You think The Australian Financial Review would have learnt by now that the phrase “private equity to bid” is no indication of news, or quality in a story. There needs to be more when revealing a market raid or thrust. The capabilities of the supposed bidder or bidders have to be assessed, their track record and ability to generate value for investors, probed and tallied.
Take this morning’s breathless story on page one (an exclusive, according to the paper) that Pacific Equity Partners “is finalising a takeover proposal with as much as $700 million for Melbourne-based industrial company, Spotless Ltd.”
The paper also reported without noticing the irony: “It is understood Pacific Equity Partners was last night finalising the details of its proposal and preparing to inform the Spotless board and management of its intentions as early as tomorrow or Thursday”. Well, the Spotless board and management have been effectively advised of the group’s intentions courtesy of the front page of the AFR, and the Chanticleer column on the back page.
But nowhere in the story and commentary was any admission whatsoever that Pacific Equity Partner’s track record this year has been spotty, to say the least, that its ability to generate returns for investors, both of its own, and those who buy into its offers, has been weak and questionable.
No mention of the terrible collapse earlier this year of book sellers, Borders and Angus & Robertson and the loss of 2500 jobs, and untold millions of dollars, especially by those who had bought Borders’ vouchers and were forced to spend more money to get them honoured. Whitcoulls in New Zealand and a newsagency chain and calendar business were also shut.
The trend towards internet buying, weak retail sales and cautious consumers were all blamed. But Borders and A&R had to carry a mountain of debt, plus there were too many managers who didn’t know book selling and concentrated on managing and not selling books. Queries went unanswered, or were ill-informed. Borders went from a destination to ship to a shop to be avoided if you wanted to buy or find a book.
But there was also no mention in the AFR either of the sales and share price collapse suffered by investors in what is now the worst float of 2011: the sale, at $2.50 a share of Collins Foods, the company that owns KFC and Sizzler chains. Collins was actually the biggest float this year, now its the biggest dud, and it also came from Pacific Equity Partners.
Collins shares fell on listing and plunged at the start of this month after a surprise earnings downgrade. They fell 45c or 24% in one day (November 2) after the downgrade was made. They have since fallen further and closed at $1.21 yesterday on the ASX. Pacific Equity Partners owned 52% of Collins.
The problem for any bid for Spotless will be buying the shares when Pacific Equity wants to exit. Besides Collins Foods, retailers such as Myer haven’t sparkled since being floated by the private equity owners. The Myer sale price was $4.10, which has never been seen, except in the prospectus.
But not all private equity deals go bad. Shareholders in Kathmandu, the outdoor clothing retailer, who paid $1.70 a couple of years ago and have hung, had shares valued at $2.02 at the close of trading yesterday. There is no doubt the view in private equity circles that the owner, Goldman Sachs Private Equity and Quadrant, left too much value in Kathmandu and didn’t drain enough money out of it.
One final point: a story in The Australian from September 14 reported:
“UBS has become the latest broker to put a ‘buy’ on Collins Foods, the biggest float of the year, delivering a boost for a swag of big investors and company executives who have increased their holdings since its float.
“Following Deutsche Bank yesterday initiating coverage on Collins with a ‘buy’ and $3 price target, UBS today followed suit with the exact same recommendation.
“The investment banking divisions of UBS and Deutsche handled Collins’s initial public offering, which raised $200 million in July, but were forced to price the float at the bottom of its $2.50-2.92 offer range due to poor sentiment towards both IPOs and consumer-focused stocks.”
Now you would have thought that the two selling brokers and investment banks would have some understanding of what was happening in the fast-food industry. But clearly they didn’t. Just under two months after those rosy forecasts, Collins revealed the earnings downgrade and the shares plunged. That $3 a share forecast from Deutsche and UBS a long way from reality. I bet they don’t mention this research in dispatches to head office.
So will these calls go down as the dumbest of the year? I wonder what the clients of both firms feel today about their investments, especially those who bought into the float at $2.50 a share?
So if or when Pacific Equity Partners makes a tilt at Spotless, be careful when reading or seeing comments from investment banks and brokers about the pricing of the deal. In many cases they know less about the situation than the journalists concerned.
Private equity destroys value rather than creating it, judged on recent results, but we didn’t read that in today’s AFR.