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Weldon's wish list

By Frances Martin

Tuesday 1st October 2002

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As you'd expect from a former Olympic swimmer, new Stock Exchange boss Mark Weldon is good at setting goals. And, as you'd expect from a former US-based attorney and McKinsey manager, he's not afraid of stirring up a bit of controversy to achieve them.

A Kiwi who's returned from the US to head the exchange, Weldon is out to revitalise the New Zealand Stock Exchange - which has been criticised for, among other things, not having enough big or fast-growing companies.

Though he's just weeks into the job, Weldon has already created waves with the introduction of the new AX market. The AX replaces the not-so-old but largely moribund New Capital Market and the unregulated unlisted market. Weldon's stated aim: 50 companies and $250 million in raised capital in two years. He's drawn up a wish-list of successful private firms and put together a strategy for wooing them onto one of the two markets on the exchange. He's not giving anyone a peek at the list, though he's given big hints about who's on it. "We'd love to get more growth stocks - small biotech companies, for example - because they are going to be the growth engine of this country." Other contenders include some of New Zealand's many big cooperatives and dynamic family-owned companies.

You don't have to be a rocket scientist to fill in the blanks. Our largest company, farmer-owned cooperative Fonterra, must be on the list, as must Todd Corporation, the investment vehicle of New Zealand's richest family, the Todds. Fonterra's ownership structure currently prevents listing, but Weldon has come up with some clever ideas to accommodate this. More on that later.

There's also a long list of small but fast-growing private companies he'd love to get his hands on. Unlimited's educated guesses include Pulse Data, the Christchurch developer of electronic aids for the blind that averaged 43% growth in the three years to 2001, and Atlantis Group, the Auckland database company that turned in revenue growth of 414.6% over the same three years. Multimillion-dollar outdoor clothing companies Snowy Peak, Icebreaker and Kathmandu could be contenders, as could kid's gear specialist Pumpkin Patch. Then there's upmarket office furniture-maker Formway, which just won the furniture equivalent of an Oscar for its "Life" chair. Or how about car sales company Giltrap Group and fibre-optic cable-layer CitiLink?

Weldon will also want to plug gaps where the exchange fails to represent important sectors of the economy. "If we look at the composition of New Zealand's gross domestic product, the glaring omissions are the dairy, tourism and property sectors," says John Owen, head of retail financial services in New Zealand for investment advisory firm Macquarie. Plugging these gaps is important, he says, because when overseas fund managers invest here, they chase sectors where we have competitive advantages. Perhaps tourism player KiwiCar Rentals, which grew 81% in 2001? But Owen's not just talking about the big boys. Some overseas funds managers enquire about opportunities in niche areas like our blossoming yacht-building industry, he says. Again, there's no shortage of good-looking candidates. Marex - the New Zealand Marine Export Group - says its members are growing their businesses at an average of 22% a year.

While not all investors are going to be wooed by small companies, Chris Wozniak, chief investment officer at AMP Henderson, says small can be beautiful. The average listed Kiwi company has produced better returns for investors than the returns produced either by the NZSE40 or by the Morgan Stanley Capital Index - the most closely watched benchmark of the performance of world share markets (see graph). "Rather than exposure to sectors that are large, investors should prefer exposure to sectors that are successful - for example, consultancy and professional services," Wozniak says.

By world standards, New Zealand has an unusually high number of unlisted companies - family businesses, cooperatives and foreign-owned companies. As a result, our share market is only a third the size of Australia's or the US's, relative to gross domestic product. But the trouble with being a privately held company, Weldon argues, is that your options for accessing capital tend to be more expensive, stunting your growth. "So we've got a lot of small companies growing at 1%-2% a year. But what this country needs to propel economic growth is companies that are really going to have a crack at doubling or trebling revenue."

It's easy to pick holes in this argument by, say, pointing out that the privately owned companies mentioned above haven't done too badly, especially when compared with the growth performance of the NZSE40. That said, the generally held view is that raising money from shareholders is a cheaper way to grow than borrowing from banks or other sources.

More importantly, Weldon seems to be trying to teach the exchange and the wider broker community a lesson known to all good marketers: if people don't like your product, you want to think about changing the product. Hence the AX, designed to appeal, according to the exchange, to two separate groups - small and medium-sized growth companies worth $5 million or more, and larger, less-traditional companies like cooperatives. "We have to recognise the particularities of this economy and of the structure of the companies in it, including cooperatives or family-held companies," Weldon says. "To that end, we're going to try to facilitate the listing of non-voting or restricted stocks." This would allow private companies to test the water without fear of being taken over or losing control. "There's something to be said for listing non-voting or restricted stock as a way of providing transparency, pricing quality and liquidity without necessarily diluting ownership," Weldon says. Listing could allow the 20,000 shareholders of a sheep cooperative, for example, to establish an independent value for the shares, making them easier to sell and possibly increasing their value. And the biggest prize of all - the model would be a way to lure Fonterra onto the exchange.

So would these toe-in-the-water listing options appeal to private companies? "Yes, maybe," says Bill Day, founder of Wellington marine contracting firm Seaworks. "I've probably got a cultural aversion to the disciplines required in being a public company - at Seaworks there's no separation of ownership and management so we don't have to waste energy reporting to the board. But that structure has limits and if the market was able to come up with something that overcame my prejudices I'd be interested."

Selling the idea to brokers and investors mightn't be easy, however. "Non-voting securities are fraught with problems," says Macquarie's Owen. "At the outset people say they don't care about the lack of voting power, they just want the investment. Then when things go wrong they discover they have no power to change things. Go talk to a bondholder who's been through that experience and see what they think." Owen is much keener on another Weldon idea - encouraging private companies to join the exchange by listing hybrid investments mixing debt and equity. These hybrids are common in Australia; an example being the Coles Myer Reset convertible preference shares. Aussie companies like reset stocks because it looks like equity on their balance sheets and is a cost-effective way of raising money. Investors like it because it looks like debt and generally carries a high tax-paid dividend.

A rare example of this type of investment in New Zealand is the Wilson & Horton preference shares, where investors can be repaid in cash or take shares in the publisher's Irish owner. Rival publisher INL has also issued preference shares that have gone down well with investors.

No doubt these options will be discussed at a series of industry-specific seminars the exchange is planning to promote the benefits of listing. If nothing else, the private companies that attend are likely to be impressed by Weldon's enthusiasm and determination. And maybe, just maybe, one or two of his wishes will come true before Christmas.

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