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Opinion: Goodman Fielder to make welcome return to NZX

By Simon Louisson of NZPA

Friday 16th December 2005

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The famous name has been reincarnated as a $A2.1 billion ($NZ2.3 billion) spin-off from billionaire Graeme Hart's Burns Philp, which took it over in 2003 and delisted it.

Burns Philp has kept the snack and cereals operations of the old GF while GF Mark II will incorporate the trans-Tasman bakeries and edible oil businesses together with the dairy operations of Hart's New Zealand Dairy Foods (NZDF).

Hart's team has by all accounts done a sterling job selling GF so the country's richest man will get a Christmas bonus in the hundreds of millions of dollars.

Australian media reported the key to the marketing success was that promoters Credit Suisse First Boston, UBS and Macquarie got three or four large foreign institutional investors on board.

These were not put off by GF's history of chronic underperformance and Australasian scepticism about Hart's reputation for squeezing every dollar from an asset before flicking it on.

Investors like GF's defensive qualities -- everyone buys food even in hard times, and recession seems increasingly probable after today's bleak ANZ National Bank business confidence survey.

So investors lined up for GF shares almost as if they were U2 tickets and the IPO went off at the top of the $A1.85-$A2.00 indicative range outlined in the prospectus. New Zealanders will pay $2.13 a share.

As well, Burns Philp, 54% owned by Hart, was able to offload 80% of GF -- also the top of the 70-80% target range.

Some comfort can be taken that Burns Philp will still have a $A530 million exposure to GF and is bound to hold its shares until 2007.

Fund manager John Norling of Alliance Capital expects the listing on Monday afternoon to go well, although the fact that Australia has had to absorb $A7 billion of IPOs this quarter may take the edge off demand.

Because local institutions were cool on the issue, they may be underweight and have to buy stock to match the 2% weighting GD will have in the NZSX-50 capital index.

The price set meant GF was sold at a multiple of 8.5 times prospective earnings which means GF will pay the same multiple for NZDF.

Hart will thus get a minimum of $612m for NZDF and the price could rise as high as $885m by June if the maximum projected cost savings and earnings growth at NZDF are effected by Hart's Rank Group.

Despite the top price being almost double what Hart paid Fonterra for the bulk of NZDF's assets just four months ago, most analysts think it fair, as does independent assessor Grant Samuel.

"You have to look at the price in the context of the current earnings power of the company," said Guy Elliffe, senior portfolio manager with AMP Capital.

Samuel admits in a detailed evaluation of the NZDF acquisition that analysis "is not straightforward".

It says NZDF is a sensible fit with GF's other businesses although you have to ask why the so-called synergies would not be much greater if the cereals and snacks businesses retained by Burns Philp were not all rolled into one company. Burns Philp looked at buying NZDF in 2003 and rejected it.

Samuel argues that the price paid for NZDF will be fair, otherwise the institutional analysts would reject GF shares. There is the added insurance that GF's share price was set by an institutional book build process, where institutions bid for blocks of shares.

If all the cost savings and earnings growth are effected as Rank plans, NZDF's annual earnings before interest, tax, depreciation and amortisation would rise from $89m to $103.6m. That would drive up NZDF's price to a whopping $885m.

If that price is fair, the 12,000 farmers who own Fonterra should be asking deep questions of their board about what value it is getting from its assets. Rank bought NZDF for $308m in 2000, half from Fonterra, which was virtually forced to sell as part of its establishment as a mega-cooperative.

Then in August, Fonterra paid Rank $754m for key NZDF assets, including Anchor milk and Fresh 'N Fruity yoghurts. In return, it sold Rank the Meadow Fresh, Tararua and the Kiwi smallgoods brands for $416m. Hart walked away with $310m in cash.

He and his henchmen have set to NZDF in the usual slash and burn they apply to all the businesses they buy, but even Samuel questions whether all cost cutting will be well worked out.

"There may be some concerns about the sustainability of the earnings and whether costs have been cut too much," it said in its assessment report.

It also noted Rank stood to make a substantial capital gain and "this may raise some concerns given that the bulk of the business was only recently acquired from Fonterra".

However, Samuel argued GF will pay no more nor less for NZDF than would be paid in an arm's length transaction.

"The relevant test for shareholders is whether the earnings are `real' (and the [profit] uplifts will need to be certified by Goodman Fielder's auditors, and what price investors in Goodman Fielder are prepared to pay, not whether Rank Group is making a quick turn," Samuel concluded.

Alliance's John Norling said GF's earnings projections look well locked in for 2005/6.

Although GF is projected to have good earnings growth over the next couple of years, mainly stemming from NZDF, it has mostly been paid to Burns Philp in the pricing of the issue.

Norling says GF is a "dull" stock that should have reliable yield -- 5.5% in 2005/6 and 6.8% in 2007.

AMP capital portfolio manager Guy Elliffe said the valuation placed on GF was "rational".

"It's not particularly cheap or particularly expensive -- somewhere in the middle."

The GF listing will in some way save face for NZX, which has to date had just two main board listings this year -- a pitiful performance when viewed against Australia. Some 171 companies have listed on the ASX, with over $A14 billion raised. And before NZX starts crowing about Monday's $A2 billion listing, let's not forget that GF is no more a New Zealand stock than Russell Crowe is Australian.

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