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Friends, Kiwis, countrymen, lend me your cash

By Shoeshine

Friday 9th May 2003

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Capital notes issues don't usually get a lot of air time in the business media. Last week's briefing for the Goodman Finance capital bonds issue hit the front pages only because Burns Philp deputy chairman Graeme Hart showed up.

The $175 million issue is hardly a big ask as these things go ­ Mighty River Power recently raised $200 million without visible effort ­ so the appearance of the normally media-indifferent Hart set tongues wagging.

The explanation probably lies in two of the charts he included in his PowerPoint presentation.

The first showed Burns' post-acquisition leverage, in terms of net debt to ebitda (earnings before interest, tax, depreciation, and amortisation), was 4.5 times

The chart set it in the middle of a range of 14 international food companies that goes from Kraft (2.2 times) to Premium Standard Farms (5.2 times). To comply with its senior bank funding agreement this has to be reduced to below 3.5 times by July 2006.

Hart didn't seem too worried. "I've been doing leveraged buyouts for years," he told the assembled hacks and brokers. "You know you're highly leveraged, you know you have to bring it down."

There's no reason as things stand to think he can't. The merged food group has strong and stable cashflows. It also has a far greater diversity of income streams ­ about 10, Hart reckoned ­ than did Burns Philp when it hit the skids in 1997.

At that time it had foolishly engaged in a price war with McCormick Foods, its much bigger rival in the herbs and spices world. Cashflows from the other division, yeast, saved the day.

Yeast's big rival, French group Lessafre, recently expanded into North America, Burns' biggest market, by buying Red Star yeast. Hopefully there won't be another price war but if there is it's just as well yeast is now part of a much bigger group.

Even so investors need to ask whether the 9.75% (9.95% on the eight years) coupon is adequate compensation for sitting below a mountain of senior debt. The group has assets of $A4.78 billion and liabilities of $A4.09 billion, so net assets are $A691 million. Including the $A1.2 billion of intangibles arising from the Goodman takeover, total intangibles are $A2.18 billion so it has negative equity of $A1.49 billion.

In February Burns raised $US210 million through a private placement of senior bonds priced at 10.75%. These rank behind the Australian and US bank loans but ahead of the New Zealand capital notes so you have to wonder why the local paper carries a lower coupon rate.

The other interesting slide showed the merged group ranked among New Zealand's top 10 listed companies by revenue and by ebitda. In both categories its comes second, after Telecom and ahead of Carter Holt Harvey.

At first glance this seems a strange thing to highlight. Even though it's 57.6% owned by a Kiwi, Burns is an Australian company and isn't even listed here.

Shoeshine's bet is that Hart's advisers, First NZ Capital, pointed out that 12,000 New Zealanders were until recently Goodman Fielder shareholders. That number probably reflects Goodman's New Zealand roots, the scale of its operations here and the high consumer visibility of its products. It's also a heck of a lot of potential Burns Philp shareholders with cash in their pockets and the opportunity to get them on board will be quickly lost.

The company will also build an investor base with the notes issue. And those noteholders may end up as shareholders too. The notes are convertible, at Burns' option, into Burns shares in 2008 and 2011.

Given the group's high leverage and the banks' requirement for rapid repayment, Burns has to be looking at a rights issue once the Goodman acquisition is bedded down. The more shareholders the better.

So it makes good sense to wheel out the charming (when he wants to be) and photogenic boss, New Zealand's richest man and a Kiwi made good over the Tasman. Expect to see more of him.

In the meantime income investors would be better off buying higher-quality rated bonds issued by the likes of Sky City, Fonterra or Fletcher Building. Those who want to follow Hart should hitch a ride by buying the shares.

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