Richard Inder: Over to you ... Watson

Eric's play talk that Hanover Group is in the hunt for Pacific Retail's consumer finance business has created confusion for others interested in buying the operation.

Hanover, owner of the Elders, Nationwide and FAI finance brands, is 50 per cent owned by Eric Watson. But Watson also owns more than 80 per cent of Pacific Retail and, as a result, bidders are nervous about entering an auction that appears slanted against them.

Just why Hanover is in the bidding remains unclear. It may be as much to do with the finance company wanting to get scale as it is about making Pacific Retail a vehicle focused largely on its cash-hungry British play, the appliance retailer PowerHouse.

Whatever, rivals fear Watson's large shareholdings in both companies insulate him from any overpayment and, in fact, may encourage him to overpay.

The cash from Hanover would be largely recycled back into Pacific Retail.

A high bid from Hanover may disadvantage Watson's partner, Mark Hotchin, but this matter can be settled privately, presumably by Hotchin allowing himself to be diluted or perhaps by creating a separate vehicle for the business within the Hanover group.

(Watson, it must be said, has no influence over what price Pacific Retail chooses to accept, as the Pacific Retail board has set up an independent committee to manage the deal.)

Even if Watson has no intention of transferring ownership to Hanover, his mere presence at the table will be enough to introduce a more-than-normal degree of competitive tension in the sales process.

Again this means a high price.

Not that any of this will worry Pacific Retail minority shareholders, among whom Alliance Capital stands out as holding the lion's share. Macquarie, the investment bank taking the bids, is also sitting pretty as its fee will no doubt rise in line with the eventual proceeds.

Final bids are due in this month, with estimates on the price of the operation ranging from as low as $100 million to well over $200 million.

Hanover, however, has its own issues to deal with. There are doubts it will be willing to take Pacific Retail Finance while it still has the office equipment firm on its books.

Hanover planned to float Onesource, made up of a Konica Minolta photocopier business, telecoms equipment supplier Cogent and a finance business.

But just as institutional investors baulked at a float of Pacific Retail Finance, they similarly turned their noses up at Onesource.

It now seems as though a management buyout for this business is on the cards.

FELTEX TRAGEDY

The collapse at Feltex is alone enough to put small investors off the sharemarket, but the attempts by management to hide behind a semantic distinction will surely leave a sour taste.

Since its first profit warning on April Fool's Day, Feltex chairman Tim Saunders has been at pains to point out that figures setting out the expected financial performance were "projections", not "forecasts".

The claims have come as the carpet-maker's market value has fallen from $250 million at flotation to $70 million yesterday.

At first, Saunders' protests seemed a needless splitting of hairs. But it now appears there is a fine distinction.

A forecast is backed up by best-estimate assumptions, while projections are hypothetical assumptions.

Forecasts, it seems, are an altogether more serious proposition than projections - not that small investors, or perhaps many of the more financially literate, would have been aware of the distinction.

As Shareholders Association chief Bruce Sheppard noted: "The reality is those people who read prospectuses and do read numbers included in them believe those numbers are robustly prepared."

Professional investors accept such contortions as grist for the mill. Across the sweep of their portfolios, they can accept an occasional bad bet. Losses are absorbed by gains in other shares.

Small investors are not so resilient and such word play will only strengthen their suspicions of the sharemarket. Many bought into a proud brand believing it to be a solid performer. Instead of looking for another prospect, many will return their money to the bank or, even worse, into the raft of finance company debentures (another recipe for disappointment).

The sharemarket depends on these small investors for liquidity. Moreover, a vibrant retail market is necessary if a nation is to turn good ideas to profit.

Feltex's downfall will end up costing New Zealand more than the carpet-maker's market value.