Dog gone

It’s a share market truism made even truer when applied to one of New Zealand’s most spectacular share market failures, Brierley Investments Ltd. Take the last month’s trading. On April 21, news leaked that BIL would announce a tie-up with the prestigious Rothschild Bank and speculators pushed the shares up six cents to their highest point in almost a year.

It may have been the most anticlimactic name-drop in corporate history. A week later the shares were back at 52 cents and the market had gone back to sleep. Rather than the grand alliance that had the punters excited, the Rothschild connection turned out to be a small joint venture in Asia.

Adding to the disappointment was the announcement of a “new” strategic plan, barely distinguishable from the old one devised last year by Sir Roger Douglas: the same one that ultimately cost him his job. The plan has been disappointing for many reasons: chairman Sir Selwyn Cushing says he has a target for the share price, but hasn’t said what it is or how he will get it there. There has been no news on BIL’s big three investments, no new chief executive and no plan for dealing with the plague of problem assets.

It’s a misnomer of a rescue package: BIL appears to have jumped from one precipice to another.

However, a few changes stand out as positives. The desirable size of new investments, which the Douglas regime saw rather conservatively as $100 million to $600 million, has swollen to $200 million to $1 billion. The limit on the number of investments, previously eight to 15, has gone. So has the Douglas plan’s focus on Australia and New Zealand. BIL, it seems, is going global again. And there are indications more investment alliances could follow the Rothschild scheme.

None of this, however, has been enough to get the shares moving. At press time, BIL languished at 52 cents. Like they say, sell on fact.

And there’s one more fact the 95,000-strong army of long-suffering shareholders have a right to feel suspicious about. In the mêlée surrounding the deal, scrutineers found plenty of evidence to support the view that BIL is now controlled, not from Wellington, but from Singapore, by 20% shareholder Camerlin and its principle Quek Leng Chan. Most BIL shareholders bought when BIL was a successful company, run by New Zealanders you could talk to by phone or at least send a letter to. Now it’s a near penny dreadful with a shady future, run, ostensibly, by a mysterious figure somewhere in Malaysia. Who’s in control of BIL and what do they want to do?

Quek and the dead

Most local media missed the connection — their coverage curiously muted and deferential. The Australian press by comparison had a field day.

“Malaysian tycoon Mr Quek Leng Chan’s Camerlin Group has cemented its effective control over Brierley Investments”, began the Australian Financial Review’s report.

“Strategy ‘rethink’ puts BIL on a slow and rudderless boat to Asia” brayed the headline in the Sydney Morning Herald, over a commentary that claimed the plan was plastered with Quek’s fingerprints.

Cushing plays the talk down. The plan bears many fingerprints, he says, including those of BIL and the Singaporean government, another large shareholder. But it’s now hard to find anybody who doubts Quek is an irresistible force in the BIL boardroom. And with nine scalps taken in the past 14 months, it’s clear no BIL director, with the possible exception of Sir Ron Brierley himself, can regard himself as an immovable object.

What’s the evidence for a Quek-controlled BIL?

Most obviously, BIL says it is considering moving its head office to Singapore, a short hop from Kuala Lumpur where Quek, who holds 20% of the shares, is based. The official line is that BIL as an international company needs to be based in an international financial centre. BIL also says it will pay a yearly dividend and consider a share buyback. Quek’s business empire is short of cash and the suspension of the dividend last year is thought to have triggered his October boardroom clean-out. A share buyback in which he did not participate would lift his voting power without taxing his resources. And comments from Rothschild’s boss, Wilbur Ross, make it clear Quek was instrumental in brokering the Asian investment agreement. “Our linkage is through the Quek family and Camerlin,” Ross told a teleconference held to announce the new plan.

Still, so what? What if Quek is king maker in the new BIL?

Who is he?

Quek remains the great unknown. To say he shuns the limelight is an understatement. There is an unconfirmed rumour he once gave a media interview but officially this is denied. His aides ignore press enquiries. In the run up to last year’s annual meeting he hired Wellington spin doctor Barrie Saunders, but not even the effusive former Roundtable PR man said much, if anything.

What we know about him is hearsay. Quek is said to strike with a quick temper at any that frustrate or fail him. He didn’t show up at the shareholders meeting but, behind the scenes, he was orchestrating the departure of three BIL directors and, later, of chairman Douglas.

Critics, such as the Sydney Morning Herald’s Stephen Bartholo-meusz, read the evidence as showing BIL is shifting its main investment focus to Asia, a strategy they say is full of risk. They point to the mess the company made of its last foray into the region. Over the past decade, BIL has spent around $700 million on Asian investments, many of them greenfields projects.

