Rivals' knives out for Baycorp

By DANIEL RIORDAN

Baycorp Advantage has attracted a lot of noise lately - the sound of millions of dollars being wiped off shareholders' wealth and the sound of rivals sharpening their knives in the hope of slicing big chunks off the company's credit information business.

The former sharemarket darling has seen its share price savaged since the start of the year (from $7.45 to $4.24), wiping $750 million off its market capitalisation.

Major international concerns Dun & Bradstreet and Collection House have signalled their intention to set up competing credit bureaus across the Tasman, and two smaller players here have formed a new company and are talking of bringing in D&B to run its database.

One of those players has complained to the Commerce Commission, alleging that Baycorp has abused its dominant market position.

The complaint, laid last November by John Campbell, managing director of Law Debt Collection, stems from Baycorp's decision in October to charge $5 for every debtor lodged by other agencies on to its database.

Baycorp says it introduced the charge to compensate it for having to maintain the information's integrity because the agencies were not updating the records they had loaded after collecting money from defaulters.

Baycorp claims about 90 per cent of the information it was given was incorrect, although its rivals dispute that figure.

Law Debt has joined EC Credit Control to set up what they claim will be a competing database, called Credit Data. They want Dun & Bradstreet to run it.

D&B is not commenting, but earlier talk of it (and later Collection House) entering the Australian credit information market has helped to put the wind up investors, hitting Baycorp's share price.

The owners of the new database reckon it will be up and running by August and say they will charge users about half the amount Baycorp does, or whatever it takes to build up market share against the incumbent.

In the meantime, Law Debt and EC Credit, along with most other debt collectors, are refusing to load default notices to Baycorp's database.

Keith Goodall, president of industry group Associated Credit Bureaux (whose members account for about 80 per cent of the industry not including Baycorp), is concerned at the denigration of Baycorp's database and says the industry is awaiting the outcome of the Commerce Commission's investigation before deciding how to proceed. But he says it would be enormously expensive to set up a second credit database.

Commission spokeswoman Jackie Maitland says the commission has been talking to a wide range of industry players but she could not put a timeframe on the investigation's conclusion.

Parties found in court to be in breach of Section 36 of the Commerce Act, which relates to taking advantage of market power, face maximum penalties which are the greater of $10 million or three times the value of the illegal gain made as a result of the breach or 10 per cent of the turnover of the company.

Another complaint was made at the same time under the Fair Trading Act, claiming Baycorp was misleading people by saying its service was excellent when it was actually becoming less robust.

The Business Herald understands that complaint, while not officially dropped by the commission, is not being actively investigated.

Baycorp says it is not worried by the threats. Its managing director, Keith McLaughlin, says EC Credit and Law Debt were the worst offenders when it came to providing inaccurate information.

In the year to last October 31, EC Credit loaded 4731 defaults with Baycorp and Law Data 760, says McLaughlin, and more than 90 per cent of them were not updated.

Baycorp introduced the $5 fee as much to bring the issue to a head as to recoup the extra costs of having to update the records itself. McLaughlin says continuing to provide incorrect information would have breached the Privacy Act.

Baycorp's share of the New Zealand consumer credit market is thought to be between 40 and 50 per cent.

Analysts are cautious about the new entrants' ability to seriously weaken Baycorp's grip on the market and are waiting for more information. They acknowledge the potential for the new entrants to erode some of Baycorp's revenue - Collection House posing a greater threat than D&B - but believe it will be difficult.

The track records of second credit bureaus, in Australasia and overseas, do not inspire confidence. Baycorp's share price took fright a couple of years ago when Eric Watson's RMG entered the market, but recovered quickly once the substance of the threat was known.

The irony is that Baycorp has continued to perform well since the merger of Baycorp Holdings with Data Advantage, with profit growth continuing on its healthy track.

As well as the perceived threats from new entrants, McLaughlin has consistently cited three reasons for the share price slump: the removal of the inevitable premium built into the pre-merger price, the reweighting of shares by institutions which held both companies and found themselves overweight, and the general battering high P/E stocks have taken in the past six months or so.

Certainly the share prices of other industry players - Computershare, Collection House, RMG and Credit Corp Group - have fallen by similar levels over the same period, suggesting an overdue re-rating of the entire sector has taken place.

"We didn't anticipate financial markets reacting this way to organisations putting their hands up and saying they are going to start credit reporting," says McLaughlin. "But there's a big difference between saying that and actually doing it."

He questions the likelihood of Baycorp clients using any competing database, which may be cheaper but will take years to approach Baycorp's in terms of its depth.

Baycorp's key customers are staying loyal, as are institutional investors, says McLaughlin.

And analysts who have been following Baycorp's fortunes closely, through the merger with Data Advantage and this year's sharemarket struggles, are not pressing the panic button.