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D-day dogs Brierley

By Roger Armstrong

Saturday 1st December 2001

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BIL needs to repay or refinance a $US600 million loan next June. Where will the money come from, asks Roger Armstrong.

No matter how many self-improvement programmes Brierley Investments puts itself through - new management, new board, adoption of EVA, move to Singapore - the results are the same: more misery for shareholders.

Although the investment company is not owned by any New Zealand institutional investors, 90,000-odd unfortunate individuals own shares or capital notes.

That such a dog of a share has been the most widely owned in the market (it had 180,000 shareholders in the late 80s) is an ongoing bad advertisement for the New Zealand share market.

For those of you who missed it, Brierley had a capital reconstruction this year, whereby each shareholder got one new share for every two old ones. The 32 cents each share currently trades at is equivalent to 16 cents for each old share, down from a peak of around $8 back in the mad 80s.

What has caused this huge loss of value? Brierley has been badly burned by its concentration of investments in the tourism sector. Bad luck, to be sure (foot and mouth disease, the Fiji coup, then the September 11 terrorist attacks), but diversification is a simple concept understood by most amateur investors.

Non-diversification can be added to the list of past documented disasters: buying Thistle Hotels, guiding Air New Zealand into the Ansett debacle, regular currency losses, the $US193 million total writeoff of the Asia Power Indonesian power project after the Asian crash, continuing huge overheads, and getting into the "e-thing" at the arse end of the boom (BIL allocated $US100m to technology investments late last year).

After years of stumbling along, top managers drawing $1 million salaries, shareholders getting an annual thumping, Brierley is fast approaching its D-Day in July 2002. At this time, Brierley either has to repay or refinance a $US600 million loan. With the company arguably hugely over-geared, I believe the bankers will be reluctant to renew the loan. That would mean Brierley will have to find most, if not all, of this large sum from its own pocket.

It is a much tougher test than that imposed by the 87 share market crash, when the quality of Brierley's investment portfolio was, in my opinion, far superior to that currently owned.

Things look a whole lot worse for BIL's assets if you compare how they looked last June, then adjust them for the savage downward movement in tourism company share prices since September 11, as well as for a perceived overvaluation of some of its unlisted investments (see table).

It's hardly inspiring stuff for shareholders.

The net worth as suggested by this restated balance sheet coincides roughly with the company's current share price. An estimated net worth of $US180–200 million, versus debt of over $US500 million, must be giving management and the company's bankers more than a few sleepless nights.

For a company like Brierley, I would say net debt of no more than half its net worth is appropriate. It is no wonder that interest rates on Brierley's traded corporate debt (capital notes) have now hit 20%, way above what most others trade at.


What to do?

Following last year's sale of its James Hardie stake for a respectable $A234 million profit, Brierley Investments has no more aces up its sleeves. Arguably, it has a handful of low clubs. Its portfolio is increasingly illiquid, with all its easy-to-sell, high-quality assets already sold.

The Molokai Ranch land holdings in Hawaii has been a financial black hole for years, with huge regulatory impediments to development that make New Zealand's Resource Management Act look developer-friendly. The ranch has been a hard asset to move for many years, but will be especially so now given the global downturn in tourism and the slowing of the US economy.

Brierley has tried and failed to sell Thistle Hotels through a trade sale. In today's climate it would be even more difficult, with most international tourism operators retrenching and hoarding cash rather than expanding through acquisitions. The institutions might buy Brierley's shareholding but, I suspect, only at a 20% (or more) discount to the market price.

Such a whopping discount on sale would take another nine cents off Brierley's net worth, illustrating the problem inherent in being an anxious seller.

Ironically, Brierley's Air New Zealand shares are more saleable now that they are worth less - but probably only at under net asset backing (around 20 cents by the time you factor in the coming year's loss) rather than the 30 cent level at which the shares currently trade.

Sure, Denerau Island is a nice place to go on holiday, but who would buy tourism-based land in Fiji right now?

That leaves Singapore-based Fraser and Neave, in which Brierley has an 11% stake. This is a conglomerate, probably ripe for breakup, but has Brierley got the spare cash to buy control?

Since September 11, I suspect Brierley management is looking to conserve cash, knowing the Thistle share price and Air New Zealand's near collapse has damaged the company's worth and the attitude of bankers. And Brierley can't rely on rolling over any debt in the current world climate.

That would mean finding the $US118 million of debt due during this financial year and the $US600 million due in July 2002 from its own coffers. Plus the estimated annual $US30-odd million cash flow deficit likely from running the head office and paying interest over and above dividends received.

In total, that's $US750 million of cash to find. With $US525 million cash on hand last June that may not seem too much of a stretch - until you need to allow for some minor expenditure on Fraser and Neave shares since balance date, and the fact that Brierley would probably always want to keep at least $US100 million cash on hand.

By my calculations, if Brierley doesn't want to behold itself to the banks in July next year, it should sell assets worth about $US300 million this year. Even if it sells the Fraser and Neave stake, all of its "other" listed investments and its Air New Zealand shares, the company will still fall a little short of that target.

The banks might be persuaded to roll over a small portion of the $US600 million, but one thing is sure: Brierley is hamstrung. To ensure survival it can't make any significant investments in anything but the most liquid of assets. As it sells down its remaining liquid investments, the resultant rump of the portfolio will become increasingly illiquid and of debatable quality.

The next meaningful scheduled debt repayment a year later, while not anywhere near as large as July 2002, may become just as challenging. All it would take is another shock to world financial markets or world tourism and mere survival is on the cards.

Brierley's 90,000 shareholders deserve a break, but it's hard to see where it will come from.

Roger Armstrong
finn.ltd@ihug.net.nz



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