Mergers & Acquisitions

When Goodman Fielder was floated a little over three years ago it was promoted as a company that provided for investors in the same way as its products - bread, butter, milk and oil - provided for the nation. This was staple fare - a share for grannies.

The tagline on the prospectus for the $2.55 billion share float said it all: "Superior market positions supported by heritage brands - dividends and growth supported by a strong financial position."

Goodman Fielder projected growth in trading profits for the first two years of around 17%, a dividend yield of around 6-7% and imputation credits for New Zealand investors - a rare quality for a company that spanned the Tasman. And the company, in its first couple of years, delivered. Results and yields were robust. Sure, it was not exciting stuff, but it filled investors' tummies.

The last year has not been quite so bright. This is not because management has been doing an especially bad job. Instead it reflects the fact that recent economic conditions have thwarted Goodman Fielder at every turn. Goodman Fielder should be a defensive stock.

As a food manufacturer, it should be relatively insulated against the ebbs and flows of the economy. People might be able to put off buying a new car or a meal out, but they still need their (Meadowfresh) milk in the fridge and their (Molenberg) bread on the table. And when the economy roars away, the more highly-branded elements of its offerings such as luxury desserts or fresh cheeses might tempt shoppers.

However, few companies can withstand the volatility that has harried the market over the past year. This is especially the case for Goodman Fielder, whose fortunes are highly dependent on the trajectory of prices in the sector of the economy which has been subject to the most extreme swings in prices - bulk commodities.

In short, Goodman Fielder is proof positive that stability in prices is more important than the absolute level of those prices.

Prices for key ingredients, such as wheat for Goodman Fielder's baking operations and edible oils for its commercial and home ingredients businesses, soared to a peak around the middle of the year. The rise was linked to a belief that elevated oil prices would spur the planting of crops to produce bio-fuel, displacing food crops and thus elevating their prices.

Goodman Fielder's response to this surge was to lock in hedges at lower rates - believing commodities would be "stronger for longer." But as the turmoil in financial markets began to spill over into the real economy and commodity prices fell, Goodman found itself locked into hedges that prevented it from benefiting from the lower prices.

The firm last week warned commodity price hikes would lop $A100 million from its bottom line and it will not start to see the effects of lower prices until the second half of this financial year. The depth and the severity of the downturn have, ironically, unmasked a weakness in its strategy. Goodman Fielder's brands are supposed to be one of its greatest strengths.

Customer loyalty should allow it to pass on these costs. However, during this downturn, shoppers are leaving these in favour of the growing stable of supermarket house brands, depriving the business of one of the key levers to keep earnings on track.

One of the big questions now facing the company is whether the power of its brands in staple food categories has diminished.

As a result of these forces Goodman cut its earnings guidance saying it expected full-year net profits to be in the range of $A191 million and $A204 million, equating to a fall of 8% to 14% on last year's result.

However, it could be a lot worse. Management, led by former National Foods boss Peter Margin, has been working hard to contain these forces with cost cuts including 225 redundancies, rationalisation of its manufacturing sites and a refinement of its distribution channel.

At the same time it has been investing in new products initiatives. In New Zealand this initiative is represented by the development of a specialty cheese facility at its plant in Longburn in the Manawatu and upgrading the plant's yoghurt and liquid milk operation. In Christchurch it is developing a UHT milk facility from which Goodman Fielder will be able to service its emerging market opportunities, particularly in Asia.

Its balance sheet is also sound. As at June 2008 the firm has $384 million available in its banking facilities and net debt stands at around 65%, and interest cover at around 4.6 times.

Reflecting this strength, the firm has already refinanced well over half its long term borrowings at rates that represent a respectable spread over wholesale rates. It is also trying to increase its economies of scale with acquisitions including the River Mill Bakeries in Huntly, independent liquid milk producer Independent dairy producers, dip manufacturer Copperpot and the biscuit manufacturer Paradise Foods.
--
Richard Inder is an investment advisor at Macquarie Private Wealth. His disclosure statement is free and is available on request. His clients may hold shares in the firms mentioned. Comments, think differently? Write to richard.inder@macquarie.com

Australia's OneSteel is planning to spend about $175 million to take over Wellington-based Steel & Tube Holdings.

