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Opinion: Sorry Feltex saga has damaged reputations and confidence

By Simon Louisson of NZPA

Friday 22nd September 2006

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The sorry saga of the collapse of Feltex Carpets has not only damaged reputations, it has put a fresh ding in the much dented confidence of the equities market.

It has also raised questions about the wisdom of investing in the cast-offs of private equity firms.

Some of the most prominent financial institutions, as well as Feltex directors and even supposed rescuers, do not come up smelling of roses from the Feltex fiasco.

CSFB bought Feltex in 1996 for just $19.5 million. It was then sold to one its many private equity firms, CSFB Asian Merchant Partners. It then did what private equity firms do and stitched Feltex together with Australian carpet company Shaw Industries, which it bought for $149m.

When they deem the time right, private equity firms invariably try to onsell companies to a trade buyer on the theory that 100% of the company is worth more than a 100 lots of 1%. But CSFBAMP failed to find a buyer for Feltex and so floated the company to the public.

The float was lead-managed by First NZ Capital, which has always had close ties to CSFB, and Forsyth Barr, and co-managed by ABN Amro and Macquarie Equities.

These brokers pushed the IPO strongly. It was the biggest float around in 2004 but from the start there were questions that the forecast earnings in the prospectus were heroic, even though then ceo Sam Magill called them "conservative".

CSFBAMP escaped with a handsome $254m, with investors paying $1.70 a share. It was an inauspicious float with the shares listing at $1.62 - 5% below the issue price.

After initially reporting a full year profit above forecast, trouble surfaced eight months after the float with a warning of "challenging times ahead".

Bigger trouble came in April last year, when a profit warning resulted in the shares losing a third of their value. It was virtually all downhill from there, with the shares hitting a miserable one cent today.

Investors were particularly angry that the April warning came less than six weeks after the half year profit when the company said it was on track to meet forecasts despite the concern of challenging market conditions.

Market commentator Brian Gaynor said what has happened with Feltex was the dark side of private equity investing.

"Everyone looks on private equity as being very positive, but this is what a private equity firm does - it gears up a company quite substantially, leverages it, and then sells it either as a trade sale or a sharemarket float as a highly geared company.

"This is what goes wrong when the model doesn't work."

While Freightways had been a shining exception, most IPOs floated by private equity funds had been duds in New Zealand, including Frucor, Vertex, Skellmax and Viking Pacific.

"When a private equity firm floats a company, one assumes it is because they haven't been able to make a trade sale and therefore that's a situation investors need to be aware about and nervous of," he said.

As a general rule it has been rejected by the natural buyers.

Investors should be wary of investing in highly geared companies, such as Feltex.

"In the end it was debt that killed Feltex."

The role of NZX in monitoring Feltex's continuous disclosure, or lack of it, has come under scrutiny while the Securities Commission finding that the Feltex prospectus was not misleading was seen as a whitewash.

The commission was in an embarrassing position because it had granted the prospectus a waiver in the first place.

Shareholder activist Tony Gavigan, representing a group of Feltex shareholders, is threatening to take the IPO promoters and possibly the directors to court.

"This is not the end of the situation, in fact it's the beginning," said Gavigan.

He called for shareholders to force a company meeting and sack the board "which has gone AWOL again".

"You have to ask where's the board? They should be down at the High Court at the moment seeking an injunction," said Gavigan, who has led a group of shareholders in a nine-year legal battle over Fletcher Challenge's takeover of Southern Petroleum.

He also accused Feltex's banker ANZ of putting Feltex's interests behind those of its long-standing client CSFB.

ANZ said today it would recover all its $140 million the debt Feltex owes it - probably getting more back than it would under a rescue plan.

ANZ also got it in the neck from unions for putting money interests ahead of jobs and social responsibility, and from the Turner brothers. The latter accused ANZ of scuttling their bid for no good reason, suggesting the bid was not fully funded when they swore it was.

They in turn were accused of screwing up the first rescue plan led by Australia's Godfrey Hirst.

"You had a deal on the table. Godfrey Hirst was going to buy the assets and there would have been some money left for shareholders," said Mr Gaynor.

"I think the Turner brothers in the end didn't do the Feltex shareholders any good at all."

They rounded on Hirst for withdrawing its varied rescue plans and not being prepared to bid in a competitive environment.

Gaynor said that when the dust settles the spin from those in the industry would be that this sort of thing happened in markets all over the world.

"They will say it's the risk investors take. But I disagree."

The New Zealand sharemarket is more fragile than others because it has never really recovered from the 1987 crash, he said.

While Australia's market is worth 140% of its GDP, here the ratio is only 36%. As well, a much higher proportion of our market is foreign owned, so New Zealanders actually invest very little in shares.

"We have a very fragile sharemarket and very fragile investor confidence."

People involved in the markets needed to nurture investors back into the sharemarket and the Feltex saga had done the opposite.

"This kind of thing affects New Zealand much more than it does other countries because the confidence in the sharemarket is so fragile.

"It's not disastrous, but I don't go along with those who say this is just a risk of investing in the sharemarket. "We can't afford these things."

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