The largest and arguably most disastrous is AsiaPower (see box). The shares BIL holds in two Hong Kong listed companies, SEA Holdings and Paul Y-ITC Construction, are trading at a fraction of their purchase values. A joint venture with Thailand’s defunct GF never got off the ground. Only Seabil Pacific, with shares in Trans Tasman Properties and two property developments in China, has its nostrils above water. All up, those investments are estimated to be worth $150 million.

The company says things are different this time. The last investment programme was carried out during what we now know to be the lead up to a collapse. Lately many of the affected economies have steadied and asset values have started to recover. BIL also argues it will have the benefit of partners with deep regional knowledge and investment expertise.

That may be so in Rothschild’s case (see box), but critics argue there is room for doubt about Camerlin. For one thing, the pressure of the Asian flu on Camerlin means its investments in the region are still languishing. Then there is the BIL investment itself. Camerlin bought in at 140 cents a share and has been kicking itself ever since.

And many of BIL’s failed Asian investment decisions were made after Camerlin bought in.

Key question

Still, it’s not as if all of BIL’s eggs are in its Asia basket-case. Asia-sceptics, such as Bartholomeusz, seem to forget BIL’s $US100 million contribution to the new fund is only slightly more than 5% of its assets. Also, such investment alliances have worked well in the past. Alongside International Paper, BIL added significant value to its Carter Holt Harvey stake and IP provided it with an exit route. Sky City, set rolling with Harrahs, was one of BIL’s most successful plays.

Then again, those ventures were with industry players — partners who had first-hand knowledge of the business at hand. Rothschild is simply another professional investor like BIL. With examples like AsiaPower and Molokai Ranch in mind, BIL says the fund will invest only in established businesses, not in start-ups. But Sky City was a start-up. Perhaps the lesson for a company like BIL is that the most successful investments are those you make on your home turf with an established industry player.

The key question is, can BIL afford to make investments large enough to shift the share price?

At present the answer appears to be no. The most optimistic of analysts estimate the company has leeway to invest up to $400 million, almost half of which is committed to the new Asian fund.

The analysts argue Quek’s influence will be critical in all the three main areas that will drive BIL’s fortunes; cash flow, and the future of the investments in Thistle Hotels and Air New Zealand.

To understand the cash flow argument, you have to look at the kind of company BIL is, and how it got into trouble last year.

BIL’s business is investing in up-and-coming companies. Those with strong cash flow and high dividends tend to be fully valued. So investors such as BIL look for firms with the potential to reach that stage, but have not yet been recognised by the market. Not penny dreadfuls, nor blue chips; but little gems languishing in between. As a consequence, BIL finds itself in a difficult spot. On the one hand, it doesn’t collect strong dividend income from its investments, so net cash flow is neutral or slightly negative. Yet much of any incoming money is eaten up by interest payments on the debt backing the investments.

Shareholders have to eat too, so dividend payouts, announced at shareholder’s meetings attended by mum and dad investors, stuffing after-match sausage rolls into their handbags, have been generous. BIL bridged this gap between income and expenses by selling assets and booking a capital gain.

That works fine when asset values are rising and there is liquidity in the balance sheet. But when asset values fall and cash dries up, as they did during the Asian upheaval, the sausage rolls turned rancid fast. First the dividend goes. Then the banks start sniffing around. So it was with BIL. The dividend was suspended and enough assets were sold to get bank debt and interest payments down to a sustainable level. Unfortunately, the company was in a hurry to sell and the most marketable assets were those, like Sky City and Fairfax, that paid good dividends. That concentrated the influence on BIL’s finances of the dogs — AsiaPower, Molokai Ranch, Vox. And dogs eat cash.

The SIA connection

Despite the asset sales and the new banking covenant, analysts say BIL is still barely cash flow positive. A one-cent dividend costs BIL $30 million. A two-and-a-half-cent payment would eat all the ordinary dividend income it received last year from its two largest assets, Thistle and Air New Zealand.

So the decision, purportedly at Quek’s behest, to reinstate dividend payments will, at best, hamper its ability to make new investments. At worst, it could put the company under renewed financial pressure.

Speculation is also rife about the Asian directors’ influence on Air New Zealand, which accounts for 23% of BIL’s assets. The airline owns half of Australia’s Ansett and has pre-emptive rights over the other half, which Singapore International Airlines wants to buy from News Corporation.

The Singapore government, through Temasek Holdings, holds 6% of BIL and has one of six board seats. It is also the major shareholder in SIA.

Cushing denies the Temasek representative has put any pressure on BIL directors to use their 42% Air New Zealand stake to veto exercise of the pre-emptive right. Nobody knows what Quek thinks.

Ansett’s profits are growing fast and there is a strong argument Air New Zealand should go it alone rather than become a junior partner of the giant SIA. If that is the right view then it should recommend itself to Quek, who will benefit indirectly through his BIL holding.

