.

NZX investors should have as much confidence in Hart as the banks, because his only other domestic listed company was a huge success.

Hart first appeared on the public scene on January 27, 1987, when the Rank Group lodged its prospectus before a sharemarket listing.

The main objective of the company was to raise $2.75 million from the public through the issue of $1 shares, and to acquire Pacific Rental (mainly Carlton Party Hire) and Vella Investments (a cash management and sharemarket investor) through a combination of shares and cash.

When Rank listed on March 9, 1987, it had a sharemarket value of $7.6 million at the $1 issue price, compared with a combined $2.6 billion for Carter Holt Harvey and NZ Forest Products, the two companies which have subsequently combined and were on Hart's target list this week.

Rank shares briefly traded at $1 but finished the year at just 30c.

Unlike many of his contemporaries, Hart battened down the hatches after the 1987 crash. He sold Pacific Rental in December 1988 and repaid all debt.

Hart came out of his shell again in 1990 when he bought the Government Printing Office for $23 million under controversial circumstances. Fay, Richwhite valued the company at $71 million, and it had a book value of $44 million, $21 million above Rank's purchase price. Rank was due to settle on January 31, 1990, but payment was delayed five months, giving Hart free control of the former state-owned enterprise for that period.

Hart took advantage of the poor handling of the sale, which was criticised by a select committee inquiry, and in September 1991 Rank bought Whitcoulls from Brierley Investments for $71.2 million, changing its name to Whitcoulls.

After several additional acquisitions, two bonus issues, a 10-for-one share split and a rights issue, Hart, who owned 64.5 per cent, made a takeover offer for Whitcoulls in 1996 at $2.32 a share.

Although Grant Samuel valued the company between $2.70 and $2.96, and the independent directors unanimously recommended rejection, some institutions accepted and Hart was able to move to compulsory acquisition.

Whitcoulls was delisted on July 19, 1996, when it was worth $280 million compared with its IPO value of $7.6 million. Shareholders who invested $1000 in the IPO just over nine years earlier ended up with $26,000, excluding dividends.

This was a remarkable return, as the period covered the sharemarket crash, most of the new floats of 1986 and 1987 did not survive, and the benchmark NZSX40 capital index fell 36.5 per cent between Rank's listing and delisting.

Shortly after he acquired 100 per cent of Whitcoulls, Hart flicked it on to Blue Star for a profit.

Is this a precursor as to what might happen at Carter Holt Harvey?

Hart has gone from strength to strength since he sold Whitcoulls, although he had some nervous early days at Burns Philp. But the Sydney-based company has improved its earnings performance since acquiring Goodman Fielder and Hart has done extremely well from his purchase of New Zealand Dairy Foods.

One of the early reactions to this week's bid was that the quickest way for Hart to go from New Zealand's wealthiest individual to the doghouse was for him to buy Carter Holt Harvey. This is a cynical view but it reflects the poor standing of the target company.

International Paper first became involved with Carter Holt in November 1991 when it bought 16 per cent from Brierley Investments at $2.15 a share. The US company acquired a further 8.1 per cent from Brierley at $3.70 a share in 1994 and bought the investment group's remaining 7.6 per cent in 1995 at $3.55.

On the same day as the last Brierley purchase, International Paper made a successful on-market bid to go to 50 per cent at $3.80 a share, capitalising the forestry giant at $6.6 billion, twice what it is today.

Needless to say, the stewardship by International Paper has been poor, particularly in recent years. The Americans have sent down a succession of top brass who have failed to realise that commodity-based companies cannot afford a large head office full of highly paid, non-operating executives.

Hart's attitude towards due diligence illustrates a major difference between him and Carter Holt.

Due diligence is an extremely expensive exercise that requires a host of highly paid lawyers, accountants, investment bankers and analysts. It helps a potential bidder to gain a more detailed insight into the past performance of a company and its contractual arrangements, but it gives little insight into its future prospects, which is the key ingredient when making an investment decision.

A smart investor - and Hart is definitely in this bracket - doesn't need to waste money on the due diligence of a listed company that has a high level of disclosure.

On the other hand, you could bet your last dollar that Carter Holt's board and bankers would insist that the group's management team undertake due diligence if they were proposing a $3.27 billion takeover. This due diligence would be a cost impost on shareholders and reflect a lack of confidence in management's decision-making abilities.

An astute investor doesn't need to undertake due diligence to realise there has rarely been a better time to buy New Zealand forestry assets, particularly an investor who can obtain majority control and slash excessive head office costs.

The positive outlook is because of factors including an expected decline in the value of the dollar, lower shipping costs, rising costs for Russian timber producers and the desire by more institutions to hold forest assets in non-listed vehicles.

This should have a positive impact on forest values in the years ahead, and means Hart will be in no hurry to break up Carter Holt and sell individual assets.

Minority shareholders now have to decide whether to accept Hart's $2.50 offer, which is a requirement under the Takeovers Code.

The decision is a no-brainer. Why sell out of Carter Holt when the new controlling shareholder has turned a $1000 investment in his only previous NZX company into $26,000, whereas Carter Holt's exiting majority shareholder has overseen a diminution in the group's value from $6.6 billion to $3.27 billion?

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and a Carter Holt Harvey shareholder.