OneSteel, which already owns 50.27 percent of Steel & Tube, is to offer $4 a share for the rest. This compares with a price of $3 on the market before the offer was announced this morning. The offer values the whole company at $353 million. The offer will be conditional on the Australian company achieving 90 percent acceptance. Also, and most unusually, the bid is conditional on the NZX 50 index not dropping below 2710 for three consecutive days prior to the bid being declared unconditional.

The NZX 50 is comfortably above that level at the moment - trading above 3200 early today. But the inclusion of such a condition demonstrates nervousness about the current global environment.

The bid comes at a time when Steel & Tube's profitability has taken a hit from the economic downturn. Its earnings slipped 19 percent to $22.5 million for the year to June.

The company said that its three Key market segments of construction, manufacturing and the rural sector, all suffered to a varying degree as the combination of exchange rate volatility, high interest rates and reduced growth in consumer spending slowed the economy. These conditions prevented businesses in general from recovering the increased cost of doing business resulting in a margin squeeze.

OneSteel managing director Geoff Plummer said the takeover would allow OneSteel to simplify its corporate structure and efficiently manage the Steel & Tube business as part of the OneSteel group.

"OneSteel's proposal confirms its commitment to the New Zealand market and to Steel & Tube’s business, employees, customers and suppliers. If OneSteel's offer proceeds, OneSteel intends to retain the Steel & Tube brand, grow the Steel & Tube business and maintain a quality product offering and high level of service."

The Commerce Commission said today it had cleared Cavalier Corp and Norman Ellison Holdings to form a joint venture company that will acquire the carpet businesses of Norman Ellison and its subsidiaries. Commission chair Paula Rebstock said the watchdog was satisfied the proposed acquisition would not substantially lessen competition in any relevant market.

Auckland-based Cavalier manufactures and distributes broadloom carpets to domestic and export markets.

Norman Ellison is a privately owned and operated yarn and carpet manufacturer with tufting machinery and a yarn spinning plant in Auckland. It manufactures a range of carpets marketed under the Norman Ellison carpets brand in New Zealand and Australia. Cavalier shares were untraded today, having last traded at $3.13. They have traded between $2.96 and $3.62 in the last year.

The iconic New Zealand brand Swanndri has been bought by Christchurch apparel company Longbeach Holdings for an undisclosed sum. Longbeach, fully New Zealand owned, is an apparel supply specialist with operations in New Zealand, Australia, South Africa, UK and China.

It has been working with Swanndri for the past two years including developing new innovations in fabrications and styling.

Swanndri chairman Bryan Pearson, said the board and management of Swanndri had spent the past four years repositioning and growing the business. Two years ago Swanndri, which brands itself "a New Zealand legend,", decided to shut its Timaru factory and manufacture in China for economic reasons. "We all felt the time was right for a major company like Longbeach to come in and take Swanndri to the next level," Pearson said. "Longbeach has the expertise and infrastructure to support further growth of this great kiwi brand in New Zealand and international markets."

Longbeach chairman, Ken Sparrow, said it was a great deal for both companies and the Swanndri.

--

CAPTION: NEW HOME: the Swanndri brand, which features designs by Karen Walker, has been bought by Christchurch firm Longbeach.

Freightways' first-quarter profitability was flat as the express delivery company continued to be shackled by the sluggish economy. Managing director Dean Bracewell told shareholders at the annual meeting in Auckland yesterday that operating earnings for the three months to September 30 were up by 4 per cent. But higher interest rate costs meant net profit was flat at $7.7 million, he said.

Mr Bracewell declined to comment on mounting takeover speculation. Freightways, which shares the New Zealand express package market with NZ Post in a near-duopoly, has long been touted as a likely takeover target. Suggestions that Toll Holdings might launch a bid have been around for a couple of years. This month, the Australian Financial Review reported that as well as Toll, Qantas, FedEx and Deutsche Post's DHL were interested.

"I have no doubt that it's on at least a couple of companies' radar screens," First NZ Capital analyst Andrew Mortimer said. "I certainly wouldn't discount it but it's a question of timing. It's got an open register and it's vulnerable."