But there is a suspicion Camerlin’s close ties with the Singapore government and its investment agencies will ensure Camerlin’s two BIL directors will vote against an Ansett buy. And BIL’s three New Zealand directors will hardly want another boardroom fistfight to erupt.

Prickly Thistle

By far the most important issue for BIL remains the future of its investment in Thistle, which at $1.4 billion makes up 40% of assets. What does Quek think of it? Again, probably only Quek himself and his closest advisers really know. When reports of negotiations to sell Thistle surfaced last year he was reported to be in favour of keeping it. But when a deal with Japan’s Nomura fell through, he was rumoured to be furious.

He knows Thistle’s business well. Alongside a Singapore government representative he sits on the hotel group’s board. A Camerlin group company, Hong Leong, controls fellow British hotelier Millennium & Copthorne. Hong Leong recently backed its New Zealand and Asian hotel interests into Millennium, raising the possibility Quek will seek to take the increasingly profitable Thistle off BIL’s hands and fold it into Millennium.

To stay within banking ratios, much of the proceeds would have to be used to retire debt. If the remainder was used to make shrewd strategic investments at low prices, BIL’s shares could lift out of the doldrums. But that would depend on how Camerlin has weathered the downturn in its home markets. Part of the money would have come, via Millennium, from within Quek’s empire. A payout to shareholders of some or all of the remaining money would relieve Quek’s reported need for cash.

It would also send the strongest signal yet that BIL, far from being resurrected as an investment company, is undergoing a gradual wind-up.

As if to confirm all the above, the latest announcement from Brierley came from London. Why not from Wellington, New Zealand, where most of its shareholders and analysts live? Maybe it’s because Quek and the Temasek directors were over there taking stock of their British hotel interests. Now that Asia’s recovering, they are most likely looking to raise cash off the back of their highly valued investments.

At stake is the future of BIL: will it be a stand-alone strategic investor or a down-sized vulture fund? One of these will not lift the share price one bit.

AsiaPower

Why BIL’s Asia investment is a pup

Only a massive and sustained lift in the Indonesian economy can save BIL’s AsiaPower venture from a sticky end.

BIL pulled together AsiaPower in 1993 as part of its $700 million Asian splurge. The venture’s main asset is the Wayang Windou geothermal power station under construction in West Java.

Stage one was planned to come on stream last month. The power was to be sold to the Indonesian state retailer Perusahaan Listrik Negara under a 30-year contract priced at an initial seven US cents a kilowatt hour.

But the country’s political and economic upheavals have seen the rupiah lose 70% of its value against the US dollar, making the power prohibitively expensive, at least under the terms of the contract.

PLN, which is effectively bankrupt, announced in December that it would try to renegotiate its contracts with all the foreign-owned power projects building plants around the country. Its president director, Adhi Satriya, said the companies “need to look beyond their contracts and be flexible”.

The trouble for BIL and its partner Southpac is that the venture’s debt is also in US dollars, some 250 million of them, lent mostly by investment banks Credit Suisse First Boston and Deutsche Morgan Grenfell. It needs US dollars at the level set in its contract to pay the interest.

BIL is estimated to have sunk around $190 million into the project, but most analysts believe it is now worthless.

Could things get worse? Yes. Although the rupiah has stabilised recently, another collapse is feared.

Old money

Just who is BIL’s prestigious new partner?

The bargain hunters of Rothschild Inc are, says managing director Wilbur Ross, a “kind of amoeba who go off where the opportunity is”.

The New York-based company is jointly owned by its managers and the two main arms of the Rothschild empire, Britain’s NM Rothschild and France’s Rothschild & Cie. The group’s worldwide activities are run from one or another of its main centres. London, for instance, handles telecommunications and privatisations. Rothschild Inc handles “distress investing”.

Ross needs no prompting to chart the bank’s Asian track record. It opened in Tokyo 22 years ago and now has offices in all the main centres. It has substantial investments in Korea, Hong Kong, China, Singapore, Malaysia, Indonesia and India. A joint venture with investment bank ABN Amro is the leading book manager for equity offerings in the Asia Pacific region.

The vulture arm has operated in the region for only three years -— before that, Ross says, Asia was “too healthy” — and has generated an average internal rate of return of 26.4% a year.

Somewhat ironically, the distress investor picked up 2% of Brierley Investments’ shares while setting up the joint venture Asian Recovery Fund. Ross says the shares, bought in the low 40 cents range, looked very attractive against net asset backing of 70 cents plus. “We’d have been much happier to have a larger stake,” he says. “It just happened [the shares] started moving upwards in price before we accumulated a large position.”