Stock takes: Squeeze on for equity

Crescent Capital Partners has sold out of Simply Squeezed. Photo / Greg Bowker

The credit crunch and associated increase in interest rates was always going to be bad news for players used to high levels of debt to buy businesses at the top of the cycle a couple of years back, ie a number of private equity firms.

There has been a growing feeling that it's not so much a question of if, but when, some of these buyers choose to take their lumps and exit their investments early and at a loss.

It has been interesting to see the announcement that Crescent Capital Partners has sold out of Hawkes Bay fruit juice firm Simply Squeezed.

Crescent bought a 60 per cent stake in Simply Squeezed from founder Steve Brownlie in 2006.

As is the way with private equity, there is little information on the purchase and subsequent sale price, but given where we are in the cycle Stock Takes would be surprised if Crescent had made much on its investment.

Meanwhile, this week saw reports that Goldman Sachs JBWere's Hauraki Equity No 2 fund and Quadrant Private Equity were looking to exit their investment in outdoor clothing chain Kathmandu which it bought from founder Jan Cameron in 2006.

Talk this week was of a potential IPO that would value the company at between $500 million and $600 million, which if it went ahead would appear to be a bit of a premium to the original purchase price, reported to be about $500 million.

FRIDAY FLASH

At long last, the Securities Commission has released its report on the string of incorrect statements Plus SMS released to the market back in 2006.

Turns out it finished this report a couple of years ago but didn't see fit to release it before now.

When we asked the commission a while back how the investigation was going it gave us nothing.

However "recent events" involving the company, which is now suspended from trading, prompted the commission to finally release its findings.

It found no evidence of anything it could do something about, and it didn't see fit to investigate stuff it does now have the ability to pursue because any breaches took place before it gained that ability.

Now Stock Takes won't go so far as to label the commission's work on this as "pathetic" as others have. As far as we know, it does its best with the resources it has under the current regulatory framework, but releasing the report at 5.07pm on a Friday? It's almost as though it wanted to minimise media coverage of the report.

We rang the commission that evening and asked if they could have chosen a more awkward time. We were told that's just when it was ready to go. Given the thing has apparently been sitting in Jane Diplock's bottom drawer for the past couple of years, that's a bit hard to swallow.

Plus SMS shares last traded at 0.5c.

INTERESTING CONFLICT

We know he isn't everyone's cup of bile, but Stock Takes has a great deal of respect for the way the Shareholders Association's Bruce Sheppard "stirs the pot" when it comes to capital market matters.

In characteristic fashion he has been getting up NZX's nose in recent weeks with a series of blogs examining the company's roles as market operator, participant and regulator under the leadership of Mark Weldon.

The thrust of Sheppard's criticism is familiar stuff: that the old conflict of interest inherent in NZX's dual role as market operator and regulator has become much more acute since it became an aggressively for-profit organisation owned by shareholders listed on its own exchange.

So what's new? Sheppard tells us he has been seeking and gaining support from a number of individuals and organisations to lobby for a change to the existing regulatory regime and it sounds as though we could see some fireworks before too long.

NZX, Sheppard says, has been in touch to express its dismay at what he has written and is "considering its position".

MORE REFORM ANYONE?

Sheppard and his supporters would like to see NZX relieved of its regulatory functions but they are loath to see the Securities Commission take them over, at least in its current configuration.

He believes one of the major problems around our capital markets is that regulatory and enforcement responsibilities are spread between too many different agencies including the commission, the Companies Office and National Enforcement Unit, NZX and even the Serious Fraud Office. A potential solution is to roll together these agencies, or at least their relevant functions, into a single organisation with a wider and better integrated skill set.

What are the chances of this happening? Commerce Minister Simon Power has told us the Government had no plans to remove NZX's regulatory responsibilities.

In the meantime, the commission is at least showing some signs of responding to criticism.

Sheppard tells us he was interviewed this week by the commission as part of a self-initiated review of its performance, competency, structure and governance.

DIVING INTO FLETCHER

Although it's lost about 50c over the past month, Stock Takes hears there's been a lot of buying interest in Fletcher Building shares.

Investors Mutual's Hugh Dive, who as senior equities analyst helps manage US$3 billion, told Bloomberg Television the company is one of his top picks in the New Zealand market, which he expects will continue to do it tough for the next few months but is showing signs suggesting "in the medium term this will be quite a good place to go".

Dive's picks are he says, defensive plays, but he likes Fletcher because of its market position and its vertical integration which provides for bigger margins than some competitors in the Australasian market.

Dive's other picks included SkyCity, on its casino monopoly positions in Auckland, Darwin and Adelaide and also the resilience of gambling revenues during the downturn. He also likes Telecom on the basis once again of its monopoly position in some markets, its relatively cheap price, and the fact it has already dealt with much of the regulatory risk that Telstra is still grappling with.

Fletcher shares closed up 9c at $6.50 yesterday.

PATCH UP

Morningstar analysts liked children's clothing retailer Pumpkin Patch's news last month it was cutting its losses in the US by closing 20 of its 35 stores there.

The restructuring, Morningstar said, was likely to dramatically lower the company's US operating loss from consensus estimates of about $13 million to $3 million.

The move would, however, cost the firm about $36 million to $42 million which would be written off in the current year including cash costs of $6 million to $8 million.

"This is a very positive development," said Morningstar. "A significant reduction in US losses coupled with lower capital expenditure in full year 2010 and working capital savings should improve group cash flows and lift returns going forward."

Morningstar has lifted its fair value on the stock to $1.80 and now rates it "accumulate".

The market also liked the June 30 announcement - in fact it appeared to like it even before it was made. Pumpkin Patch shares began rising sharply a few days beforehand and have now gained 20 per cent since June 25 and closed yesterday at $1.50.