Drilling for profits

By Fiona Rotherham

Monday 1st July 2002

Ross Investments is a cheeky little company that specialises in buying securities at discounted prices from companies in financial difficulty. But who is behind the company? Fiona Rotherham investigated and discovered, to her huge surprise, a retired Australian dentist.

BIL International didn't like it, but it couldn't do much when, earlier this year, the little-known Ross Investments made a cheeky offer to buy the $1 capital notes held by about 6000 BIL investors - for 61.5 cents each. BIL directors warned investors that Ross's deeply discounted offer didn't represent fair value. The capital notes were then trading on the stock exchange for between 88 and 90 cents. Brokers say they had ready buyers on the secondary market that would have given investors a much better return, even with brokerage added.

Still, some punters sold. A registry search shows the company now holds just over one million of the 186 million BIL capital notes due to mature in October next year, and a smattering of the later maturing notes. It may hold more under nominee companies.

Ross's bid preceded a return to profitability to the tune of $US5.1 million in BIL's half-year result, which could have changed noteholders' sentiment about selling.

The notes are now trading just above 90 cents each.

It was a cunning bid, worthy of a big investment company. Thing is, Ross Investments isn't a big investment company - or a big anything. Instead, the deals are the work of Australian-based Bob Ross, a retired dentist-turned-antique trader-cum-distressed stock buyer. Ross co-owns the New Zealand-based company with former Melbourne sharebroker Peter MacLaren and solely owns an associate company in Bendigo, Ross Investments Australia. Ross has been active in Australia for 20 years, and wheeling and dealing in New Zealand for more than a decade.

Over the years, his successes have included Trans Tasman Properties, Smiths City Group and NZ Rural Property Trust. His failures include Skellerup bonds, where Ross paid an estimated 5 cents per bond more than it recovered.

How does his cunning plan work? Not with insider knowledge, Ross says. Instead, he pores over annual reports and other financial information about companies that have gone under, are in trouble or out of favour with investors, and makes an educated guess on the distressed company's true worth.

Maybe a company has management problems that a leadership change will fix, or has over-extended on legal action likely to favour the company. In receiverships, the key is studying the debt structure, how much is available to divvy up among creditors and who has higher priority in the payout stakes. Ross chooses companies he thinks have hidden value and makes a discounted bid to small investors. He's gambling on the dividends paid by a receiver being higher than his offer. In troubled companies, he's banking on a share price lift.

Having picked the company, he makes an offer, hoping that people will sell out of their troubled investment well below its potential worth. Sellers often react emotionally to the fact the company is in trouble or are solicitors acting for estates of elderly investors, wanting a speedy exit and to save on brokerage. Ross avoids the possibility of ending up with too many shares it can't afford by not mailing the offer to the bigger holders and including an opt-out clause. "We don't know what we're going to get back in the hand. It's a bit of a gamble, but life's like that."

Win some, lose some

He doesn't always get it right. Out of every 10 offers, Ross reckons he loses money on a couple, five do okay and the rest make it worthwhile. He is deliberately vague on the details of his 20 to 30 New Zealand deals. Before the BIL offer, he made another last year for Trans Tasman Properties' ordinary shares at 17.1 cents a share, when the share price was 19 cents. That offer was mailed out to 4100 shareholders who held between 2000 and 10,000 shares. Ross accumulated just over 3.5 million shares - well under 1% of Trans Tasman's issued capital. The share price has since risen to 25 cents. Ross says it is still trading at a big discount to its real value and he's a long-term holder of the shares.

Ross Investments also profited from the recovery of Smiths City Group. In March 1996 it made an offer for the group's capital notes at 30.5 cents while they were trading at 35 to 40 cents each. The offer came prior to a capital repayment under the company's scheme of arrangement as it came out of receivership. Ross no longer holds any of the stock. Other forays include buying units in the NZ Rural Property Trust, which later recovered in price, and debentures in collapsed Christchurch company Burbery Finance, where after 14 years the receiver has just made final payouts, for a total return of 69.5 cents in the dollar.

One of Ross's first moves in New Zealand (as one of the partners behind another company, Melday Investments) was to buy Equiticorp debentures and stakes in other companies hit by the 1987 share market crash - AIC Merchant Finance, Investment Finance Corp, First City Finance and Crown Finance, for example.

The Independent newspaper reported that Melday initially spent $1.13 million on Equiticorp Holdings in May 1992, offering 7 cents in the dollar for stock with a face value of $16 million. Institutional debenture holders sold out in droves. Melday ended up competing for debentures with Ross when the New Zealand manager, Graham Wallace, parted company with the Australian owners and kept Melday. Ross Investments went on to make several more offers over the years and is estimated to hold over 10% of the Equiticorp debentures. Ross kept in close contact with the statutory manager, making sure he had the publicly available information that most shareholders didn't bother to ask for. Often Ross's offers were made just before a payout to debenture holders. The amount Ross offered diminished to 5.5 cents and then as low as 1.1 cents in the dollar last October, just ahead of a successful court action. Distributions paid amount to 88 cents in the dollar and the statutory manager says there will be a further final payout of 3 to 3.5 cents in the dollar. Once again, Ross is in the money - though it took many years.

"In this game, it can be a long time between drinks," says the philosophical Australian.

Fiona Rotherham
fiona@unlimited.net.nz

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