Liam Dann

Graeme Hart isn't wasting any time with the sale process for Carter Holt Harvey's Building Supplies division - expected to fetch in excess of $2.3 billion.  Hart and Rank Group expect to receive indicative bids by October 12, have due diligence under way by mid-October and receive final bids by late November.

The timetable is included in a sale flyer being circulated by Hart's bankers.

The Building Supplies business includes Woodproducts NZ, Woodproducts Australia and the Carters retail chain.  The division is projected to have total sales of about $2.2 billion in the 2008 year and ebitda of $305 million.  Rank decided to put the business up for sale after getting unsolicited inquiries from parties interested in acquiring the whole business, the flyer says.

The sale of the business in parts hasn't been ruled out.  A trade sale or a transaction involving private equity interests is understood to be the most likely outcome.

Since Hart paid $3.3 billion for Carter Holt Harvey and delisted the top-tier company early last year he has sold most of its forests for somewhere between $1.5 billion and $2 billion, and the company's head office, various retail depots and packaging plants to Australia's Valad Property Group for just over $300 million.

The two listed companies which upgraded their earnings outlook last week both received takeover offers this week.

Dental software group Software of Excellence upgraded its earnings outlook last Thursday, lifting its net profit forecast to $4.3 million from $3.85 million. On Monday trading was halted while news of a conditional bid by an unnamed buyer was released.

Also last Thursday Tourism Holdings increased its after-tax trading profit forecasts to between $17.5 million and $18.5 million - up from the previous predictions of $15 million to $18 million. Then on Monday it announced a takeover bid from ASX listed MFS Living and Leisure at $2.80 a share.

Interesting timing.

Still if someone was coming round to make an offer on your car, you'd want to give it a bit of a polish wouldn't you.

Tourism Holdings shares closed at $2.73 yesterday. Software of Excellence closed at $2.72.

Woolworths lynched
As reported in Stock Takes last week, Merrill Lynch - which has been linked to UK retailer Tesco - has been in town assessing the local grocery scene.

Merrill Lynch’s Sydney-based research team has produced a report which comes to some bold conclusions about the New Zealand market.

The report is highly flattering of the Foodstuffs co-operative. Merrill Lynch analysts have rated it the best example of a co-operative business they’ve seen (sorry Fonterra). They also say Foodstuffs is providing Woolworths (which owns the rival Progressive chain) with the toughest competition it has faced in any business. Wow.

Citing examples of the speed with which Foodstuffs has responded to match or better proactive pricing moves by Progressive, the report concludes that Woolworths could not win a price war with Foodstuffs.

And despite Woolworths' best efforts, Foodstuffs continues to gain market share, it says. Foodstuffs is dangerous because it has a unique, "patriotic, highly efficient and almost family-like" ideology which is difficult for Woolworths and its equity analysts to fully understand, the report concludes.

Apart from the faintly patronising tone (Foodstuffs comes off as some sort of hardy barbarian tribe that will never bow to the Roman Empire) it's glowing stuff.

The report portrays the co-operative's position as so strong that it is probably the last thing Foodstuffs management needs the Commerce Commission to be reading right now as it fights for the right to buy The Warehouse.

There are still growth prospects for Woolworths in New Zealand - but only if it stops trying to beat Foodstuffs on price, the report says.

The analysts also make the case for Woolworths being a likely buyer of The Warehouse - but we already knew that.

So, where does all this leave us on the The Warehouse sale prospects?

The Australian newspaper has reported that Tesco is now a serious contender for at least parts of the Coles empire. There’s been no denials and if correct it seems reasonable to assume that Tesco would also look seriously at The Warehouse.

In relative terms it's not a huge purchase ($22 billion plus for Coles vs $2 billion or so for The Warehouse). And the distribution synergies would make a double buy compelling.

Tesco has also been linked to Woolworths with the assumption that Woolworths might buy the general merchandise parts of Coles (which wouldn’t attract the ire of competition regulators) and Tesco would take the grocery.

Of course, a research report by the Merrill Lynch broking team doesn't equal proof of interest from the Merrill Lynch investment banking team.

But what it does mean is that the local market is now exciting enough to warrant a rare foray across the Tasman by Australian analysts.

The Warehouse shares closed down 1c at $6.95 yesterday.

