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A mixed investment bag

By Peter V O'Brien

Friday 13th June 2003

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The successful operation of an investment company is a combination of detailed analysis of potential acquisitions, the opportunity to add value to the investment and an ability to make opportunistic moves when available.

Five companies in the table had various mixes of the three in the past year and one ­ IT Capital ­ missed out on the lot. Share price changes were mixed, as shown.

BIL International benefited from an apparent battle between Asian investors to increase their holdings and market reaction to UK-based Thistle Hotels and becoming a subsidiary.

Dorchester Pacific is technically a financial services company but it is convenient to include it here in view of its diversified interests. The group has acquired or disposed of various subsidiaries in recent years and therefore qualifies under the definition of a "successful investment company."

It is inappropriate to include Dorchester in any consideration of registered banks and the massive demutualised insurance companies, now described as purveyors of financial services.

Dorchester's share price movement over the past 12 months was relatively modest at 9.1% but it was on the back of a substantial 36.2% gain the previous year.

The company has made its acquisitions wisely, following the key criterion that there must be the capacity to add value to any investment.

Companies come unstuck when they buy others at prices that leave no room to improve returns, a lesson often forgotten when people assume the acquisition will produce a gain in earnings.

There is no sense in paying "real" or "fair" value unless the buyer can add to value for its shareholders.

There is a view that owners of minor financial services' companies have an inflated idea of their values, particularly if they are privately owned. That comment also applies to industrial and service companies that are regularly canvassed for acquisition. It can be a catch-22.

The seller needs to expand and can sell for cash and/or shares in the buyer. Too high an asking price and resistance comes from the buyer, leaving the potential seller forced back to loan finance, some other capital source or stagnation.

Guinness Peat Group (GPG), under control of former Brierley Investments founder Sir Ron Brierley, knows about pricing and adding to shareholder value. That could be seen in the company's strategic position in Tower, ahead of the July 4 meeting to consider a share placement to GPG.

Institutional shareholders in Tower (a 2003 form of corporate incest) are unhappy (see Shoeshine, NBR, June 6) but shareholder support of less than 75% maintains the current situation and means GPG has to wait until September to increase its holding beyond the current cap.

The investment company obviously thought through the options, a process seemingly overlooked when the institutional shareholders took stakes in an ailing company. It is not be the first (or last) time GPG and Sir Ron developed a win-win scenario, a strategy perhaps foreign to protesting fund managers.

Hellaby Holdings was the most successful local investment company over the past year and in the preceding 12 months. A 40.8% price increase since June 2002 followed a 33.3% gain in the period from end-May 2001.

Hellaby is lean, as an investment company should be, relying on monitoring of subsidiaries' management and ensuring the parent company gets added value.

Infratil is in a different situation. It confines investment to utilities but has people with direct, hands-on experience of airport management and the electricity industry.

Investment companies' share price performance

Company Price Price Change 2003 2003

6.603 7.6.02 June 02-June 03 high low


--------------------------------------------------------------------------------

BIL International $0.77 $0.59 +30.5% $0.84 $0.41
Dorchester Pacific $1.58 $1.43 +9.1% $1.59 $1.35
GPG $1.49 $1.51 -1.3% $1.52 $1.26
Hellaby Holdings $3.83 $7.27 +40.8% $4.00 $3.12
Infratil $2.02 $1.93 -6.7% $2.08 $1.64
IT Capital 1.4c 5c -72.0% 2.8c 0.7c

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