Editorial: Feltex fall swift after rosy float

No company's slide toward ignominy is pleasant. Always there are casualties in some shape or form. It is particularly sobering when the company bears the name of a household brand, as is the case with Feltex. But it also is a cause for incredulity when the collapse takes place so soon after potential shareholders are presented with a rosy picture of that company's prospects.

Just two years ago, the public offering of Feltex shares was trumpeted by lead brokers as the biggest since that of Contact Energy. The message was that those who failed to invest in the carpet manufacturer were missing a great opportunity. Here was a well-known name operating in what most mum-and-dad investors might assume was a relatively stable business. Thus, the private equity arm of Credit Suisse First Boston was able to sell Feltex to the public for $204 million, a far cry from the $19.5 million it had paid to buy the company from British conglomerate BTR Nylex in 1990.

The float was specifically tailored to individual investors, and, because of the Feltex name, to the New Zealand market. Yet the company makes some three-quarters of its revenue in Australia. Potential investors, thus, had to be able to assess market conditions there. They needed to know that Australian economists were warning of a downturn in housing demand, and to recognise the significance of this. Many did not, so, while institutional investors steered clear, they dived in.

Shares in Feltex were floated at $1.70 each. This week, as the company agreed to sell itself to arch-rival Godfrey Hirst, investors learned that the most they could expect to receive now was 12c. So ended 18 months of turmoil during which the company's fortunes went from bad to worse. The good half-year that Feltex recorded immediately before the float soon seemed like an aberration. A string of profit warnings culminated in the breaching of banking covenants.

Questions have been raised about the float. The Shareholders Association has complained to the Securities Commission about a vendor-controlled board being incentivised to obtain the highest price. If that creates a moral hazard, there is also the fundamental issue of the hyping of Feltex. As always, a strong element of buyer beware had to apply, but the ultimate victim when things turn so dramatically bad is the credibility of the sharemarket.

Throughout its travails, Feltex offered a variety of excuses. These included tough competition, a shortage of carpet-laying contractors, delays to commercial contracts, the exchange rate and even outside economic advisers. Underlying all this is the tale of yet another New Zealand company coming unstuck in Australia. Feltex can be added to names like The Warehouse, Tower, Telecom and Air New Zealand.

Its major involvement across the Tasman stemmed from the acquisition in 2000 of the Australian business of American carpet-making giant Shaw Industries. The purchase was done during the days of CS First Boston control but by a board that, for the most part, remained after the float. Feltex, like other New Zealand companies that seized on Australian assets with more bravado than nous, has learned a harsh lesson in the realities of white-hot competition.

So have the mum-and-dad shareholders who stand to lose badly from the company's collapse. They face a couple of months of uncertainty as Feltex's future is determined. All they know for sure is that, whatever happens, they stand to recoup only a fraction of their outlay. The likely retention of the Feltex brand will be the only bright spot in a wretched chapter in this country's corporate history.