Airport stocks defy dollar's drag
A look at the top-performing stocks for the year so far shows Air New Zealand still leading the pack with returns of 61 per cent. Tourism Holdings is now second after the takeover offer this week - up 41 per cent. Michael Hill continues its strong run up 39 per cent.

But most interesting is the strong performance of Auckland International Airport, which hit a record high of $2.63 yesterday (it closed at $2.61) despite the fact that the high dollar is largely a negative for the company as it is likely to dampen foreign visitor numbers. The stock has delivered returns of 22 per cent for the year to date.

Goldman Sachs and Macquarie are understood to have been big buyers in the past few days.

A possible reason for the surge in buying is a belief that the airport may be about to spin off some property assets in a listed trust to take advantage of the portfolio investment entity (PIE) tax changes kicking in on October 1.

Conventional wisdom would suggest three key factors holding sway over AIA shares. The dollar, which has moved unfavourably in the past six weeks, is a negative.

That is offset slightly by the strong growth of AIA's biggest customer, Air New Zealand, which is increasing passenger numbers with the addition of new routes such as Vancouver and Shanghai.

The airport's new price regime - due to be in place later this year - is another positive. It is almost certainly going to mean an increase in revenue although how much of a jump is still to be determined. There are those who believe the airport cannot afford to push prices up too much or it risks copping a new regulatory regime from the Government.

Another positive factor is the market enthusiasm for infrastructure stocks, considered a safe bet by those who fear the long bull run may be drawing to an end.

But none of these explains the recent sharp surge.

An independently listed property subsidiary makes a lot of sense. Property management provides a sizeable revenue stream for the airport and the tax changes will be lucrative for listed property trusts.

Stocks such as Kiwi Income and and AMP Property Trust have already risen this year as the positive benefits of the change have been factored in.

Listed property entities will get a tax-favourable status as portfolio investment entities. Taxpayers now have to pay additional tax on dividends from property trusts.

But under the proposed changes, the investors’ tax rate will be capped and could be the same as the property entity’s tax rate. Most entities have tax credits and pay well under 33 per cent tax.

Tourism takeover
Valuations of Tourism Holdings were all over the show prior to the $2.80 per share takeover offer from MFS Living and Leisure this week. But they had one thing in common - no one thought it was worth $2.80.

Just last week Goldman Sachs JBWere had the value as low as $1.90 but following the profit upgrade yesterday it revised its view to $2.10.

Forsyth Barr’s Rob Mercer was most optimistic with a pre-offer valuation of $2.58 (he has raised that to $3.17 this week).

ABN Amro's David Oxley had it at $2.09 prior to the bid but has now upped that to $2.80.

UBS and First NZ have also both raised their valuations to $2.80 in the wake of the bid.

The success of the takeover ultimately hinges on the response of US private equity consortium Sterling, Drake and Associates. They hold a 20 per cent stake which they have been steadily building for the past 12 months. Buying by the consortium prompted Stock Takes to speculate on the prospect of a THL takeover last year.

Presumably the US grouping had identified THL as an undervalued company but whether they were planning a bid of their own or whether they were just counting on an offer like this one emerging remains to be seen. Investors clearly don't rate the chances of a rival bid emerging. THL shares closed up 2c at $2.73 yesterday.

Dollar downgrades
Goldman Sachs JBWere has made some more currency related downgrades to two more export stocks. Pumpkin Patch and Cavalier Corporation both get their 2008 earnings forecasts dropped by about 4 per cent in a note by analyst Rodney Deacon.

Revising his forecasts to reflect Goldman's latest currency projections, Deacon drops the 2008 Pumpkin Patch profit forecast to $38.3 million. He also drops the 2009 profit forecast by 2 per cent to $46.8 million.

His valuation drops slightly to $3.91. That's because his model runs forecasts all the way out to 2020 and the currency revisions impact only on the next three years.

However, Deacon also retains a long-term "buy" recommendation on the stock and it closed up 13c at $4.48 yesterday.

Any short-term weakness should be seized as a long-term buying opportunity, he writes.

Cavalier has its net profit forecast for 2008 lowered 4.5 per cent to $215.9 million and 2009 dropped by 1.9 per cent to $16.9 million. As well as the dollar, Cavalier still faces challenges from weakness in the New Zealand market, he writes.  Deacon values the stock at $3.08 and rates it as a "hold" long term.  Cavalier shares closed up 12c at $3.20 yesterday.

