Brian Gaynor: GPG meeting more like wake than party

Sir Ron Brierley, pictured with Sir Selwyn Cushing at a Brierley Investments meeting in the 1990s, was our most influential businessman. Photo / Brett Phibbs

The defining moment of Guinness Peat Group's annual meeting on Wednesday occurred at 4.06pm, just over two hours after official proceedings began.

That was when Sir Ron Brierley - who was seated on the podium next to Chairman Rob Campbell - leaned back, picked up his brief case, shuffled off the stage and left the Ellerslie Event Centre.

Nothing else mattered after that because most of the attendees had invested in Sir Ron, not in GPG. They came to listen to him. They were his long-term devotees who remembered his glory days and had invested in GPG in the belief he still had his old magic.

They remember him as the country's most influential businessman in the late 1970s and 1980s. That was when a frenzied sharemarket was fuelled by a plethora of investment companies trying to emulate Brierley Investments (BIL).

In the mid-1980s he was as popular in Wellington and Auckland as Warren Buffett is in Omaha today. An estimated 3500 attended BIL's 1986 annual meeting in Wellington which lasted well into the night as enormous quantities of Woodley wines were consumed.

The following year more than 5000 attended in Auckland and Sir Ron was again swamped by adoring shareholders. Yvonne van Dongen wrote in her book Brierley, The Man behind the Corporate Legend that he "loved the public adulation".

She wrote about these annual meetings: "Minutes after the formalities were over, his lunar-pale visage was lost in a cluster of grateful, hand-shaking shareholders, and he rewarded them with a display of patience and endurance seldom witnessed outside the royal family. He would stand stock-still for hours, smiling and nodding and saying little of any consequence until [Bruce] Hancox and [Paul] Collins decided he had had enough and whisked him away for another year".

The patience and public adulation has long since gone and Sir Ron left this week's meeting early to catch a flight to Sydney.

Shareholders were deflated and subdued after the meeting. The mood wasn't helped by the sparse refreshments - tea and plain biscuits instead of wine and exotic food.

The original directors gave themselves Rolls-Royce salaries, bonuses and option schemes but the new board offered little more than bread and water to the 700 shareholders who attended GPG's first, and probably last, New Zealand annual meeting.

Attendees wanted to know should they sell their shares or wait and see how the asset sales programme goes. What would Sir Ron advise us to do? Why didn't he say something? Why did he leave early? Will GPG's asset realisation programme be successful and will shareholders ultimately receive more or less than the net asset value of 54.8 pence quoted by Campbell at the meeting?

The last question is extremely difficult to answer for a number of reasons including the unattractive nature of the investment portfolio, the future of Coats, pension fund liabilities, EU fines, tax and currency considerations amongst others.

Sir Ron always said GPG had a finite life but many of its investments will be difficult to sell because the shareholdings are large and GPG's options are curtailed by takeover code requirements.

Among the assets in this latter group are Turners & Growers (74 per cent owned) and Tower (35 per cent) in New Zealand and CIC Australia (72 per cent), Clearwater View (49 per cent) and Capral Aluminium (47 per cent) in Australia.

These five companies, which represent nearly 30 per cent of GPG's assets, will be difficult to sell unless a buyer is willing to make a full takeover offer or shareholders give a potential purchaser permission to acquire the GPG stake without making a full offer.

Coats, which represents just over a third of GPG's assets, will also have a huge bearing on the final outcome for New Zealand investors. Chairman Campbell insists that all options are open for the threadmaker including a trade sale, an IPO or it could remain as GPG's only asset.

Coats CEO Paul Foreman gave an upbeat 30 minute presentation at the annual meeting. His central message was that Coats, founded in 1755, was once a great company and it could be again. His objective was to turn it from an ex-growth company into a growth company.

It is difficult to know whether Foreman will achieve his goal because Coats is a complex company with 73 factories and 22,000 employees around the world.

For example he told shareholders that 144 million teabags using Coats' thread are used every day around the world. He presented a reasonably positive outlook for the December 2011 year although a 300 per cent hike in cotton prices and volatile trading conditions in Japan, US and Europe are a concern.

GPG operates three large defined benefit pension schemes in the UK - the Brunel, Staveley and Coats schemes - in addition to the Coats North American plan. These are held under self-administered trust funds but GPG is ultimately responsible for any unfunded liabilities.

The pension schemes have £1.90 billion ($3.78 billion) of defined benefit obligations and £1.87 billion of scheme assets that are not on GPG's balance sheet. These figures are massive, particularly as GPG's total sharemarket value is only £779 million at the latest 42.75p share price.

The problem is that the trustees of these pension schemes have the ability to restrict GPG's capital returns to shareholders. This is more likely to occur if investment markets perform poorly or life expectancy increases. For example a one-year movement in life expectancy increases or decreases pension scheme liabilities by £51 million.

In addition there is the EU fine of €110.3 million ($194 million), the uncertainty regarding the tax implications of future GPG capital distributions and the impact of currency movements on NZ investor returns.

Another issue raised at this week's meeting was the 102.7 million outstanding options, nearly 40 million of which are held by Sir Ron, Blake Nixon, Gary Weiss and Tony Gibbs. These are exercisable between 17.2p and 55.8p.

The issue here is that GPG's first distribution is through the cancellation of one share for every eight at 35.07 pence each. As a consequence the net asset value of the non-cancelled shares will rise and make the options more attractive.

Why did the new board adopt this approach, why didn't it cancel shares at closer to net asset value? The 102.7 million options will become more and more attractive if GPG continues to cancel shares below their true worth.

Campbell was asked a question about this on Wednesday but he wouldn't go any further than to say the directors were aware of this issue but they hadn't made any firm decision on possible adjustments to the exercise price of these options. This is consistent with the statements in the notice of meeting.

Shareholders will watch developments regarding these options with interest and there will be strong opposition to former directors receiving any favourable adjustments to their option exercise conditions.

But, other than the options and the 35.07 pence cancellation price, the meeting was notably subdued; it was more like a wake than a party.

All of Sir Ron's companies had great runs but have ultimately failed investors, mainly because of poor governance and disjointed strategies.

Sir Ron was once quoted as saying: "I've always said quite openly that I thought the best long-term solution would be a merger of BIL and GPG because they are both my creations really, so if they are both going to be successful thriving companies why would you want two of them? Why not put them together and get the best of both?"

Unfortunately this objective has not stood the test of time.

Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management and owns GPG shares. Milford also holds GPG shares on behalf of clients.

bgaynor@milfordasset.com