Posts Tagged ‘private equity’

  • Private equity’s role in Blue Star break-up – Andy McCourt’s Reverb

    We’ve all seen the news – Blue Star Australia is back in the hands of Geoff and Paul Selig as Caxton Print Group, backed by Wolesley Private Equity, while across the ditch, it’s groundhog day for Tom Sturgess whose Tiri Group, backed by Mercury Capital, has acquired the NZ Blue Star operations. Andy McCourt (pictured) looks into the mysterious world of Private Equity funds and their decade of involvement in Australasian printing, and what the future may hold.

    A little over eight years ago, Print21 alerted the Australian Printing industry that “The Kiwis are Coming!”  Our Paul Revere moment foretold of New-Zealand-led raiding on long-established Australian printing businesses, starting with Merrit Madden (now inside Blue Star) and Graphic World (now inside GEON). The buyers were offering handsome leveraged buyout sums to ageing business owners with few or no succession ideas and ‘lazy balance sheets.’

    There were two progenitors of this activity and both had begun the roll-up of fragmented print businesses under one rationalized umbrella in New Zealand. Geoffrey Wilding’s Pacific Print Group, backed by ANZ Private Equity, had subsumed around seven NZ print businesses and Tom Sturgess, a director of Goldman Sachs JB Were PE (NZ) had rolled up the likes of Nicholson’s, McCollums and so forth, before striking out across the Tasman with the Merrit Madden buyout.

    These two were later followed by a third Kiwi-based PE fund; Knox Investment Partners who acquired Ligare Bookprinters and went on a buying spree of Southwood Press, Cactus Imaging, Omnigraphics, COS (Singapore), CanPrint and the reverse takeover of McPherson’s, which under the Opus Print Group banner delivered the only public listing of a PE-backed print group.

    Regrettably, since listing last April, the shares have bombed 88% from $1.76 to 21cents as of writing. Something must be worrying the market, not the least that Knox, as a foundation shareholder, immediately extracted $8.3 million from the float and Ligare co-founder Richard Celarc $2.5 million. In early January, up to $3.4 million of this was loaned back to Opus at 15 per cent interest; rising to 24 per cent should shareholders not approve its conversion to equity. Restructuring to reduce debt, with a focus on Asia, is underway according to CEO Cliff Brigstocke. Hopefully this will begin to restore shareholder value in what appears to be a well run print group.

    To cap it all off, Kiwi fund manager Maui Capital acquired paper merchants BJ Ball, Focus, Boomerang and CPI. The head of Maui is another ex-Goldman Sachs NZ man, Paul Chrystall.

    Private equity – a different kettle of fish

    The first thing I have learned about Private Equity Funding is that it is wheels within wheels, funds deal with funds, executives leave and start new PE ventures but still deal with their old employers and there is a significant sprinkling of Harvard MBAs and other highly qualified finance individuals whose job it is to generate significantly higher returns than can be earned at the bank, in government bonds, or on the stockmarket.

    The second thing I have learned is that everyday rules of accounting and legal corporate frameworks do not apply to PE funds. The accepted authority of accounting for PE funds, Mariya Stefanova, says in her seminal training work: “private equity accounting is unique and difficult to understand, at least at first, by accountants from outside of the asset class.”

    The third and most eye-opening lesson is that, by nature, the vast majority of PE funds are illiquid. They have little or no cash. They leverage small amounts of cash to gain massive results. Money comes in from ‘Limited Partner’ investors and this is used to buy businesses that can generate cash. Some PE funds are turn-around focused and invest in under-performing businesses to make them an attractive ‘exit’ following restructuring or IPO float. Others appear to use part of their portfolio as ‘cash cows’ – milking them for all they are worth and not caring what value is left at the exit point. NZ stockbroker Chris Lee has openly stated that Blue Star was ‘continuously milked for everything it had’ and ‘the brand was being destroyed instead of being saved and was directing cash flow to the directors and employees, while not honouring their obligations to bondholders.” Phew!

    Whatever the performance of component companies in a PE fund, the ultimate goal is to return a multiple on Limited Partners’ capital invested in the fund, generate fees for the PE management and ensure a healthy ‘carried interest’ capital gain, also for the fund managers or general partners. And this they do.

    Why New Zealand?

    Why did this phenomenon start in New Zealand? Well, a full possible explanation will be published in the February issue of Print21 magazine but one significant factor, apart from the recognized derring-do of Kiwi entrepreneurs, is that there is no capital gains tax there.

    The kicker is that the PE funds are allowed to class their ‘carry’ (proceeds from acquisitions) as capital gain and not income or profit to be taxed at corporate rates. Of course there are taxes on wages but most PE fund ‘Masters of the Universe’ would be unfortunate to pay taxes over 10 per cent of their total earnings.

    I can hear the screaming but this confession came from one of Europe’s leading PE fund Chairmen; Nicholas Ferguson formerly with SVG Private Equity (now has replaced James Murdoch as head of BskyB) who famously proclaimed in 2007, with genuine distaste, that he and other PE buyout barons: “pay less tax than a cleaning lady.”