Yesterday was supposed to be one of those days financial journalists live for. The battle for The Warehouse begins - Foodstuffs and Woolworths go head to head in a 12 round tussle for control of New Zealand's biggest retailer. Corporate auction as blood sport.

But no, we've been left reading the tea leaves yet again. The Commerce Commission has delayed its decision on the eligibility of the prospective bidders for a third time.  But at least there are a lot of leaves in the cup.

Market-watchers are picking that the delay is because one of the contenders has been knocked back.  Or, more accurately, was about to be knocked back but managed to come up with some sort of new information for the commission to consider. Hence the delay.

Anything less than a head-to-head bidding war will be bad for shareholders, who have been rubbing their hands together at the prospective of a price above $8 a share.  So it was no surprise that The Warehouse shares dropped 18c yesterday, closing at $6.92

And if you had to put money on it, Foodstuffs - which owns the Pak 'n Save chain - has always looked the more likely of the two bidders to be rejected. It has a slightly bigger share of the retail grocery trade and is much bigger at a wholesale level.

That could be an overly negative assumption. The commission may just be being cautious.  But even if Foodstuffs is out, all may not be lost for investors. There's still plenty of talk that other parties are eyeing The Warehouse.

Rumours on both sides of the Tasman this week suggest British grocery giant Tesco is making a move on Australasia, and has employed investment bank Merrill Lynch to look at a potential Warehouse bid.

Tesco has also been linked to a Woolworths bid for Australian retailer Coles this week.
And Pacific Equity Partners (PEP), the high profile private equity group, is still watching closely from the sidelines.

PEP has a 13 per cent stake in Coles as part of the Wesfarmers bidding consortium. It also backed Stephen Tindall's original $5.75 bid.  What we do know is that this delay now seems unusually long.

Foodstuffs applied for commission approval in December; Woolworths applied in mid-January.  Since then, we've watched some of the biggest takeover battles in Australasia unfold across the Tasman.

We live in interesting times for corporate activity. But watching from this side of the Tasman is a bit like tuning into the cricket World Cup final this weekend.  It'll be good cricket but without our team it's not the same. Roll on May 25 - the new deadline.

* Liam Dann is deputy editor of the Business Herald

STILL KICKING ...
The tyres, that is. At least that is what we are being told about the long-running sale of Restaurant Brands.

The company promised a definitive call on sale prospects by the end of the month and, despite delivering its full audited result yesterday, chairman Ted van Arkel maintains he won't talk about the sale process until April 30.  It could be that final talks are going down to the wire, although there are few in the market who view the situation with that much optimism.

The last potential buyer - likely to be CVC Asia Pacific - must surely be tempted to drop out and come back for another go on its own terms when a few issues have been resolved.  The share price has already sagged to pre-takeover talk levels and may sink further if the sale process is declared a failure. That would make the prospects for a hostile bid pretty good.

It is also likely that prospective buyers would rather wait and see if the turnaround at KFC can be maintained, and if there is any hope of a similar revival for Pizza Hut, before they make a commitment. If the company can continue to make some operational progress then revived sale prospects might not be so bad in the long run.  Restaurant Brands shares closed at 92c yesterday.

ENDANGERED SPECIES
A small announcement from the NZX this week could mean big changes to the way shareholders get the lowdown on a company's progress.  Basically, the NZX is bringing its regulations in to line with changes to the Companies Act so that - in theory at least - big glossy annual reports could be a thing of the past.

One reader was quick to point out all publicly listed companies should be encouraging shareholders to opt for electronic reports - from an environmental and financial perspective.  But companies also needed to ensure that the electronic reports are user friendly: "Simply reproducing a multi-column report for reading on a computer monitor is a sign of laziness." Which is a fair point, although there are also plenty of shareholders out there who still like to get the full report in the mail.

The economic practicality of printing reports for all shareholders will vary from company to company.

But, as the NZX's Elaine Campbell points out, shareholders will have the right to tell companies what they want. Making that clear in no uncertain terms is the key to making this change work.

AIR NZ EFFECT
It's great to see a soaring local stock impacting on valuations in Australia. It's usually the reverse of course, with anything the Rinker takeover deal to the Coles furore prompting New Zealand investors to reassess relevant values on this side of the Tasman.

