Taking advantage of cheap capital John Durie Senior Writer/Columnist AUSTRALIAN JULY 08, 2014 THE reality of the global marketplace was underlined in three deals yesterday that should serve as a giant wake-up call to corporate Australia. The starting point, as noted by fund manager Mike Mangan from 2MG asset management, is that 56 per cent of the world economy lives under zero interest rates after global central banks cut rates 567 times in the past seven years and pumped $14 trillion into the global economy. The Netherlands is now enjoying the lowest interest rates for 500 years, which suggests that, yes, now is a great time to access capital but, yes, maybe we should worry about what happens next. Global capital markets are offering extraordinary opportunities for the clever and bold corporate boards wanting to create long-term sustainable value for their shareholders. Swap back into corporate Australia; yesterday Aristocrat’s Jamie Odell took advantage of the cheap money to make a $1.3 billion acquisition to more than treble his stock of US-based poker machines from 8200 to 28,400. The industry is consolidating. Rival Bally has bought SHFL Entertainment and Odell wants to be part of the game. The deal will be financed in part by a $375 million, UBS underwritten equity raising and the rest by US debt, which on paper at seven times earnings looks like a great deal. It is structured cleverly by including the goodwill on the deal in such a way that Odell gets 15 years of tax deductions to effectively reduce the deal multiple from 8.2 to seven times. Lesson one: Australia is a small market and if you want to expand in your sector then it must be offshore. This applies for all but a handful of Australian companies. Lesson two: global leaders are taking advantage of the cheap credit and expanding their market as shown by Expedia’s $703m acquisition of Wotif. The local founders Graeme Wood and Andrew Brice will pick up around $260m from this deal and have chosen almost the right time to sell the business on the back of their excellent brand and market position. Lesson three: restructuring troubled assets is a tough game and management, board and shareholders need patience. At Pacific Brands the board has moved straight to clean-up mode. Executive chairman Peter Bush has, in outgoing chief executive John Pollaers’ view, apparently effectively thrown in the towel and sometime might let us all into his game plan. Pollaers took on the job nearly two years ago believing the company had a future based on its top two brands, Bonds and Sheridan, and increased advertising and promotions to extend their sales growth. The board has other ideas. It is considering a range of options presented by Macquarie. Yesterday’s departure of Pollaers was a direct result of a dispute over the pace and means of the asset sell-off to be instigated as a result of the Macquarie review of the company. Bush must now let the market into his plans because, based on yesterday’s announcement, this stock is trading with the market fundamentally uninformed. Since its overhyped float in 2004, Pacific Brands has struggled to find its niche, in part because successive managements have over-estimated the power of the brands, but Pollaers was hoping to take a more measured long-term approach. His three to five-year turnaround plans have effectively been jettisoned by the board on the advice of the same Macquarie Capital that advised KKR on the failed bid for the company more than two years ago. Former boss Sue Morphet shut down manufacturing in 2009 with the loss of 1850 jobs and then changed the business from a category manager to a brand manager. A category manager dominates the category where a brand manager has, say, Bonds underwear at a time when key outlets such as Kmart dump the brand for a cheaper store brand product. Throw in currency, commodity prices and a weak discretionary consumer market and it’s a tough game. Just how advanced the plans are is a moot point, but Pollaers has moved before it is too late. Few would question his decision to walk now rather than preside over a piece-by-piece destruction of his own plans. Pollaers picked up $4.8m when he left Foster’s in 2011 after the SAB Miller takeover and, given he resigned yesterday, one assumes he will be entitled to six months’ pay or $700,000 on leaving.
Posted on: Tue, 08 Jul 2014 11:44:26 +0000
Trending Topics
Recently Viewed Topics
© 2015