Stock takes: Lucrative queries

Talk that Telecom was tendering its partnership with Xtra shows the telco it is pushing ahead with its plan to sell its directories business.

Listings in the Yellow Pages - like the rest of the world's classified advertising - are migrating to the internet. As computers and the internet penetrate deeper into our lives, the printed directories become less and less convenient compared with the service available through a computer.

Telecom realises the Yellow Pages business is probably worth more to one of these international internet businesses. An online business such as Google that can link directory searches to other advertising can probably make the information work harder than a telecommunications firm.

This is especially the case for the Yellow Pages, as its users typically search by category rather than by name, making it much easier for the provider of the service to sort the information in ways that generate the most revenue. How much will a plumber in Panmure pay to have his name appear at the top of listed plumbers in South Auckland?

Google, for one, has built a a behemoth on such expertise and would also benefit from the increased traffic such searches would bring to its sites.

Telecom knows this and will relish the prospect of returning the likely $1.6 billion proceeds to its less-than-satisfied shareholders. But it also knows directory searches drive internet traffic to its other internet offerings, such as the the home shopping site Ferrit.co.nz, and its web mail and its internet portal Xtra benefit. Its interest, therefore, is to ensure that these synergistic benefits are protected ahead of a sale.

Sure such an alliance may weigh on the price of the directories business, but for Telecom it is a zero sum game as the value is retained in its business. Telecom shares closed yesterday down 2c at $4.31.

A healthy option?

Goldman Sachs JB Were reckons buy Fisher & Paykel Healthcare up to $4.55. It says over the last three months price earnings multiples of the manufacturer's peer group have expanded. Yet F&P Healthcare's has shrunk and is now the cheapest firm in the global group. Goldman Sachs thinks the wider market is wrongly counting on the dollar staying stronger for longer. F&P Healthcare shares closed yesterday down 1c at $3.89.

Thin margins

Stephen Tindall appears to be taking a big bet joining with private equity firm Private Equity Partners (PEP) to privatise The Warehouse. Market talk suggests the reconstructed business will have an enterprise value (debt plus equity) of about $2 billion. Most private equity deals are structured with a ratio of 70 per cent debt to 30 per cent equity, suggesting Tindall and PEP will put around $600 million of equity in total.

Just how much of that equity Tindall will take remains unclear.

At the public briefing on the deal, he said he was not a seller, suggesting he is rolling over his entire 27 per cent stake, worth $476 million, into the business.

He also said he was taking more than a simple majority stake, ensuring he retains control and calls the shots when PEP decides to exit. Meanwhile, PEP is likely to still be seeking a meaningful position.

This suggests a 60/40 split with Tindall putting $360 million of his $474 million stake into the new vehicle's equity and the remaining $114 million going into debt, most likely in the note issue to fund the expansion.

The rest of the privatisation has to be funded by debt, which on these calculations could in total run as high as $1.4 billion.

This implies a gross interest bill of about $126 million - this is just $23 million over this year's earnings before interest and tax.

PEP and Tindall have got big plans. The mere fact the retailer is no longer listed could add more than a million to the bottom line.

Disposals - potentially the stationery division - will help reduce debt.

At the same time, the new Warehouse Extra format at Sylvia Park showed a 7 per cent lift in sales on 32 per cent less space. If this can be replicated elsewhere, Tindall and PEP have a proposition. But it is a huge risk.

The food retailers are not going to take The Warehouse's entry into their arena lying down.

Woolworths has proven an aggressive competitor since taking control of Progressive and is sure to knock down prices in a catchment where it competes with The Warehouse. Foodstuffs will do the same. And the Warehouse Extra format may not work as well elsewhere as it has in Sylvia Park.

If PEP and Tindall are faced with a storm, their protection - as The Warehouse stands at the moment - does not amount to much. And in the cut-throat discount retailing business, this is especially true. Shoppers are always looking for a bargain. The word is Tindall will not be exposing his charitable foundation to the plan. It is perhaps just as well.

Clear as ...

What colour do you get when you mix all the colours of a rainbow into one pot? It is perhaps a question the marketing team at Baycorp Advantage should have asked before they unveiled the credit-reporting group's plans for a new corporate moniker - Veda - yesterday.

The name according to yesterday's effusive press release is derived from an ancient word for knowledge and rhymes with leader, and Advantage.

To be fair, it is not a bad name and builds on a well-established tradition of corporate mashing. Fonterra springs - excuse the pun - from the Latin words for fountain and earth and Zespri from zest and spring.

But set aside for a moment the dodgy claims to rhyme, it is a long shot to claim that it represents the "competitive benefits customers obtain from leveraging the company's data and analytics capabilities, as well as a bridge to the company's history".

The new name will more than likely be waved through by shareholders at the firm's annual meeting next month. But questions are sure to abound about just how much of the $2 million to $3 million cost of the rebranding was spent on meaningless philosophising.

That said, Veda will probably do fine. In the corporate world, a name is what you make it. As long as Baycorp's service is good, and its information is accurate, the word Veda and the rest of the company will become a valuable asset.

Oh and by the way the answer is brown - not rainbow stripes.

Once more into the tax battle

Guinness Peat Group's Tony Gibbs has been forced to return to the battle over the Government's increasingly confusing plans for taxation of foreign investments.

The Government's latest version scraps the tax on unrealised capital gains on share portfolios outside New Zealand and Australia, proposing instead a tax on up to 5 per cent of the shares' value at the start of each year.

Investors making a return - including any dividends paid - of less than 5 per cent would pay tax on that lower amount instead. If their returns were negative they would not pay tax.

The anomalies - which Gibbs has promised to highlight - are numerous. For example, $100,000 invested directly with the BNZ at 7 per cent will create taxable income of $7000. That same sum invested in a Cayman Islands trust which then deposits the cash with the BNZ at 7 per cent, will create a taxable income of $5000. The investor will pocket the difference, after fees.

But Gibbs' frustration with the new proposal is more deeply founded. An intense lobbying campaign won his shareholders a five-year holiday from the earlier proposal.

Ministers were apparently swayed by GPG's deserved reputation for creating wealth for its mainly New Zealand-based investors. This year, its shares have risen 20 per cent, extending its record of delivering returns to shareholders of a compound 20 per cent a year for the past 10 years. The shares closed yesterday up 1c at $2.39.

But with the new plan, GPG's tax holiday may be under threat. Gibbs has written to the ministers seeking an assurance they will stick to the deal. Such hope may be empty - but Gibbs' skill in lobbying should not be underestimated.

* Liam Dann returns next week.