Mr Bracewell said he saw no short-term let-up in the challenging New Zealand conditions. "We said at the full-year we expected a flat environment and that's what we've got," he said. "It will come back; it always does. And when it does we'll be ready with good-quality capacity and we'll reap the benefits of it then, but I couldn't put a time frame on that."

At close the Freightways share price was down 15 cents at $3.80.

Growth in the business mail and information management businesses continued to outpace the core express business, Mr Bracewell said. Capital investment of $15 million would be spent during the 2008 year including the initial development of a recently acquired information management site in Wellington.

Freightways' largest shareholder is Fisher Funds, which has a 9.8 per cent stake. Fisher Funds chief investment officer Warren Couillault said Freightways was doing well relative to the conditions it was operating in. "It does feel to me that the underlying barometer of the economy, in moving freight around the country, has been weak for about a year and a half," he said. "The fact that they're holding their bottom line is good, given that they've got huge cost increases in labour, occupancy and energy. "The little nibbling acquisitions they are making in data and storage are good as well. That will give them a springboard in Australia and it's exactly what we want them to be doing."

Directors Sue Sheldon and Sir William Birch were re-elected to the board at the meeting. Directors' fees were increased from $225,000 to $336,000. This includes $52,000 to be available if a sixth director, likely to be an Australian, is added to the board.

Fletcher Building is teaming up with Australian rival Boral to bid for Carter Holt Harvey's Wood Products, Carters and Interion businesses being sold by billionaire Graeme Hart in what is expected to be a $2 billion plus deal.

Indicative offers for the Carter Holt assets were due last week. Market sources said yesterday that the Fletcher-Boral combination was facing its main competition from international private equity fund CVC Capital Partners.

Mr Hart is selling wood-based building items manufacturer and marketer Wood Products New Zealand, which has 12 manufacturing sites, Wood Products Australia, which has six, New Zealand's Carters building materials chain and Interion, which markets and sells furniture, joinery and construction products. Combined, these assets are forecasting 2008 earnings before interest, tax, depreciation and amortisation of about $300 million.

Sources suggested that, if successful, Fletcher and Boral planned for the Kiwi firm to take the bulk of the New Zealand assets and Boral to pick up those in Australia. Mr Hart's Rank Group has told Carter Holt staff it wants to complete a sale by the end of the year.

Boral is Australia's biggest building and construction materials supplier and also has operations in the United States and Asia. Kylie FitzGerald, Boral's general manager of corporate affairs and investor relations, declined to comment on "market speculation".

Fletcher chief executive Jonathan Ling said he could not comment "at the moment".

Staff at CVC's Sydney office did not respond to requests for comment. CVC's history in the trans-Tasman building industry includes ownership of laminates and panels business Laminex and insulation, concrete and roofing group Amatek. Ironically, it sold both to Fletcher - Laminex for $754 million in 2002 and Amatek for $582 million - in 2005.

It was unclear whether Rank had received further offers. US forestry group Weyerhaeuser, which sold half of a 67,000-hectare Nelson forestry plantation to partner and fellow US firm Global Forest Partners in June, is touted as a potential bidder. Tasmania forest products group Gunns, which owns a veneer factory in Christchurch, is also a possible bidder. Gunns declined to comment.

Fletcher completed the $1 billion acquisition of US-based benchtop group Formica on July 2, issuing $328 million of new shares to help pay for the deal. It might issue shares to help fund another big buy.

Tower equities fund manager Paul Robertshawe said Fletcher should easily be able to convince investors of the merits of buying Carter Holt assets. Fletcher had a good five-year track record, had not overpaid for previous acquisitions and its finances, with gearing, or debt-to-equity, of 46 per cent were not stretched. "If they come to us with a deal that makes sense I don't think shareholders would be upset about the timing," Mr Robertshawe said.

However, a Fletcher purchase would need Commerce Commission approval as its businesses have significant crossover with Carter Holt, notably PlaceMakers and Carters. Since completing the $3.3 billion acquisition of Carter Holt in March 2006, Mr Hart has already recouped about $1.9 billion.

Postie Plus's board has had no communication with Jan Cameron, founder of Kathmandu retail chain, who has taken an 8.6 per cent stake in the clothing company.

