Brian Gaynor: Sticky situation could have been avoided

Brian Gaynor

This week's Nuplex capital raising was a shambles and reflects poorly on the company's board and senior management as well as First NZ Capital, its financial advisers.

The original proposal was changed dramatically, disclosure was poor and the company's share price has been savaged. Its shares closed yesterday at 51c, down 52.3 per cent for the week and 93.5 per cent below its all-time high of $7.81 in October 2007.

Nuplex, which makes resins and chemicals, is a classic example of a company that has far too much debt and was too slow to respond to the deteriorating economic conditions.

The group's problems can be traced back to 2005 when it acquired the Coating Resins assets of Dutch-based Akzo Nobel for $208.5 million. The acquisition was funded by $137.2 million of debt and $71.3 million of equity through the issue of 14.55 million new Nuplex shares at $4.90 each.

The newly acquired business had manufacturing operations in The Netherlands, United Kingdom, United States, Brazil, Malaysia, Indonesia, China and Thailand.

The purchase raised Nuplex's sales from $655 million in the June 2004 year to $1.3 billion two years later.

A major concern regarding Nuplex is, and always has been, the dominant position of the chief executive and the depth of his management team.

The company, which was formerly known as Floor Tiles and Parquet (NZ) and then Revertex Industries (NZ), was founded in 1952 by Glasgow-born Bill Campbell.

Since its establishment 57 years ago, Nuplex has been strongly influenced by these three individuals:

* Campbell, who was chief executive from 1952 to 1981 and chairman from 1952 to 1996.

* Fred Holland, who joined the company in 1965, was chief executive from 1981 to 2000 and chairman from 1996 to 2008.

* John Hirst, who started with Nuplex in 1967, has been chief executive since Holland retired in 2000.

When Coating Resins was acquired there was considerable interest as to whether its strong top-down management style would be effective once it became a major multinational organisation.

Hirst once told analysts he spent up to 200 days a year in aeroplanes travelling around the group's operations and this strategy seemed to work at first.

However, its Brazilian and UK operations underperformed, working capital requirements increased and borrowings continued to expand.

Nevertheless, Hirst remained positive and his review in the 2008 annual report was headed: "Nuplex's businesses are well established, set to weather any short-term economic storm and take advantage of the inevitable recovery."

This optimism was reflected in a dividend of 43c for the 2008 financial year compared with 36c for the previous year.

But the defining moment was the 2008 annual meeting, which was held on October 31.

Hirst remained relatively positive. He told shareholders the company would still consider acquisitions and, although earnings for the first half of the June 2009 year were expected to be lower than the same half in the previous year, he believed that full-year earnings before interest, tax, depreciation and amortisation (ebitda) could reach analysts' consensus forecasts of around $130 million.

This compared with ebitda of $121.8 million for the June 2008 year (see table).

Why was the company so optimistic, particularly when it was already clear that economic conditions were deteriorating rapidly?

How does it do its economic forecasting?

Are its economic forecasts prepared in-house or does the company outsource this task to a major economics consulting group?

What contribution do the directors make to the economic outlook debate?

Nuplex's shares traded at $5.27 immediately after the annual meeting. If the company had anticipated its problem at this stage, it could have had a capital raising at far more favourable terms than it did this week.

Nuplex announced its 2009 year interim result on February 26, when its share price had slumped to $1.35, and raised the probability of an equity raising. Ebitda of $43.8 million for the period clearly showed that its $130 million target for the full year was unattainable.

Finally, on Monday, the company announced that it would have a $110 million capital raising through a placement of new shares to institutions to be followed by a pro-rata rights issue to existing shareholders.

The placement and rights issue would be managed by First NZ Capital and there would be a sharemarket trading halt on the company's shares from 10am Monday, March 16, to 10am Wednesday, March 18.

The capital raisings was a shambles for a number of reasons, including;

* The full details of the capital raising, particularly the indicative share price, were not released. This created a great deal of anger among large individual shareholders who felt they were getting a raw deal.

* No presentation or telephone conference was arranged for Hirst to update investors on trading conditions and answer questions on the company's debt and capital structure.

* The company didn't reveal any new strategies to deal with its problems. A number of Australian companies that have raised new capital have said that they would sell surplus assets or announced specific cost reduction programmes.

* There was no indication of any changes to the management structure or whether the current set-up was the best way to run a major international organisation.

* Analysts quickly determined that a $110 million capital raising would not be sufficient to resolve the company's problems.

* The placement was not underwritten and there was no public commitment by the largest shareholders to participate in the placement.

By contrast the same morning, AXA Asia Pacific told the ASX that it would raise a minimum of A$660 million through an institutional placement at A$2.85 a share, compared with a closing price of A$3.03 on Friday, and have an offering to existing shareholders at the same price.

AXA's placement was underwritten by Goldman Sachs JBWere and UBS, the company held a telephone conference for investors and its largest shareholder indicated that it would take sufficient shares to maintain its percentage shareholding post the institutional and retail issue.

The insurance group raised its money in a flash and its shares were relisted on Tuesday. They traded at A$3.35 yesterday, which is 17.5 per cent above the placement price and 10.6 per cent ahead of last Friday's close.

Meanwhile, Nuplex and First NZ Capital stumbled from pillar to post as they desperately tried to raise capital from uninformed and uninterested institutional investors.

On Wednesday, the company extended its sharemarket trading halt for a further two days and, yesterday, it announced a 7-for-1 rights issue at 23c a share with the ability to issue an additional 99 million shares at 23c to sub-underwriters without receiving shareholder approval.

The rights issue and additional placement will raise $155.6 million, compared with the $110 million announced on Monday, and increase the number of shares on issue from 82.5 million to about 760 million shares.

The capital raising will give the company some head room with its banks but Nuplex has a long way to go in terms of communications, disclosure and giving investors comfort that it has the correct board and management structure to govern a worldwide organisation.

The crux of the situation is that Nuplex shareholders would be in a far better position today if the board and management had addressed the debt problems a few months ago.

Bill Campbell must have turned in his grave this week as the future of his beloved company rested on a knife edge and shareholders suffered a massive destruction in wealth.

Campbell would never have taken on so much debt and allowed Nuplex to be at the mercy of the banks and First NZ Capital's equity raising capabilities.

bgaynor@milfordasset.com