But Australian commentators seem to have noticed that Air NZ's stellar run is making the Macquarie-led consortium's bid for Qantas look a bit ordinary.

The Sydney Morning Herald this week noted that Qantas shares had risen 28 per cent since rumours of the private equity bid began to circulate last November.  But Air NZ shares have doubled in the same period, the paper notes.  Ironically, it was the takeover bid for Qantas that was originally tipped one of the reasons for the resurrection in Air NZ's market value.

But a strong operational performance combined with some relief on the fuel price front seem to have left that theory back on the tarmac. In fact Air NZ has now risen 158 per cent since it bottomed out at $1.08 last August. Shares closed up 12c at $2.79 yesterday.

AIRPORT WARS
Meanwhile, still on an aeronautical theme, Infratil - owner of Wellington Airport and enthusiastic "would-be" developer of Whenuapai Airport in Auckland's north west - is more than a little miffed at the news that Auckland International Airport (AIA) has been funding local opposition to the development.

Infratil director Tim Brown has found a story in community newspaper the North Shore Times which says AIA has provided Whenuapai Action Group with $19,000 to fight plans for the airport.

Infratil has long expressed interest in developing the old airforce base at Whenuapai as a second commercial airport for the region.

Brown says he now intends to check the legality of the funding relationship. "It is hard to see how it would be in the spirit of the Commerce Act to be funding a vociferous group opposed to the establishment of a competitor," he says.

"At least the AIA team are not the Brethrens, so are probably not praying for divine intervention on their side."

GPG PURCHASE
Guiness Peat Group has built a war chest of more than $700 million which it is likely to spend on a new acquisition, concludes Goldman Sachs JBWere analyst Rodney Deacon in his latest report on the listed investment company. Deacon has taken another look at the group in the light of last week's sale of the Australian Wealth Management (AWM) business - which has delivered the investment company a cool A$267 million.

The timing of the AWM sale was in itself a little surprising, Deacon noted. He bases his view on the belief that the Australian wealth management industry is generally considered to be in a growth phase with potential for further consolidation. AWM was also still in the process of integrating the Select Funds business and the corporate superannuation business it had acquired from Zurich Financial and Genesys. "We think it is questionable whether the full benefit of these transactions has been fully factored into the share price," Deacon writes.

And no reason for the sale was provided by GPG management. The only logical reason for sale is a belief on GPG's part that Australian equities are near a peak.

The question now is what will GPG do with the proceeds - which take the amount of cash on the balance sheet to more than $700 million by Deacon's calculation. The Coates business is now largely self-funding and none of its other businesses need the capital. That makes a fresh acquisition the most likely option.

GPG shares closed up 1c at $2.33 yesterday.

TESCO IN THE WAREHOUSE RACE ...
The race for The Warehouse (due to get the starter's gun today, Commerce Commission willing) looks set to get more crowded.

Well-placed market sources say investment bank Merrill Lynch has hit town, hired by British grocery giant Tesco to scope out the Red Shed auction.

Tesco has long been tipped as potential buyer, with rumours dating back to a supposed meeting during Stephen Tindall's UK visit last year.

But just how Tesco might fit into a potential bidding war remains unclear.

Also this week, sources in the Australian media linked Tesco to a Woolworths bid for Coles, so it looks increasingly like there is some big-picture stuff going on behind the scenes. Tesco management has been highly public about its aggressive international expansion plans in the past year. Foodstuffs and Woolworths have been in the starting blocks for months.

Today is the Commerce Commerce's third deadline for ruling on who is allowed to buy. But considering what's at stake it would be thoroughly unsurprising if the runners are once again left waiting for another month.

Meanwhile, in the calm before the storm ... trading in The Warehouse shares has slowed to a near standstill. The share price has drifted sideways from a $7.11 close last Friday to yesterday's close of $7.10.

OLD DOG DOES NEW TRICKS
Stalwart Wellington retailer Kirkcaldie & Stains sometimes looks like a bit of a throwback on the NZX.

It all seems a bit Are You Being Served? in these days of global retail conglomerates. But Kirks is obviously doing something right because its shares hit a three-year high this week. On Tuesday the company reported its half-year profit had more than doubled to $747,000, allowing it to resume paying dividends.