    Let’s be clear, not all PE funds are run Gordon Gekko-style (film: Wall Street) by ‘barbarians’ (book: Barbarians at the Gate, about KKR’s hostile buyout of RJR Nabisco), and certainly not by the new hybrid PE + seasoned industry veterans back in the saddle at Blue Star; but PE does get very bad press all over the world.

    In Europe it has reached such a point that Vincenzo Morelli, a former head of the world’s largest PE/buyout firm TPG is now Chair of the European Private Equity and Venture Capital Association and is busy trying to polish up the industry’s image.

    Morelli sounds like a wise man, saying: “The (PE) industry needs to recognize it’s now too big and too important to operate below the radar screen. It has to recognize that it needs a societal licence to operate, an implicit licence that accrues as a result of recognition by broader society. We need to be more open and more proactive.”

    Amen to that. Trying to get any meaningful statements, with one exception, from PE types is like breaking the code of Omerta. Many PE fund managers are quick to complain that they are ‘misunderstood’ and ‘doing an essential job in the economy,’ but offer nothing by way of transparency, disclosure or detail other than the great returns they have delivered to their LP investors. They proclaim that self-regulation is the answer to rogue elements and asset-strippers who trash companies and cost thousands of jobs and millions of dollars in un-repayable debt. Sure, and biker gangs can self-regulate too!

    It all started with printing

    The very first PE deal that rocketed the LBO (Leveraged Buyout) game to fame was for a printing company in the USA – Gibson Greetings. In 1982, a former US Treasury Secretary William Simon bought Gibson for US$80 million but only put up around US$1 million of his group’s own cash. 18 months later, Gibson floated for US$260 million and Simon trousered a rumoured US$66 million.

    In Australia and New Zealand, the decade of PE fund dominance of large print groups has not necessarily ended but it has entered a secondary market phase where smaller, more focused PE firms such as Mercury Capital and Wolesley PE, in partnership with highly capable former owners, the Seligs and Tom Sturgess, are set to turn around the businesses and run them for profit and growth and not as cash cows. Sure they have bought cheap – in Kerry Packer/Alan Bond mode – but their businesses were successful and profitable before they sold them.

    Sturgess’s Tiri Group (which he bought from the Hauruki PE fund #1 when it was exited by Goldman Sachs JB Were), comprises several industrial units including Masport (lawn mowers and foundry), Pacific Wallcoverings (wallpaper), NZ Insulators (electrical), RH Freeman (sheet metal), Rapid Labels and others. His strategy is to let existing management run the businesses with advice and finance always available if and when needed. The acquired Blue Star NZ operations should be no exceptions.

    Wilding’s original Pacific Print Group, which morphed into today’s GEON, operated under the same principle – separate businesses and brands managed under an umbrella financial entity. The subsequent aggregation, consolidation and single brand strategy appears not to have worked, with shareholder and brand value decimated. KKR and Allegro Capital are now the masters since they own the GEON debt – purchased at a distressed discount from Lloyd’s. What the future holds there depends on KKR and Allegro.

    Tom Sturgess told Print21: “I’m not an apologist for the PE industry.” Read into that what you will, but for Blue Star and GEON debt and/or bondholders, there seems to be a lot to apologise for from some other quarters.

    Andy McCourt’s full investigation into the ‘PE Decade of Print’ appears in the February issue of Print21 magazine with some startling revelations, plus a ‘where are they now?’ rundown of PE movers and shakers from the passing parade. Don’t miss it.

  • One year on Blue Star NZ bondholders will lose the lot

    Investors in the New Zealand bonds (NZDX) of the troubled printing group are unlikely to see any return on their $105 million when the company is sold.

    Blue Star applied to the New Zealand Stock Exchange to de-list the capital and Participating Bonds in order to protect the integrity of its current sales process. The bonds will be removed from public view on 28 August. The de-listing stops any requirement for NZX reporting and Blue Star releasing an annual report.

    According to the company the bonds are now trading effectively at a nominal value, infrequently and on very low volumes. In a statement it said The Board now considers it unlikely that any value will attach to the Group’s NZDX listed bonds.

    The delisting is the final act in a slow train wreck for the bondholders who last year voted to split their holdings into two lots – one that would not pay interest until 2013 and the remainder, $37.5 million, that would never pay interest. The deal was framed as either that or the company would go broke.

    Under new CEO Phillip Bower, the group has hired Goldman Sachs to oversee a sale and likely break-up of the trans-Tasman printing enterprise. It is one of the largest companies in the industry with 13 production sites spread across Australia and NZ. The break-up process began with the sale of Rapid Labels last month to originator, Tom Sturgess.

    CHAMP Private Equity will lose hundreds of millions of dollars from its ill-fated investment. The US-based fund bought the company for NZ385 million in December 2006 with the intention of floating it on the Stock Exchange. Sales estimates now range between $100 and $150 million.