Cameron cashed up her highly successful Kathmandu retail chain last year for a reported price of $275 million.

Cameron taking a stake has left shareholders wondering if this is a signal she may have a takeover bid in mind.  Postie shares were thinly traded on Friday, closing steady at 80 cents, below their 2003 100c issue price.  She is New Zealand's richest woman, according to the National Business Review Rich List, worth $300m.  Postie Plus chairman Peter van Rij said: "We have had no communication with Jan Cameron."  Van Rij said if the company had it would probably have to disclose that to the New Zealand Exchange.

Cameron was probably the single largest shareholder now because the Dellaca family, which founded the company in Westport, had sold some shares to her.

Asked if the board was expecting Cameron to call, van Rij said: "Perhaps the answer is no because if she was she probably would have spoken to us by now.  "She may talk to us but she hasn't talked to us. Maybe it's just a passive investment that she's making," he said.  Richard Dellaca said he believed Cameron had bought about 1.1 million shares from family members.  The purchases were done through a broker. 

Postie Plus has 40 million shares on issue meaning the market capitalisation is $32m.

Mainfreight has taken another step towards its goal of becoming a major global logistics player with the $76 million acquisition of United States freight forwarder Target Logistics.  The New Zealand freight forwarder and logistics company will pay $3.54 a share for Target, which is listed on the American Stock Exchange and incorporated in Delaware.

Mainfreight already has acceptances from Target's three major shareholders, who together hold 66.5 per cent of its stock, and under Delaware law is able to compulsorily acquire the rest of the company.  Managing director Don Braid said the remaining Target shareholders were able to challenge the acquisition in the courts, but he didn't think that was likely.

Mainfreight's offer is at a significant premium to Target's current share price which last closed at $2.59.  "We think we've paid a fair price for Target shareholders and a fair price for Mainfreight," Mr Braid said.

All going smoothly, the acquisition will be completed by November or December with Mainfreight intending to run Target as a stand-alone company retaining its brand and current management.  Target has 34 offices across the US, more than 3000 customers and about 350 staff.  It has an international network of agents in more than 70 countries and has a strong presence on China and Southeast Asia routes, with many of its US customers manufacturing in Asia.

Its revenue in the year to June 2008 is expected to exceed $255 million and earnings will be positive from day one for Mainfreight.

Forsyth Barr analyst Rob Mercer said the acquisition did not come as a surprise.  "They've bought exactly what they've said they've been targeting. It looks like it's a well-run business."

Mainfreight shares closed up 5 cents at $7.10.

Christchurch businessman Ken Anderson looks set to expand his Lane Walker Rudkin clothing manufacturing empire.

His takeover of Auckland textile manufacturer Pod is almost home and hosed. Anderson had secured 87 per cent of Pod shares by yesterday with only 3% left to reach the 90% threshold at which he can compulsorily acquire the rest of the shares. A key shareholder with 6.4%, Aucklander Hemat Lal Patel, who had considered the bid too low, told the New Zealand Exchange (NZX) yesterday he had sold to Lane Walker Rudkin.

Anderson, an accountant by training and chairman and chief executive of Lane Walker Rudkin Industries, has a week more up his sleeve with the 50c-a-share Pod takeover offer deadline next Thursday.

Anderson owned LWR and there were no other shareholders, he confirmed. He bought LWR in 2001 except for the Canterbury brand. He keeps a low profile and will only say the LWR business has a turnover of several hundred million dollars. Pod will add about another $65 million in sales and about 250 staff.

LWR Manufacturing has more than 1000 staff in New Zealand and Australia. About 600 staff are in Christchurch at LWR's site in Sydenham where it has a textile manufacturing and hosiery and underwear making plants. LWR manufactures hosiery and underwear for other companies including Pacific Brands.

LWR has two sock factories, one in Timaru and one in Melbourne, and three smaller hosiery and underwear factories in the central North Island, one in Greytown (135 employees), Levin (130) and Pahiatua (25).

In Brisbane, LWR owns a sport apparel factory which makes sports team uniforms under licence for Adidas. It also owns the Stirling Sports and Champions of the World sports clothing retail chains. He said he was confident of reaching 90% in the next week, because of indications from other shareholders that they would sell.

