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On the carpet

By Rebecca Macfie

Friday 14th October 2005

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It ought to have been a fairytale investment story: a well-loved, iconic Kiwi brand is repatriated back to New Zealand after years in the investment wilderness, rewards its loyal shareholders fat dividends, and everyone lives prosperously ever after.

Kiwi punters certainly liked the Feltex yarn: nearly 9,000 flocked to buy shares in the carpet maker's $254 million initial public offering in May last year, apparently excited by the prospect of owning stock in a company that was as much a part of New Zealand's heritage as the Buzzy Bee and the Edmonds Cookery Book.

But, 16 months on, the fairytale has been revealed as a farce. That $254 million investment is now worth less than $78 million, the share price having plummeted from the issue price of $1.70 to $0.52 in early September. In other words, over two-thirds of the market value of the company has been destroyed.

Not only that, but reputations have been scarred, careers derailed and the Kiwi icon welcomed home so warmly is now a sitting duck for a takeover. How did it all go so horribly wrong? Could anyone have seen it coming? Was the fairytale over-hyped, and those promises of happy-ever-after returns oversold?

But before we take a closer look at this sorry saga, it's helpful to have a quick run-down of the key players involved:

  • Credit Suisse First Boston Asian Merchant Partners: Part of the private equity wing of the Swiss conglomerate Credit Suisse Group. It bought Feltex from BTR Nylex in 1996 for $19.5 million. Last year's IPO allowed it to sell out of its Feltex investment after eight years of ownership.
  • Sam Magill: An Australian who served as CEO of Feltex from 2000 until August 2005, when his tenure was brought to a premature end (with the assistance of an undisclosed golden parachute). An old hand in the carpet industry, with 36 years in the trade.
  • Peter Thomas: CSFB' s man on the Feltex board and now acting CEO in the wake of Magill's departure. A Kiwi expat who lives in Australia, Thomas led CSFB's operations in Australia from 1983-96, and in New Zealand from 1990-94.
  • Tim Saunders: Feltex chairman since 2000 and a board member since 1997. An experienced member of the New Zealand financial community and professional director.
  • Forsyth Barr and First NZ Capital: Joint lead managers of the IPO, responsible for managing the process and marketing the company to investors. For this task they received $5.5 million in fees, as well as further undisclosed 'incentive' payments based on performance. First NZ also has strong links to Credit Suisse First Boston, having been formed out of what was CSFB's New Zealand operations in 2002.

Now we have the characters in place. Here's how the tale begins - with CSFB's decision to sell out of Feltex. In the private equity business, eight years is a long time to hold on to a single investment, so by 2004 CSFB was well overdue to exit (particularly as the original game plan was to quit after about five years). Insiders say from the time CSFB bought Feltex, Peter Thomas had harboured strong ambitions to return it to New Zealand ownership via a stock exchange listing.

By the time of the May 2004 IPO, Feltex had come through some tough times, but was profitable and was forecasting strong growth for the 2004 and 2005 financial years. Indeed, things appeared to be going relatively well immediately after the IPO - the 2004 result bettered the prospectus forecast, and the half-year result to December 2004 looked hunky-dory too, with the company assuring the market on February 23 that everything was on track to meet prospectus projections.

Then, boom - five weeks after telling the market that everything was going swimmingly, there was a dramatic and unexpected turnaround. On April 1, it announced that the carpet market had soured, and instead of the promised $23.9 million profit for the year to June 2005, it was more likely to be just $15-$16 million.

The share price fell off a cliff, immediately dropping in value by a third. Then, three months later, even more bad news - another profit downgrade, with the company by now expecting an end-of-year result of just $11.5-$12 million, and the share price taking yet another hit. Magill, formerly touted as a carpet industry hero, was now apparently regarded as part of the problem, with the company advising he'd be leaving Feltex at the end of this year. On top of that, there was a clean-out of senior executives and 42 managers were made redundant.

Eventually, in late August, the audited results were released showing a bottom line profit of $11.8 million - less than half of what was promised in the IPO. And the results made clear to shareholders that the core of the com-pany's problems were across the ditch where sales for the year fell 7.6%, whereas New Zealand remained strong, up 8.1%.

Instead of holding on to Magill until the end of the year, it was agreed that he'd step down immediately, with Thomas filling in until a new CEO is found.

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