KEY POINTS:
The NZX's Indian summer came to an abrupt end at 8.52am on Monday when Fisher & Paykel Appliances announced that it was experiencing "unprecedented and difficult trading conditions" in all markets.
The announcement, which had an immediate impact on investor sentiment, demonstrates that our companies are not immune from the international recession and the negative consequences of too much debt.
For the rest of the week shareholders were asking how did the company get into this distressed situation and is there an obvious solution, including the possibility of a government bailout?
To search for answers it is useful to look at the history of the company, going back to January 25, 1934 when Woolf Fisher and Maurice Paykel established Fisher & Paykel Limited (F&P) to import Crosley refrigerators, Maytag washing machines and Pilot mantle radios.
The two friends were descendants of Russian families with Paykel's grandparents fleeing the country in 1882 and Fisher's father leaving in 1900.
The Paykel family held 550 of the original 1000 1 shares with the Fishers holding the remaining 450 shares.
The two families came closer together in 1935 when Woolf Fisher married Joyce Paykel, Maurice Paykel's sister.
The company's first manufacturing operation, which was for wringer washers, was established in December 1939. It expanded rapidly after the war and a medical division was established in 1977.
F&P listed on the stock exchange on November 1, 1979 following the sale of 4.3 million existing shares to the public at $2 each. This gave the public a 26.9 per cent holding, staff 3.1 per cent and the original shareholders 70 per cent.
The IPO prospectus, which was a flimsy 20-page document, revealed that the company had net earnings of $9 million in the March 1979 year but was forecasting a decline to $7 million for the March 1980 year because of a higher tax rate and uncertainties regarding exports to Australia.
In 1987, Allan Hawkins' Equiticorp purchased a 23 per cent stake in F&P through a share placement, which accounted for 10 per cent of his acquired shares. The remaining 13 per cent came from family interests.
Hawkins bulldozed F&P into purchasing 20 per cent of New Zealand Steel.
When Equiticorp went bust Email, the Australian appliance company, tried to acquire the investment group's interest in F&P - which had risen to 30 per cent - but the shares were eventually placed with friendly institutions. F&P eventually sold its stake in New Zealand Steel to BHP Steel for a profit.
In 1989-90 the company established its first major overseas appliance facility in Cleveland, Queensland.
The next significant development occurred on November 13, 2001 when the company was split into two separate entities; F&P Appliances and F&P Healthcare.
On the day before separation, the combined group had a market value of $1.6 billion. The two companies were given almost the same value in the separation process yet this week F&P Healthcare had a market value of
$1.7 billion and F&P Appliances just $0.2 billion for a combined worth of $1.9 billion.
F&P Finance was included with F&P Appliances, where it remains.
Immediately after separation F&P Appliances, excluding the finance company operations, had a strong balance sheet with just $63.3 million of term debt. The company had three manufacturing plants in Dunedin, East Tamaki in Auckland and the Queensland operation.
F&P Appliances' balance sheet was further strengthened in February 2004 when the company sold its legacy shareholding in F&P Healthcare for $230.9 million and used the proceeds to repay debt and pay a special dividend to shareholders.
As a consequence it had total term debt of only $16.7 million at the end of the March 2004 year.
The company's borrowings began to expand following the debt funded acquisition of Dynamic Cooking Systems for an all up cost of $82 million in October 2004.
The newly acquired US operation had a manufacturing facility in Huntington Beach, Los Angeles.
In the March 2006 year, the company moved its Smart Drive washer line from Queensland to a new plant in Ohio, US.
Following this development, F&P Appliances had two major manufacturing plants in both New Zealand and the US and one in Australia.
In June 2006, the Italian cookware manufacturer Elba was acquired for $158 million, funded $55 million by a share placement and the remainder by debt. This added an additional production facility in Northern Italy.
In the March 2008 year, F&P Appliances moved the East Tamaki laundry manufacturing plant to a new facility in Thailand and a few days after that balance date the company announced a Global Manufacturing Strategy that included:
* The purchase of Whirlpool's manufacturing plant in Mexico for US$33 million.
* The closure of the Dunedin, Queensland and Los Angeles production operations and their transfer to Mexico, Thailand and Italy.
* The sale of surplus property in Dunedin and Queensland that was expected to realise approximately $100 million.
After the strategy is completed F&P Appliances will have manufacturing activities in Thailand, Mexico, Italy, Ohio, and a scaled down operation in East Tamaki.
However, there will continue to be a considerable number of research engineers, service people and sales staff at the Australasian venues.
The execution and timing of the Global Manufacturing Strategy has been flawed and is causing a number of major headaches including:
* The company has not sold its Queensland property and it is trying to secure a sale and lease back arrangement over its East Tamaki site in difficult market conditions.
* There has been a substantial increase in inventory as the company continued to maintain production in old plants as the new Thailand operation gears up to full output.
* Term debt has soared from $409 million as at September 30 to $512 million at the end of January and a projected $570 million by March 31. This is a massive increase on term debt of just $16.7 million five years ago. Management plans to reduce this by $230 million over the remainder of the calendar year but this will be difficult to achieve in light of the worldwide depressed market for appliances.
F&P Appliances has a great history but it was criticised in the past for being engineer dominated and reluctant to take advantage of its innovative technology.
When it did adopt an aggressive approach - which included acquiring companies in the US and Italy, a manufacturing operation in Mexico and the establishment of new operations in Ohio, US and Thailand - its timing was unfortunate and there has been far too much reliance on debt.
The situation is not terminal.
The company will survive if it can raise new equity, find a cornerstone shareholder, sell land in Queensland and East Tamaki or market conditions improve to enable it to realise surplus stock at reasonable prices.
Prime Minister John Key's suggestion that the Government could bail out the company is strange because appliance manufacturing is not a strategic New Zealand industry, the company has exported many of its jobs to Italy, Thailand and Mexico and no particular region or town is highly dependent on the company.
Investors had decided a long time ago - as reflected by share price movements - that F&P Healthcare has far more exciting prospects than F&P Appliances.
Reasons for this include that the former has had a much better executed overseas growth strategy and has only $108.7 million of term debt.
Finally, one of the most important aspects of the business world is that it is dynamic; companies rise and fall while new ones are created.
The legacy of Woolf Fisher and Maurice Paykel will live on through F&P Healthcare, no matter what happens to F&P Appliances.
Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management.
bgaynor@milfordasset.com