Since buying LWR six years ago when it had about 400 staff, he had about doubled the business. About 60% of sales are in New Zealand, 30% in Australia and about 10% in the United States and other countries, Anderson said. In its heyday the company employed about 4000 staff, he said.

Pod would add more scale to the business. Savings existed in delisting Pod and in product rationalisation, he said. "There's a lot to be said for manufacturing close to the market," he said. About 90% of the firm's sales are from Australasia.

AUSTRALIA'S biggest private transport owner, Linfox, surprised the investment community yesterday with the purchase of Westgate Logistics for an estimated $180 million.

The move triggered speculation that it was part of the Fox family's grand plan to list on the Australian Securities Exchange for at least $1.5 billion.  The market has been waiting for a second force behind Toll Holdings, and analysts say Linfox is conscious of this.  It is not the first time Linfox has listed on the ASX. It listed in 1987, but that lasted less than two years before the family bought back the company.  Linfox is the second biggest transport company in Australia and has operations in 11 countries.

To fund its expansion -- especially projects in other parts of the Fox family empire such as Avalon and Essendon Airports -- it will need large amounts of capital.  Pricing multiples in the transport industry have never been so high. Transport companies are selling for 15 to 20 times earnings.

As a private company, Linfox does not release profit figures, but it says the latest acquisition will bump up its turnover from $1.8 billion to $2 billion.  This is still a far cry from transport industry leader Toll Holdings, which is forecast to report annual revenue in 2007 of close to $10 billion, and net profit of almost $500 million.  Linfox's purchase of Sam Tarascio's Westgate business follows two other acquisitions in the past year, including Bill Gibbons' freight forwarder FCL Freight last August for $170 million and Provincial Freightlines in May this year.

Apart from his transport interests, Mr Tarascio is one of Melbourne's most high-profile builder-developers, with a current construction work book of more than $700 million. His Salta Constructions is one of Australia's largest and most diversified privately owned building groups.  Westgate beefs up its warehouse capabilities and extends its offerings to customers to include more dangerous goods warehousing. It also ensures that it maintains at least one of the big retailers as a key client.  Right now Coles is Linfox's biggest client. Indeed, Linfox founder Lindsay Fox used to sit on the Coles board.  But, with Coles for sale, future contracts may be reviewed. Westgate has a big chunk of the Woolworths transport business.

Linfox has been trying to consolidate its position in the Australian transport market for the past two years, even before Toll Holdings' purchase of Patrick Corporation.  For instance, Lindsay Fox spoke to Chris Corrigan about selling Linfox into Patrick and taking a 20 per cent stake in the merged entity. These plans were derailed when Paul Little's Toll came along and made an offer for Patrick.  He then spoke to Qantas about selling its business.  Sources close to Qantas say the Fox family wanted $1.1 billion, which the airline considered far too much.

Executive chairman Peter Fox's goal is to turn Linfox into a $4 billion to $6 billion operation by 2010, but after the Toll-Patrick merger, the Australian transport landscape changed so dramatically that it forced many of the smaller transport operators to either close or sell out.

Peter Fox said Linfox decided to build up its acquisitions because if it had sat still after the Toll deal it would now be finished. "We have made three acquisitions in the past year to consolidate our position in the industry," he said.  "You can only be number one or two or maybe three in this industry. The others will get squeezed out."  Because of this he expects the third-biggest transport operator, Allan Scott's transport business, to put up the for-sale sign.  "Let's face it, Allan Scott is 84 and there isn't a clear succession in place as far as I can see," he said.  Not surprisingly, Linfox would be first in line to bid for the business. "It's a good business and I can't imagine the ACCC letting Toll buy it.  "Then again, you never know. I didn't expect them to let the Patrick deal go through."

Transport is one of the toughest industries to operate in. It got even tougher when Toll emerged as a fully integrated logistics and transport operator.  It got tougher again with the rising fuel prices, heavy capital expenditure in IT and difficulty in getting staff.  For this reason there will be a lot more consolidation in the next few years.  "As I see it, this place is built on monopolies and duopolies. Companies at the bottom will get squeezed out," he said.  Mr Fox said the company was not looking at listing at the moment. But, he said, "Never say never."