Brian Gaynor: Shareholders will miss Norris touch

Former Air New Zealand boss Ralph Norris, who left the company this week to take up the top position at Commonwealth Bank of Australia, will be missed.

Top-rate chief executives are extremely important as far as the sharemarket is concerned and Norris is one of the best.

Most media attention is on the two other main types of businesspeople; the entrepreneurs and deal-makers. These two groups are also more likely to appear in the rich list.

Entrepreneurs and deal-makers have made a huge contribution to the market. Stephen Tindall, Michael Hill and Bruce Plested are included in the former group while Sir Ron Brierley, Tony Gibbs, Graeme Hart and the up-and-coming Craig Norgate are in the latter.

But most of the largest listed companies are relatively mature and their main requirements are multi-skilled boards and chief executives with vision and leadership skills.

When Norris started as chief executive on February 18, 2002, the national carrier was in a mess.

It had reported a loss of $1.4 billion for the June 2001 year and had to be bailed out be the Crown. The company had been decimated by its disastrous acquisition of Ansett Australia.

Less than three weeks after Norris started, Air New Zealand reported a loss of $377 million for the six months to December 2001. Its balance sheet was weak even though the Government had injected nearly $900 million of new equity in January 2002.

One of Norris' biggest contributions was that he changed the company's mindset in relation to pricing and demand.

It is hard to believe that before Norris, the airline had not worked out that air travel demand was relatively elastic. In other words, more and more people flew when airfares were reduced.

This concept had no traction at Air New Zealand even though Ryanair in Europe and Southwest Airlines in the United States had been trailblazers in this regard.

One of Norris' first major initiatives was to reduce fares, particularly on domestic routes. In order to maintain margins, he reduced costs by cutting travel agents' commissions and encouraging on-line booking.

This strategy has been successful as the number of domestic passengers carried by Air New Zealand has risen from 5.5 million to 7.2 million over the past three years and international passenger numbers have increased from 3.6 million to 4.5 million.

Pre-tax earnings, before unusual items, have risen from $33 million in 2002 to $235 million in the latest year.

Air New Zealand's balance sheet has also been strengthened under Norris' stewardship. Its cash reserves have risen from $0.6 billion to $1.1 billion since June 2002. Over the same period, net long-term debt has fallen from $1.1 billion to $0.8 billion.

This has had a positive impact on earnings as interest costs have gone from a net outflow of $56 million in the June 2002 year to an inflow of $23 million in the latest period.

But it has not been all good news at Air New Zealand. The group's annual fuel bill has increased from $570 million to $626 million over the past three years and is expected to be $900 million this year.

Air New Zealand will recover about two-thirds of the increase through hedging and surcharges, but rising oil prices are a major concern for all airline companies.

The other major issue at Air New Zealand is labour costs, which have risen from $709 million to $843 million over the past three years while revenue per employee has fallen.

As escalating labour costs are becoming a major impost on the carrier, it would be better if an outsider, rather than an internal candidate, replaced Norris.

Chief financial officer Rob McDonald will be acting chief executive until the new appointment is made.

Norris will be missed but investors are fortunate that most of the country's largest listed companies have chief executives with vision and strong leadership skills. One of the reasons for this is that the Takeovers Code has reduced the influence of deal-makers, particularly the second-rate ones.

This has allowed chief executives to take a long-term strategic view as they don't have to worry about low-skilled corporate raiders obtaining a 30 per cent stake, taking control of the board and meddling in their affairs.

Three of the country's biggest deal-makers, Eric Watson, Graeme Hart and Craig Norgate, were in the news this week.

Pacific Retail, which is controlled by Watson, held its annual meeting in Auckland on Tuesday morning.

Once again Watson, who is a director, failed to front even though one director flew in from London and the PowerHouse chief executive appeared on a live video facility from the United Kingdom.

After the meeting, a director said that they tried to get Watson to attend but the controlling stakeholder did not like shareholder meetings. But the biggest problem with Watson, as far as investors are concerned, is that he is not good at running companies once they have been acquired. Watson doesn't take the same hands-on approach as Hart and Norgate and there is a steady stream of senior people coming and going from his businesses.

At Tuesday's meeting, chairman Maurice Kidd resigned from the board and is quitting all of Watson's companies, with the possible exception of the New Zealand Warriors, after a 10-year involvement. He has been replaced as chairman by Jock Irvine.

Richard Reilly also resigned from the Pacific Retail board and chief executive Steve Smith has also left. Stefan Preston and Bruce Gordon, who operate as joint chief executives, have replaced Smith.

Shareholders were told that a preferred bidder for the group's finance company activities had been chosen and the UK-based PowerHouse is expected to break even in the March 2007 year.

After the meeting, one shareholder quipped that Kidd stayed longer than most of Watson's executives, directors, companies and wives.

It was a landmark week for two of the country's premier deal-makers, Hart and Norgate. On Wednesday, Hart's Rank Group sent its official takeover notice to Carter Holt Harvey to acquire 100 per cent of the company at $2.50 a share. The next step is for Rank to dispatch this offer to CHH shareholders and this is expected in the second half of September.

Under the terms of Rank's lock-up agreement with International Paper, which owns 50.5 per cent of CHH, the United States company must accept Rank's offer no later than one business day after the takeover notice is sent to CHH shareholders.

Thus Hart will have majority control of the forestry giant before the end of the month.

Norgate, who has been a man on a mission since he was let go by Fonterra, received good news this week when the Commerce Commission approved the Wrightson/Pyne Gould Guinness merger. The response to the announcement was positive with Wrightson shares rising from $2.39 to $2.65 during the week and Pyne Gould Guinness from $2.31 to $2.48.

Norgate, in conjunction with the McConnon family, has created a great deal of wealth for Wrightson shareholders since he made a partial offer for 50.01 per cent of the rural services company at $1.50 a share last year.

Grant Samuel valued Wrightson between $1.61 and $1.86 a share, including a premium for control. After a protracted battle, Norgate reached his target after increasing the offer to $1.65 a share.

Shareholders probably regret their decision to sell although Wrightson's share price wouldn't be where it is today if Norgate hadn't acquired 50 per cent.

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