Strong Christmas and summer trading, including the end of season sale, boosted sales by 11.5 per cent to $22 million, the company said.

The store has expanded from its traditional Lambton Quay home and now has a cuisine store in Wellington's Harbour City Shopping Centre.

It's also worth noting that the canny Sir Selwyn Cushing and his family investment company H&G took a five per cent stake last year.  And a group of Wellington property investors trading under the name LQ Investments has held a 19.9 per cent stake since March last year.

So it could be that new strategic stakeholders have provided management with some fresh motivation.  The shares closed up 10c yesterday at $3.10.

Graeme Hart has capped off an epic year of wheeling and dealing by selling his Bluebird snack business to US food and drinks giant Pepsico for $245 million.

Pepsico has one of the world's biggest salty-snack food businesses in Frito-lay, but has never had a presence in New Zealand. It was tipped this year as a likely contender to take Bluebird.

In 2003, when Hart was taking over Goodman Fielder, a partnership between Pepsico and Pacific Equity Partners was regarded as his most serious rival bidder.

The sale, due to be completed by January 4, completes the break-up of Burns Philp - the venerable Australian food company which Hart bought into in 1997 and paid $1.5 billion to gain complete control of last month.

The price tag is in line with market expectations, so it will not alter calculations of Hart's wealth, but it does add to the growing cash pile he and his Rank Group team have available to make more acquisitions.

The NBR Rich List put his fortune at $2.75 billion in July.  As usual, the media-shy Hart was not available yesterday. 

In May, Burns Philp's Uncle Toby brand was sold to Nestle for about $1.1 billion.

That and the float of the Goodman Fielder business last year gave Burns Philp $2.9 billion, net of debt.  Analysts say he has enough equity to raise money for acquisitions worth more than $12 billion.

And that is not counting the unknown level of equity he now has in Carter Holt Harvey.  Hart took over and delisted the forest products company in March, paying about $3.3 billion.

It is not known what level of debt he took on.  He has since sold most of the group's forests to American firm Hancock for about $1.5 billion.

Last year, Bluebird bought Krispa and Aztec from Hansells NZ - then owned by Gary Lane.

Speculation has now turned to Hart's next acquisition.  He is understood to have looked at Australian packaging company Amcor, but has not made a move towards buying it.  Market commentators say the frenzy of private equity in Australia has pushed prices higher than Hart is interested in paying.

BUYING, SELLING
* March: After paying more than $3.3 billion, Hart gains full control of Carter Holt Harvey.
* May: Burns Philp sells Uncle Toby's business to Nestle for $1.1 billion.
* August: Hart makes full takeover bid for Burns Philp.
* October: CHH buys nine ITM hardware stores. CHH sells forest assets for $1.5 billion, and buys a mill in Pine Bluff, Arkansas, and other beverage packaging plants from International Paper for between US$500 million and US$600 million.
* November: Hart gains full control of Burns Philp.
* Yesterday: Sells Bluebird for $245 million.

Graeme Hart is already New Zealand's richest man. His latest move must make him the nation's coolest under pressure.

After flogging off a $2.1 billion chunk of his international food business last month, Hart raised eyebrows by putting most of the money straight in the bank. By putting only $500 million towards the huge debt of his Australian company, Burns Philp, Hart could be costing it as much as $300,000 a day, analysts say.

That's because the cost of holding cash - the difference between the interest earned on the cash and the interest paid on the debt - will quickly run into the tens of millions.

Hart is unperturbed. He's going bargain hunting and he's not letting anyone rush him. "When we find the right opportunity we will move on it. If we don't ... then you just have to be patient," he told the Business Herald. "We're not particularly bothered about what people think and write."

Selling Burns Philp's yeast and spice businesses to Associated British Foods sparked speculation in Australia about what the former panel beater would buy.

The stripped-back Burns Philp is the Australasian businesses of Goodman Fielder - including classic New Zealand brands such as Edmonds, Ernest Adams and Meadowlea.

Hart puts the food into Australasia's lunch boxes, pantries and on breakfast tables.

He owns a 54 per cent controlling stake in Burns Philp. Dealing with the money from the spice deal was a basic financial choice, the kind most of us face every day - pay off debt or keep some money for that unbeatable bargain just around the corner?

