Jenny Ruth: Blue Chip stumbles in back door

The share market hasn't been kind to Blue Chip New Zealand since its back-door listing a little over a year ago. The shares were trading at about the equivalent of $1.50 in late June last year, immediately before the share consolidation and reverse takeover that resulted in the company becoming listed, implying a market capitalisation of $78.7 million.

Yesterday, they were trading at 94 cents, giving it a $50.5 million market capitalisation.

It doesn't help that liquidity in the stock is almost non-existent. Managing director Mark Bryers owns 72 per cent of the stock, and his associates own 20 per cent.

But the slide in the share price makes it that much harder to address that problem.

You would hardly expect Bryers to enjoy the prospect of selling down at a discount. He has already been given two waivers by the stock exchange. He has until the end of the year to ensure at least 25 per cent of the shares are held by non-associated parties.

It also doesn't help that his existing non-associated shareholders are obviously an unhappy lot.

The company is in its third incarnation, having started corporate life 1983 as New Zealand Salmon and then morphing into Newcall Communications, which had a similarly sorry existence until the Blue Chip transaction. Shareholders were faced with an invidious choice: approve the back-door listing or your company will be left with an estimated $135,000 to $170,000 shortfall owed to unsecured creditors and liquidators costs.

They showed just how disgruntled they were earlier this year when Blue Chip's directors offered them the opportunity to increase their minute stakes to more marketable parcels through a rights issue. Each shareholder could buy up to 5000 shares at $1 each.

If all shareholders had taken up their rights, that would have meant a $7 million capital injection as well as progress on diluting Bryers' holding. Shareholders opted to buy 170,500 of the shares on issue.

Chairman Jock Irvine said that despite the lack of enthusiasm for the issue, the independent directors "feel as though we've discharged an obligation to those shareholders".

The company cancelled a subsequent planned rights issue on advice from its broker that the market timing wasn't right. The shares sank as low as 85 cents in April.

The board is looking at a number of strategies for reducing Bryers' holding but is "adamant we don't want to undermine the value of the stock", Irvine said.

It seems the exchange is running out of patience. Although the company had asked for a waiver until June next year, it was given until the end of December.

Irvine said the board believed it had to resolve the matter by that deadline.

Was the back-door listing a mistake?

Blue Chip general manager Jonathan Woodhams says the much cheaper cost of a back-door listing was a key driver.

"Timing was another," he said. "We were able to do it in a matter of months as opposed to a year or 18 months" for a float.

The major motivations for listing were to provide Blue Chip with greater credibility and to give its clients and the professionals they dealt with greater comfort that it was a reputable company abiding by the stringent corporate governance rules that applied to a listed company, Woodhams said.

Bryers already had his own reputation issues. A newspaper report at the time of the listing referred to him as a "failed apartment developer".

In 2001, Bryers was caught up in the Reeves Moses debacle. He had been relying on that firm for funding of eight companies involved in a single apartment development. He rescued five of them, but three ended up in liquidation.

But Blue Chip's board composition is completely in keeping with good corporate governance rules. Bryers is the only executive director, and the other three independent directors include former Cabinet ministers Wyatt Creech and John Luxton and Jim Bracknell, the only remaining Newcall director.

Irvine and Woodhams agree, with hindsight, that not buying all Bryers' interests related to Blue Chip was a mistake.

The company has since announced that it intends to purchase Tasman insurance and mortgage broking group, which will provide it with another distribution network in addition to its existing 12 licensees around the country, and the Ingot group. Both companies are controlled by Bryers.

Ingot, a property trader and developer, is crucial to Blue Chip's fortunes.

It provided all the company's $4.8 million profit for the year ended December 2004, which included six months trading for Blue Chip, and offset the losses made by other parts of the business.

Blue Chip's business is facilitating residential property investments by mums and dads using the equity in their homes. Blue Chip provides the properties to be purchased, assumes the tenancy risk by guaranteeing the investors an income stream, takes care of all the maintenance and then shares in the capital gain at the end of the investment term, currently four years renewable for another four years.

It is Ingot that finds the properties essential to Blue Chip's business. For every property Ingot provides Blue Chip to sell through its licensees, Blue Chip received 12.6 per cent of the property's valuation.

While its investors also pay it a fee of 2.95 per cent of the valuation, Blue Chip is paying its licensees 3 per cent of the valuation in commissions. Its property leasing arm, Auckland Residential Tenancies (ART), is also running at a loss because it's paying the investors more in income than it is receiving in rents. Woodhams says ART should become profitable once it has about 1500 properties under management, about double the number at the end of 2004.

Ingot's importance to Blue Chip is so great that its auditors, BDO Spicers, labelled it a "fundamental uncertainty". The relationship with Ingot has been fully disclosed, approved by shareholders and sanctioned by the stock exchange. But "if for any reason Ingot Holdings or one of its subsidiaries was not able to meet their obligations to the group, adjustments may need to be made to the groups statement of financial position and statement of financial performance to reflect the group's costs and liabilities to supply such properties," Spicers says in its audit report.

Woodhams said: "The commercial advice we took at the time was very strongly that to put anything to do with property development in with the whole package may not be something the market was prepared to countenance."

But since Blue Chip is required to seek a new stock exchange waiver covering its dealings with Ingot every year, it has become clear to the board that Ingot would be better inside the listed company.

Irvine says the board's view now is that "within reason, we want to get as many of these related party issues inside the listed entity as we can".

In addition to buying Bryers' interests, the company is also establishing a similar operation in Australia and will shortly launch a finance company.

The company has chalked up a few brownie points since the back-door listing. On an annualised basis, its first profit result easily exceeded its forecast. An independent report by PricewaterhouseCoopers forecast it would earn $8.4 million on revenue of $34.9 million for the year ended March 31.

The company has since changed its balance date to December, and annualising its six months result produces a $9.6 million net profit on revenue of $41 million.

The company has also paid a fully imputed 5 cents a share dividend, and the board has said its objective is to provide a gross dividend of at least 10 cents a share each year.

Blue Chip NZ

Market capitalisation: $50.5 million

The company reported a $4.8 million net profit for the year ended December 2004, which included six months trading for Blue Chip.

Managing director Mark Bryers, general manager Jonathan Woodhams and chief financial officer Gregor Duncan.

Major shareholders: Mark Bryers with 72 per cent and his associates with 20 per cent.