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Debt boy's standoff - RMG versus Watson

Friday 4th August 2000

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Eric Watson doesn't smoke but he loves a good roll-up.

Previously he has bundled together office products companies to form Blue Star Group and retirement villages to form Eldercare. Now his latest amalgamation, RMG (Receivables Management Group), brings together 19 debt collection and associated companies on both sides of the Tasman, providing the first major competition for repo-dazzler Baycorp.

But unlike Watson's previous winners, RMG is so far proving a fizzer.

When RMG's formation was announced in April, Baycorp's share price fell heavily for the first time in years, from about $11 to $8.50. Okay, so markets everywhere were sliding, but Baycorp went down harder than most. The word was that RMG, in which Eric Watson's Cullen Investments holds 27%, would savage Baycorp's growth prospects; some commentators initially estimated up to half its debt collection earnings could end up in RMG's pocket.

Oooo-weee, the boy is hot, the markets breathed.

Then reality set in. After doing their homework, brokers like Merrill Lynch and ABN Amro announced "buy" recommendations on Baycorp, returning its shares to the seemingly inexorable rise, breaking the $12 mark in a matter of weeks. RMG's shares, on the other hand, are limping. A week after re-listing (RMG was backed into the previously listed Frontier Petroleum) the share price flattened at 33 cents, about what institutions paid in a pre-listing placement. As Unlimited goes to press, they're languishing at 38 cents.

"The [Baycorp] sell-off was a knee-jerk reaction", says one analyst. "People [eventually] realised RMG wasn't some big scary American company coming down here to shake up the market."

So it's neither a ball breaker, nor a spoiler. What is RMG?

On market capitalisation it's a mere shadow of its competitor: $185 million to Baycorp's $960 million. Turnover is more impressive: it's forecast to be $A57.5 million ($74 million) this year, compared to Baycorp's $51.8 million in 1999. The majority of that comes from RMG's Australian companies (Receivables Management Victoria, Receivables Management New South Wales and Laurens & Co) where it has 20% of the receivables management and debt collection market. In New Zealand RMG has about 12%, compared to Baycorp's estimated 50%.

While RMG's size will give it a competitive leg-up against Baycorp and Australian competitor Data Advantage, in the key receivables management market, its weak point is in credit information, where a big debtor database is essential. Baycorp has a near monopoly in credit information, especially in the corporate sector. So far that has made Baycorp a market darling. When first listed in 1995 with reported profits of $4.6 million, its shares traded at around 40 cents. Since then profits have risen to $13.4 million and the share price has kept in step, even after last year's two-for-one share split.

Of course, RMG reckons this is all under threat. Chief financial officer David McLaughlan exudes confidence about his company's ability to take on Baycorp and Data Advantage. "They'll find out shortly they have a very effective competitor in the Australian market," he warns. RMG is also working on its database and so will be able to be competitive in New Zealand, he says, though is reluctant to reveal too much. "We're confident we will have a product that will compare very well, both on quality and on price, with what Baycorp's got."

Analysts aren't so sure. "They fit into two very different parts of the market," says Ord Minnett's Blair Tallot. "Baycorp and Data Advantage are sitting in the major corporate and banking sector. RMG is sitting down in almost the corner-dairy level. They might dream about being at the same level, but the market quickly realised they aren't in direct competition."

True, in New Zealand, RMG's existing database, together with some third-party databases (from Pacific Retail Group, for example, another part of the Watson empire) will give the company the potential for a competitive product in the longer term. But, as Tallot says, "they are going to need a long time to replicate what Baycorp's got".

Baycorp's not feeling threatened either. Or so says strategy guru Paul Stewart. The way he sees it, nothing's changed, as the rolled up firms had already been operating on both sides of the Tasman. The two companies will simply share a growing market, he says.

RMG can do it

Even so the new company should be able to work off a lower cost base than its predecessors, and RMG's David McLaughlan denies that keeping on all the existing executives will jack up the overheads. "They each have a function to manage certain areas of the business," he says. "For example, Keith John [of Laurens & Munn] manages the business in Perth and has a high profile in that market. If Keith went we'd have to find someone to replace him."

RMG's new scale will allow it to do things the individual companies couldn't - for example, get into debt purchasing in a big way.

But why is the share price floundering? Bruce McKay, head of research at DF Mainland Securities, reckons investors are waiting to see if RMG can weld together 21 companies simultaneously, a goal that, at first glance, may be a recipe for disaster. McKay thinks it can be done. The vendors selling their businesses into RMG are being paid mainly with shares, meaning they will have a big incentive to make sure it works, he says. Almost all the executives concerned are staying on with RMG. And 65% of its revenue will come from the top three constituent firms, meaning the integration risk is far less than it appears. Also, he points out, RMG will be able to access the experience of Watson's Cullen Investments, which holds 27% of the new firm, in rolling up companies.

Moreover, the real opportunity is in Australia, where RMG's strength is. "At present receivables management companies in Australia are akin to ambulances standing at the bottom of the cliffs waiting for debtors' [revenue] to arrive," explains McKay. "The business model now being developed is to move from the bottom of the cliff to the top, working actively with the client in managing receivables, thus stopping debtors from falling off the cliff in the first place."

But if analysts think attacking Baycorp's 50% stake in New Zealand was tough, RMG's task in Aussie isn't easy either. Last September Baycorp got together with Data Advantage to form Alliance Group. Last month Commonwealth Bank of Australia took a one-third stake.

Alliance Group is concentrating solely on the highly fragmented but fast-growing debt collection and management market, and is already a major force. It's using the tried-and-tested Baycorp systems and its clients include Telstra (which also uses RMG and two other companies, but is rumoured to be thinking about giving an increasing percentage of its business to Alliance), six other telcos and, of course, Commonwealth Bank (CBA).

David Roberton, a Sydney-based analyst for UBS Warburg, isn't worried about Baycorp's position in Australia. He hasn't marked Baycorp's share price down since RMG arrived; in fact he's predicting it could rise to $14 - $15 over the next 12 months. RMG's main task in the short to medium term isn't battling with Baycorp, he says, it's moulding 19 separate businesses into a homogenous whole. Particularly when many of the former Australian companies are operating successfully with a regional, and largely small business/consumer, focus, and now have to become a nationally focused operation. "It's difficult to join businesses together," Roberton says. "You've got different cultures, different computer systems, different incentive packages." Only when the unification process is complete will anyone be able to tell if RMG will be serious national competition for Baycorp and Data Advantage.

Of course, once RMG is up and running, watch Watson turn his attention to the next roll-up. There are rumours he's working on a deal to buy Frontline Finance and roll it up with his existing finance interests. Roll, Eric, roll.

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