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Hart gives three reasons for buying his capital notes

By Philip Macalister, ShareChat Business News Editor

Sunday 4th May 2003

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One of the criticisms of Burns Philp's takeover of Goodman Fielder was that it required a high level of debt to succeed, and consequently the risks escalated.

Hart says that Goodman and their advisers fed those comments into the public domain in the early days of the offer, but it "wasn't prevalent in the latter part."

He says the structure is in the middle of typical food company debt profile and that it's at the conservative end of a food company leveraged buyout using United States comparisons.

"In substance when (commentators and analysts) sat down and looked at the way we structured the debt, the cash flows of the organisation and the stability and predictability of those cash flows (because we are very diverse by both geography and businesses) everybody got quite comfortable with it."

Hart says the three key things to consider in the offer are:

1. The stability and predictability of the cash flows. He says food is a defensive business by its very nature and that Burns Philp has diversified its risk by geographic diversity in countries that have stable economic environments. Also the business is diversified across products from ingredients to fast moving consumer goods (FMCG) and consumer branded products. "You can be very confident that the cash flows predicted will come in, in a stable manner every day of the year. That is critical when you are looking at it as a debt investor."

2. Management. Hart says the business has a tremendously strong management team and its track record is good. Added to that it hasn't started improving the Goodman business beyond the $25 million it has cut in costs in the first four weeks of ownership. "We have only just started we haven't done much value adding yet."
"We have a good track record of getting businesses to the low end of the cost curve and the high end of the performance measures. And that's what we are going about doing."

3. Financial statistics. "We're not over-levered and we are not under-levered.
Besides those factors there are two others that stand out. One is Graeme Hart himself (and his business philosophy), the other is the company's brands.

Many consider Hart to be a risk taker and someone who might have got a few lucky breaks on his way to making a fortune. The reality is quite different. He has a simple, and maybe old-fashioned way of doing business, and a very clear strategy.

Just listen to him.

Hart: "It's funny because some people say 'Gee whiz you take lots of risk' and I say I don't take any risk mate."

The businesses he has been involved in from Government Printing, to Whitcoulls to Burns Philp, all have similar characteristics.

"They look like everyday predictable consumables," Hart says. "Whether you've used your pen and had to buy a new one, or eaten a loaf of bread and had to buy a new one.

"What I know is you are going to consume it everyday and come back for a new one."

Hart says the difference between Whitcoulls and Burns Philp is that he hit a ceiling with the former and couldn't grow any further.

"What I enjoy in the food business is that it's got very similar characteristics (to the other businesses) but I'm not hitting any glass ceilings I don't have a growth constraint as the sector is so much larger and you can operate on a global basis."

Some thought Hart was history when in June 1997 he bought a 20% stake in Burns Philp for $310 million then saw his investment shrink to a few tens of millions in a matter of weeks. Now after a lot of hard work and some smart restructuring Burns Philp has made Hart New Zealand's richest man by a big margin.

Was the Burns Philp turnaround and the successful takeover (against the odds) of Goodman Fielder part of some grand plan?
Hart: "I'd be cautious about saying it was all part of a grand plan but we went into the food sector with an intention of building a significant food group and that's what we are doing.

As the years tick by the group develops and evolves. And it's a fairly substantial group now."

When asked whether there were any reservations after Burns Philp stumbled five years ago he says: "Nah nah nah nah. Burns Philp when we got in there was exactly what we wanted in terms of the underlying food businesses. There were some surprises because they hadn't given everybody the facts on a number of points and we had to work that out but that didn't alter the fundamentals of what we were doing. We just got stuck in, worked it out and moved on."

He says there was a lot more noise about it than substance.

"People look back on it now and say you have done tremendously well and I don't really look at it that way. I say 'Hey, it's just all part of the continuum'".

"It doesn't matter whether you're a politician a sportsman or a journo, every so often you are going to have a bad hair day.
"Burns Philp was just part of a bad hair day," Hart says.

The other big factor behind the Goodman issue is that investors are getting to buy into a business which has everyday products across the bread and baked goods, breakfast cereals, nutritious snacks, cooking oils and margarine sector and includes top brands such as Bluebird, Meadow Lea, Ernest Adams, Edmonds, Quality Bakers, Freya's, Vogel 's, Irvines, Leaning Tower and Champion.

Hart says that having such brands and products provides investors with a "comfort factor".

At the end of the day the power of the brands and the association with New Zealand's richest man will make the Goodman Fielder offer look pretty attractive to retail investors. That's just what Hart wants.

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