While Stephen Mayne was entirely correct in criticising PacBrands’ appalling disclosure regime after it eventually issued a profit warning a day after its shares tanked 6.8% (13 January, Item 2), of more concern for shareholders would be what was actually disclosed by the company.

In its belated announcement, PacBrands stated that first half EBIT would be between 2% and 5% less than the corresponding period last year. The poor result contrasts with what PacBrands noted on 22 August 2005, when it reported that “[O]ur brands have gained strong momentum and based on current market conditions are well positioned for profitable growth in FY2006.”

However, investors should not be surprised by the poor returns on their PacBrands investment, given that it was sold by a private equity house whose only aim would have been to maximise their return on investment.

Retail investors in PacBrands paid $2.50 per share way back in April 2004. If you invested $10,000 in the Pacific Brands at that time, your investment would now be worth $9,640 (plus $720 in dividends), equivalent to a total return of around 2% per year. By contrast, if you had simply whacked that same $10,000 in the broader market, that $10,000 would be worth almost $14,000 – an increase of more than 38%. Even a term deposit could earn an investor around 5%, more than double the return provided by the far riskier equity investment in PacBrands.

PacBrands’ appalling total shareholder returns prove the old adage, “never wrestle with a pig, you both get dirty, and the pig likes it.” Private equity companies like CVC Asia Pacific aren’t stupid. Investors can rest assured, if a private equity fund floats a company, like CVC did PacBrands, you can bet it will be fully priced.

In fact, a senior lawyer who advises private equity firms once told me that he would never invest in any float being conducted by a private equity firm. Investing in the float of a growing company can be very fruitful, so long as the owners of the company are floating because they need additional capital to fund profitable growth.

By contrast, a private equity company’s sole aim is almost always to maximise the value of their investment – raising capital is merely consequential. In fact, the PacBrands float was only about CVC realising its investment. The PacBrands prospectus noted that “the total gross proceeds of the offer [of] $1.22 billion…less an amount to cover the costs of the Offer, will be received by [CVC]…The Company will not retain any of the proceeds of the Offer, other than an amount to cover the costs.”

Apart from generally being exceptional business people, as the owner and manager of PacBrands, CVC would have had a detailed understanding of the business and its growth prospects. If CVC felt it was time to sell its holding in a public float, the chances are PacBrands growth prospects were limited (this has been borne out by the recent profit warning).

Here’s another adage, never invest in a company being floated by a private equity firm, because only one person will make any money, and it probably won’t be you.

Peter Fray

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