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Opinion: Graeme Hart cooks up bread and butter offering

By Simon Louisson of NZPA

Friday 30th September 2005

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The country's wealthiest person, Graeme Hart, is media shy but lately can't keep out of the news.

In the past couple of months he has reeled off three deals, each of which has stunned commentators in their audaciousness and the prospect of huge additional financial benefits for the double billionaire.

In August, his Rank Group pulled off a deal where its NZ Dairy Foods (NZDF) swapped brands with Fonterra, netting Hart $338 million, $28m more than Rank paid for the entire company three years earlier.

A few weeks later, he emerged from left field to snatch control of New Zealand's biggest forest products company, Carter Holt Harvey. He paid $1.65 billion for International Paper's 51% stake, triggering a full takeover offer at $2.50/share for the rest - an offer few shareholders look likely to accept as they coat-tail Mr Hart.

Yesterday, came the third big play - getting his 54% owned Burns Philp (BP) to spin off the bread, oils and spreads assets of Goodman Fielder (GF) into a separate company to be relisted on the ASX and NZX.

As part of that deal, GF, one of the biggest names in Australasian corporate history, will buy NZDF, the country's second largest dairy products company, for a yet to be disclosed sum.

BP will retain GF's snacks business including premium brands such as Uncle Toby's and Le Snak and Bluebird and about 30% of GF.

Over the years, Hart, the 50 year-old former tow truck operator, has pulled off a series of risky, and increasingly big takeovers, beginning with Government Print and Whitcoulls.

He is known for his meticulous planning, risk-taking, tenacity and flashes of extraordinary luck.

His modus operandi is to buy non performing assets and wield the axe to improve returns. The result of his work could be seen this week with the closure of Mainland Products' Meadow Fresh yoghurt plant in Christchurch with the loss of 50 jobs, and 115 jobs lost at Carter Holt's Rainbow Mountain sawmill in Rotorua.

In, 1997, he spent most his then fortune, some $A260m, to buy 19.9% of BP, only to find a big hole in its earnings. In an oft-recounted story, the shares plunged from $A2.45 to 3.4c before he turned the herbs and spice company around to the extent that in 2003 it could takeover GF for $2.5 billion.

So what do we make of Hart's latest move?

The stock exchange will benefit from a big new listing that is likely to raise over $1 billion in an IPO. GF will have assets of around $A3.2 billion and be capitalised at around $2.15 billion - not far shy of what BP originally paid for it.

The GF businesses generated sales of around $A2 billion and had earnings before interest, tax, depreciation and amortisation (ebitda) of almost $A300m last year.

Rank is likely to be paid around $525-635m for NZDF.

BP, which sold its US yeast and spice businesses last year for $1.9 billion, will essentially be left with the remaining GF brands plus a strong balance sheet after repaying $US820m ($NZ1.20 billion) of junk bonds used to fund the GF purchase.

It will be a cashed up predator ready to pounce on some major new acquisition or, if it fails to find a suitable target, could flick those tasty assets. They are valued at $A513m and generated ebitda of $A118m last year.

Tom Degnan, BP's managing director and Hart's right hand man and hatchet wielder, said this week's deal had nothing to do with the need to raise cash to fund the Carter Holt deal.

Analysts doubt that, given Carter Holt's size.

He said the rationale for the spinning off GF was that BP had added as much value as it could through cost reductions. His axe started one week after purchase with 500 head office and went on to slash dozens of mills.

Degnan said marrying GF and NZDF would create "synergies", although analysts question the efficiencies of putting dry groceries with chilled products. He also foresees economies of scale.

Analysts said the new GF will be steady earner with limited growth prospects - essentially a good yielding stock that may hold its value in troubled times. After all every needs to buy bread and butter.

While the price GF will pay for NZDF has not been announced, Hart has agreed to sell it for the same price-earnings multiple as achieved for the GF float. That means Hart will not get a control premium and is designed to counter cynicism that Rank has received special treatment.

Macquarie Equities investment director Arthur Lim says the IPO will go well as there are no other major food companies in Australasia.

"If Burns Philp and Hart have little presence left in Goodman Fielder, it might not be a very appealing float, but if he leaves enough skin on the table, it could prove attractive."

In the latter case, BP shareholders may well take up their preferential entitlements.

Lim said BP has a big following of retail investors in New Zealand, who like investing with Hart. Those who originally went with Hart into BP are still behind, but those who invested later have done well.

Lim said there will be an institutional book-build to price the GF float, which means it will be well scrutinised.

"It will be a stable, cashflow type entity that provides a good yield, and therein lies the rub - people who follow Graeme Hart are in there for the capital growth and for the excitement factor.

"This is quite a different beast altogether. The end result may be that a different profile of investor emerges to buy Goodman Fielder."

Those wanting excitement and growth, but are willing to wait for a dividend may be better off investing in Carter Holt. A lot of smart money has already gone that way, including Montana wines founder Peter Masfern.

Lim said the Australian media and commentators have always been grudging and sceptical of Hart.

"I have yet to see an article that even attempts to be objective about him."

They claim he has simply been lucky.

"If he was an Australian who has done what he had done, he would be up there with Kerry Packer and Rupert Murdoch."

Lim said investors should admire Hart who, unlike a lot of so-called entrepreneurs, had created wealth not just himself, but for minority shareholders.

"It's great that we have a real live New Zealand entrepreneur with a track record of creating value as opposed to the nonsensical entrepreneurs we have had in the past who have used sleight-of-hand to create value for themselves but nothing for anyone else."

"People who have been on Hart's coat-tails have done very, very, very well."

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