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2005 Review: Investors took Graeme Hart as their pacemaker in 2005

By Simon Louisson of NZPA

Tuesday 20th December 2005

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Graeme Hart was the pacemaker for New Zealand investors in 2005.

Already the country's richest man, he pulled off a trifecta of deals that stunned investors with their audacity and seemed set to add to his wealth.

The first leg involved his NZ Dairy Foods (NZDF) swapping brands with Fonterra to net him more than the $310 million he paid for NZDF in the first place.

Then he loomed from left field to snare control of Carter Holt Harvey before launching a $3.3 billion full takeover - the biggest in New Zealand history.

The last leg was the end-of-year spin-off of Goodman Fielder by Burns Philp (54% controlled by Hart), for over $2 billion plus the sale into the float of the remnants of NZDF for a staggering $800-900m.

Taking heart from Hart's gambles, New Zealand investors behaved during the year like the captain of the Titanic - steaming on regardless of looming fog and icebergs that could lead to a sinking.

The benchmark sharemarket index built on two years of 25% leaps with a further 8% rise to leave it nearly 70% higher than its inception less than three years ago.

House prices have had equally spectacular gains, up another 15% this year as investors defied repeated, and increasingly shrill warnings from Reserve Bank Governor Alan Bollard.

While the New Zealand dollar has restricted its gains against a resurgent US dollar, its trade-weighted index has nevertheless risen 6% to hit its highest level since it was floated in 1985.

The icebergs looming through the fog include a slump in business confidence to 18-year lows as the effects of the higher dollar, fuel prices and interest rates begin to bite.

Bollard has had to ignore all this to jack official interest rates up three more times this year to try to contain inflation that is running away at 3.4%.

Rising house prices, the strong currency and unemployment dropping to a 23-year low have powered a domestic spend-up that in turn has fuelled inflation.

Bollard has been at wits' end, knowing high interest rates are killing the real economy.

But the fact that 80% of mortgages are fixed, and that banks and finance houses have funded cheap finance from offshore, has rendered the governor virtually impotent.

The central bank and Treasury have resorted to looking for "tools" beyond the interest rate sledge hammer that might help the bank contain inflation more effectively without flooring the real economy. Private sector economists have scorned such ideas as reviving the spectre of Muldoonist interventionism.

The low unemployment and booming domestic economy have left Government coffers awash - nearly $9 billion in surplus in the 2004/5 year and $5.9b projected for next year, despite a plethora of promises made during an election where each party attempted to outbid the other.

Treasury was prompted to counsel the Government to cut taxes, much to the joy of the National Party, but Finance Minister Michael Cullen dismissed the advice as an "ideological burp".

Meanwhile, New Zealand's deficit with the outside world has swollen to King Kong proportions. It is projected to hit a staggering 9% of GDP by the end of the year.

Nearly half of the expected $14 billion current account shortfall is from a trade deficit that has hit record proportions despite commodity prices making 30-year highs mid-year.

These external deficits are likely to swell further as commodity prices come off and the effects of the huge rise in oil prices bites.

It can be argued the economic messages are mixed, but most indicators have turned negative, some in scary fashion. So why hasn't the sharemarket, supposedly a forward-looking beast, turned down? The answer is mergers and acquisition (m&a) activity.

A string of big and lesser names have disappeared from the stock exchange board as a result. These included Independent Newspapers, Ports of Auckland, NGC, Williams & Kettle, Pyne Gould Guinness, Owens Group, Urbus and Evergreen. Other takeover targets likely to go soon include Carter, Holt, Metlifecare, Capital Properties and Mike Pero.

The story that generated most copy was the battle between Delegat's Wine and entrepreneur Peter Yealands for control of Oyster Bay Marlborough Vineyards.

It had more twists than Desperate Housewives and shareholders sat back to enjoy the protagonists outbid each other. Delegat's appeared to have won with a $4/share bid, but the bid was declared void by the High Court on the Takeovers Panel's urging. A Christmas truce was declared when Delegat's offered $6 per share.

Fonterra's bid for Australia's National Foods, while not as entertaining, had almost as many turns, and in the end the dairy giant lost out to Philippines company San Miguel.

The exchange lost another potentially strong stock when the New Zealand assets of Foodlands, including supermarket chains Foodtown, Countdown and Woolworths, were sold to Australia's Woolworths for $2.7 billion instead of being listed as a separate vehicle.

Apart from the $600m IPO from the privatisation of a quarter of Vector, and Goodman Fielder, the only truly new main board listing in 2005 was Allied Workforce, which raised just $14m.

It is a dreadful track record, following on from one almost as bad last year. Compare that to Australia, which had 141 IPOs up to the end of November raising nearly $A20 billion ($NZ21.56b).

The dearth here is a deeply worrying sign for NZX and the country. The exchange is a vital vehicle for raising new capital - a function it is clearly failing at. The market's capitalisation has dropped $2 billion this year.

NZX chief executive Mark Weldon blamed concerns about the exchange rate, possible hard landings and even the bustle of m&a activity that is consuming the time of a limited pool of merchant bankers.

The probable delisting of Carter Holt early next year will slash another $3.3 billion off NZX's capitalisation.

Weldon will be relieved a trade sale of Goodman Fielder fell through at the 11th hour and the Australian company has been dual listed here.

Hart's sales of the Anchor and Fresh 'n Fruity brands, NZDF to Goodman Fielder will be money in the bank, while the purchase of Carter Holt continued his progress of taking ever-bigger risks.

"Business is my passion," the one-time tow firm operator said.

"The money really doesn't matter so much as the enjoyment I get. The reason I get out of bed is I love what I do and the day I stop is the day I stop enjoying myself."

It's easier to say that when you have a few million, or billion, salted away. Most of us have a lot less security and will be hoping the economy and markets avoid the looming rocks and icebergs in 2006.

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