Hart just deals with bigger numbers. His leveraged and hostile takeover of Goodman Fielder last year left Burns Philp with debt of nearly $2.9 billion. That will drop to about $2.3 billion after 25 per cent of the Associated British Foods deal proceeds are paid in.

Hart says holding the cash is just one of the costs of doing business, and sighs at the inevitable debt question. "Look, we've divested a business and we're very comfortable with the terms at which we divested it. If we weren't, we wouldn't have done it. That leaves us with a couple of billion coming through the door. It's got nothing to do with debt."

Were it not for Hart's charm and reputation for ego-free business dealings, it would be easy to mistake that supreme confidence for arrogance.

He is unshakeable in the belief that he and his trusted sidekick, Burns Philp chief executive Tom Degnan, will find another winner. He talks about debt as if it was an ordinary home loan - except that most home-owners sound considerably less relaxed when discussing their mortgages.

Many Hart-watchers are picking that, because of the cost of keeping the cash in the bank, Burns Philp will make its move sooner rather than later. Most think it already has an acquisition lined up. Hart says categorically: "We don't."

But speculation was so intense last week that the share price of the No 1 contender, Australia's largest listed dairy company, National Foods, rose 4 per cent. Ironically, the biggest shareholder in National Foods is Fonterra - the local competition for Hart's other business, New Zealand Dairy Foods.

Fonterra owns 17 per cent of National Foods and has made no attempt to increase that despite having plenty of opportunity. One unknown is whether Fonterra would consider selling. It might see that as giving too much of a leg-up to an Australasian competitor. But the possibility isn't totally far fetched, a dairy industry source says. National Foods would fit well with Burns Philp in Australia by providing ingredients for its array of foods.

More likely to deter Hart is the fact that it is already in good shape and fully priced. "There's a good chance he will be able to find a better deal somewhere else," the source says.

Burns Philp's style is to look for a business that needs work and is going cheap. Hart is giving nothing away: "I've heard the speculation about National Foods and I'm not going to comment on that. It only fuels speculation." The only thing that Burns Philp has ruled out is buying NZ Dairy Foods.

Other food businesses touted as possible targets include Australian biscuit company Arnotts and canned pineapple company Golden Circle. Buying Golden Circle would require Hart to convince 700 proud farmer shareholders to sell - an unenviable task.

Not that Hart is afraid of difficult buys. His takeover of Goodman was about as hostile as they come. The ruthless restructuring that followed - the head office virtually vaporised - proved his cost-cutting ability.

The success of the Goodman restructuring will be revealed when Burns Philp issues its full-year result this month. That should make it clear whether Hart's relaxed demeanour is justified. It may be that there has been too much focus in the speculation on Australasian acquisitions.

Hart says a geographic spread hedges against local economic downturns. "We're not geographically constrained. We're not just focused on New Zealand and Australia. We've demonstrated to our satisfaction, and to the world, that we are well capable of running a global business."

But , some countries are more likely prospects than others. "We fully appreciate the various risks between countries," he says. "The United States, Australia and New Zealand are relatively low risk by comparison with, I don't know ... India, Columbia or ... Venezuela."

When Hart bought Burns Philp for $300 million in 1997, he attracted the scorn of the Aussies. To be fair, it looked like he'd been sold a lemon. Within months, his shares were almost worthless and the company was in the hands of the bankers. But, against the odds, he traded his way out.

This time around, he has some supporters across the Tasman. One analyst there said: "I think people will support Hart and, certainly, the Australian investor market has a huge amount of respect for him. Hart's definitely the guy who looked like he was on his knees and then came back and stuck his fingers up in the air at everyone. To an Australian, that's probably the best way to get respect - that old Aussie battler kind of mentality."

Something that may confuse Hart's critics is his lack of interest in making money for its own sake.

That's not what gets him out of bed in the morning. He describes his personal wealth - estimated at much more than $1 billion - as "a by-product" of what he does. "You can only have so many cars," he once told the Herald.

His motivation is doing business and building businesses. Like a sportsman, he is always striving to play the perfect game. Appropriately for a man in the baking industry, he follows a simple recipe - buy, build, sell ... buy again.

Whether he's got his measurements right remains to be seen. But as recipe for whipping up speculation, it's unbeatable.