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Southern Capital morphs

Jenny Ruth

Friday 13th June 2003

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Jenny Ruth
Southern Capital is in the process of transforming itself from an investment vehicle, with all the unpredictability and lumpiness of profits which characterise such companies, into an industrial company with reasonable steady earnings.

Shareholders approved the first major step in May, the purchase of the 50% of Hirequip SCL didn't already own from Hirequip founder Stuart McKinlay in exchange for SCL shares worth $17.86 million. SCL bought its first 50% in August last year from GS Private Equity for $17.3 million.

SC: How did you come to invest in Hirequip in the first place?
SCL executive chairman Graeme Wong (pictured):
It was opportunistic. The main event prior to that was the liquidation of the New Zealand farms of Tasman Agriculture. We had more than our original investment returned to us within about six months and we were looking for another investment. We had some Dunedin connections and it's a Dunedin company. Trevor Scott, the other nominee joining Stuart on our board, is also chairman of Blis. (SCL owns 10.5% of Blis). In addition to that, we had seen that Projex had been purchased by Hirequip about 20 months beforehand. It used to be Air Hire Centre and Brierley used to own it - it came through the acquisition of Cable Price Downer. (Wong is a former Brierley executive). We (BRY) grew it and invested a little more in it and it ultimately went into Skellerup as part of the float in the mid-1990s. Buying Projex grew Hirequip from being purely South Island to nationwide and the largest hire company in New Zealand.

SC: What was your thinking then about how the investment in Hirequip would pan out?
GW:
We thought there might well be some other growth opportunities. At that stage, we were entering into a 50/50 partnership with Stuart. We subsequently started thinking about how we could grow the business together and we thought we could achieve common goals through the merger.

For Stuart it provided access to a greater capital base which he could only achieve by making it (Hirequip) public. This way he didn't need to sell any shares - he retains his investment by way of SCL shares.

He was happy to take exposure to our other assets. He thought they were reasonably valued. (SCL's reason for the merger was that even though its net asset value had continued to increase, its share price had been stagnant, reflecting unfriendly market sentiment.

Independent advisor PricewaterhouseCoopers valued SCL shares between 67 and 83 cents compared with a volume weighted 61 cents average on the share market over the previous 12 months.)

SC: Are you disappointed to have missed out on buying Hirepool? (After SCL walked away from negotiations saying owner Owens Group was asking too high a price for Hirepool, Owens sold it too a consortium including former Projex chief executive Tenby Powell for $46.6 million.)
GW:
Everyone makes their choice as to whether they're receiving the value they want and need from a commercial point of view.

We've always said we want to run a disciplined investment process. Some of our annual reports have gone to some lengths to explain to shareholders that if they don't see us doing anything, that might not be a bad thing. There are opportunities to grow, but we're not going to do that at any price.

SC: Were you getting bored with property developments?
GW:
We had always said when we formed SCL that we would look at a number of different investments.

In the early days, as time went by, we didn't find that many equities - the first one was Tasman Agriculture. We developed by opportunity rather than by design and we ended up doing more property. We never said to ourselves that we only wanted X% of our assets in property.

We tend to look at each investment as a free-standing transaction. We did take a decision that if we could find some sufficiently attractive equity investments, that we would seek those out and balance the portfolio a bit. We didn't have anything specific in mind. If we had found another land-based project that was outstanding, we might have done it.

SC: Have you decided whether to appeal the Environment Court decision declining the re-zoning to allow you to develop the Waimakariri Employment Park near Kaiapoi in Canterbury? What are the options if you don't appeal or if an appeal results in the same outcome?
GW:
Not yet. The land itself is saleable. It's attractively located and it's a nice piece of land. It has some subdivision potential within normal compliance.

I don't want to get unduly fixated by the fact that we've been doing this for five years. It's time to stand back now. Just because you've spent five years on it, doesn't mean you can't put your mind to something else.

SC: How long is it likely to take for SCL to exit its other investments?
GW:
We're now putting together a business plan and will evaluate each asset separately as to what's an attractive time to realise each one in a way that adds the most value.

A lot of that has to do with what else we can use the money for as well. If we have nothing to buy tomorrow, you may well be tempted to add as much value as you can over a more prudent time frame.

While we're looking at a range of opportunities (to add value to Hirequip), there's nothing that's going to pop out of the woodwork that's going to require the type of funding that buying Hirepool would have needed.

SC: What about the SCL stakes in biotech companies?
GW:
Most people tend to generalise and put them all in the one basket. They're clearly not part of a hire equipment scenario. There may be a number of possibilities which don't necessarily mean they will have reached final maturity.

SC: What about your future? Is the Hirequip deal part of a fazed retirement plan? (Wong is 46.)
GW:
There's quite a lot of work to do to manage through a lot of the SCL assets. It's not a five minute job. Probably 18 months to two years - I think that would be a reasonable target to have completed an orderly realisation of some of those investments.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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