Brian Gaynor: Farmers deal sweet for Fisher & Paykel

COMMENT

The immediate response to the Farmers deal suggests that the vendor came out on top as Foodland's share price surged 90Ac to A$18.85 and Fisher & Paykel Appliances remained static at $14.80.

This is understating the value of the transaction for Fisher & Paykel Appliances as the acquisition should boost the net contribution from its finance activities.

Foodland has agreed to sell Farmers for $311 million, with James Pascoe purchasing the retail business for $122.3 million and Fisher & Paykel Appliances acquiring Farmers Finance for $188.7 million.

The deal is expected to boost Fisher & Paykel Appliances' net earnings by about $1.5 million (2c a share) in the March 2005 year and extend its exclusive dealership agreement (whiteware) with Farmers for a further 20 years.

The arrangement is partially defensive as far as Fisher & Paykel Appliances is concerned because Foodland could have sold Farmers to a non exclusive dealership agreement operator, including Pacific Retail.

The acquisition of the retail operation by James Pascoe will be far more challenging as the purchaser is a speciality jeweller operator whereas Farmers is a department store chain.

Department stores are struggling around the world because of intensive competition from discount retails and speciality stores.

These all-purpose stores used to be "destinations" but they have been replaced by the shopping mall and stand-alone activities run by discount operators such as The Warehouse.

Malls are anchored by two big stores at either end with a large number of speciality stores in between.

These speciality stores would usually struggle to create any demand but the huge foot traffic in the successful malls has been a big boost to them.

James Pascoe is a successful speciality jewellery operator and it is difficult to understand why it is diversifying into the declining department store sector.

TRANZ RAIL

On Monday AMN-Amro released a short research note that upgraded Tranz Rail from a hold to a buy.

The broker stated that Toll had obtained only 82.7 per cent and it expected Tranz Rail to remain listed for a further two years.

It noted that the independent adviser, Grant Samuel, has valued the Toll-Crown-Tranz Rail proposal in the range of $1.34 to $1.64 per share and "we believe this range is achievable".

ABN-Amro indicated that there might be a rights issue in the vicinity of $200 million but "we do not see that as necessarily negative" as "such an issue should enhance the market capitalisation and the financial position of Tranz Rail, thereby increasing the appeal of the stock".

Grant Samuel believed that Toll's $1.10-a-share offer was not fair and there was a "reasonable probability" that the offer would go unconditional if Toll received in excess of 50 per cent.

Tranz Rail's directors took a more cautious approach and unanimously recommended the $1.10-a-share offer.

Tranz Rail's shares closed yesterday at $1.16.

DIRECTORS' FEES

Telecom's argument that its directors' fees are in line with Australasian companies of a comparable size seems rather spurious when compared with Telstra.

At last week's Telecom annual meeting, shareholders approved an increase in total directors' fees from $950,000 to $1.5 million.

At next month's Telstra annual general meeting, shareholders will be asked to raise directors' fees from A$1,150,000 ($1,320,000) to A$1,320,000 ($1,520,000).

These fees seem to be comparable but the Australian company is substantially bigger than Telecom and has 11 non-executive directors whereas the NZ firm has only seven.

Under the new fee structure each Telecom director will receive a base fee of $105,000 plus an additional $10,000 for each overseas-based individual (outside New Zealand and Australia) and $10,000 for membership of a board committee.

Thus New Zealand-based directors will receive $115,000 and Lindsay Pyne, who is based in Thailand, and London-based Michael Tyler $125,000.

Under NZX listing rules the two overseas-based directors will be entitled to a retirement allowance of up to $375,000 each if they are paid the full $125,000 a year for three years.

Chairman Dr Roderick Deane, who was re-elected to the board for another three-year term, received $384,000 in the June 2003 year but the notice of meeting revealed that there is no proposal to raise the remuneration paid to him. On the basis of his June 2003 remuneration, Deane will be entitled to a lump-sum payment in excess of $1 million when he retires.

Telecom's notice of meeting contained a letter from Sydney-based John Egan Associates stating "that the proposed levels of director remuneration are appropriate and in line with fees paid to directors of companies of comparable scale and complexity, managing significant Australasian enterprises".

This may be true but Telecom's directors are paid more than Telstra's, particularly when it is considered that the Australian telco is 7.5 times larger in terms of sharemarket value, 4.8 times in revenue terms and 5.6 times on a net earnings basis.

In the June 2003 year the base fee for Telecom directors was $100,000 whereas the average base fee for Telstra directors was A$80,700 ($93,100). Telstra chairman Robert Mansfield received A$274,700 ($316,500) compared with Deane's $384,000.

Telstra shareholders get far more value for their bucks as five of its directors are or have been chief executives of other listed companies, whereas Pyne is the only director in that position at Telecom.

It is difficult to understand why Telecom has not been able to attract more directors with listed company chief executive or chairman experience, particularly when it pays more than Telstra.

MSCI INDEX

The MSCI Index is the most widely used measurement of the performance of the world's sharemarkets. It is maintained by Morgan Stanley Capital International, which is owned by Morgan Stanley and The Capital Group Companies.

The MSCI World Index, which measures the performance of sharemarkets in 23 developed countries including New Zealand, is the most widely accepted international index.

As the accompanying table shows, our market, which was worth only US$27 billion on June 30, is the smallest in the World Index. It represents only 0.1 per cent of the total value of the 23 sharemarkets and is worth much less than the Vienna Stock Exchange, the next smallest market.

There are 1550 companies in the World Index, with 14 from New Zealand.

These are Auckland International Airport, Carter Holt Harvey, Contact Energy, Fisher & Paykel Appliances, Fisher & Paykel Healthcare, Fletcher Building, Fletcher Forests, Independent Newspapers, NGC, Sky City, Sky Network Television, Telecom, Tower and The Warehouse.

It is important that New Zealand stays in the index as it keeps the NZX's name in front of international investors and we attract money from purely passive World Index mandates (funds that allocate their money on the basis of the weighting of the index).

The potential problem for New Zealand is that some sharemarkets are big enough to join the World Index but are defined as emerging rather than developed markets.

These include Taiwan (US$288.2 billion), Korea (US$233.9 billion), South Africa (US$188.5 billion) and India (US$160.2 billion).

The good news for the NZX is that it has been one of the best performing sharemarkets this year.

Up to Friday it had a gross return, on a US dollar basis, of 36.2 per cent compared with the World Index return of 22.7 per cent.

This places it in fifth position behind only Sweden, Greece, Denmark and Canada.

* Email Brian Gaynor