Bond & Bond

Rob Stock compares the finance deals on offer at the "big stores" and gives credit where credit's due. GOOD CREDIT records mean little when buying on hire purchase in shops.

Consumer lenders often claim to be unable to publish finance rates because they judge each and every case on its own merits, but a visit to electronics, mobile phone and furniture stores in Auckland found only two shops where finance rates were not the same for all customers.

In one shop, the salesman said a lower rate could only be offered if he pushed the finance company to offer better terms.

There was also a wide range of finance costs, and in the nine big- brand stores visited we found finance rates ranged from 0% at Telecom and The Warehouse (and Harvey Norman for the first 18 months), to 23.9% at Bond & Bond.

On top of that, premiums for repayment insurance (which repays the loan in the case of death, illness or redundancy) and extended warranties could increase the real price charged for the goods by between 30% and 60%.

And there was no room to haggle, we were told in all stores, because there was no room to negotiate on price when buying on finance.

And in one store, a Vodafone stand in the Westfield shopping mall in St Lukes, we were told we had to pay for payment protection insurance even though the law states it can only be sold as optional.

The stores we visited source their finance from some of the big boys of the consumer finance industry: GE Money, Finance Now, and Fisher & Paykel Finance (which operates the Farmers and Q-card systems). The Warehouse gets its finance from Gilrose Finance.

Here is our rundown of the nine stores we visited:

Dick Smith, St Lukes: We expressed interest in an Acer 32-inch widescreen TV with 24-month no- deposit finance provided by Finance Now (catch-phrase: "Want it NOW? Get it NOW!") priced at $1798. The interest rate quoted was a flat 19.75% with no reduction for a good credit history, and a booking fee of $50. Loan repayment insurance, which would have cost $134.85, was sold as optional, though not pushed by helpful, knowledgeable staff. We were also offered an extra two years on our 12-month warranty, at a single premium of $392.99. Total repayments without warranty or insurance would have added up to $2241. Add in insurance and warranty and we would have paid $2884 in total, 60% on top of purchase price.

Hill & Stewart, St Lukes: Slickest of the salesmen, and the only one who knew the finance terms off by heart. We looked at a Sony 32-inch LCD TV priced at $2294.95, with finance offered at 14.75% from Consumer Finance Ltd's Q-Card (catch-phrase: "The Lifestyle Card"). The card is like hire purchase on a card, but like a credit card, consumers get a credit limit, so once they have paid off an item, they simply swipe the card again. Unlike a credit card, the finance rate for hire purchase depends on the stores you buy at. We were told there would be a $63 booking fee, and each time we used the card afterwards, there would be a new booking fee of $43. To increase the warranty to five years would cost a further $350. On the 36-month contract, we'd have paid $3365 in total, including the warranty, increasing the purchase price by 46%.

Bond & Bond, St Lukes: Worst sales assistant. When asked to answer questions on the TVs on display, he chewed noisily on gum and started to read the tags on each of the TVs, so we asked to speak to someone who knew their trade. GE Finance provide the finance (catch- phrases include: "Make it possible"), and the salesman said if he pushed our case on a $1999.99 Philips 26-inch widescreen TV, it might move on the interest rate. Just as well, because the 23.9% we were quoted was steep. We were told that as low as 14.9% might be possible, but was unusual. The small print on the application form set out the additional fees, such as $15 for repaying early, $25 late payment fees and 5% additional interest (28.9%) charged on money owed in arrears. There was an establishment fee of $50 and loan repayment insurance would add another $66. Another $249.99 would extend the warranty from 12 months to three years, and $399 would extend it to five years. Taking all the extras would have resulted in paying $3060 over 24 months, increasing the purchase price by 53%.

Bedpost, St Lukes: Helpful, low-key salesman and finance from Q Card again. On a $2880 Rimu king-size bed, the finance rate would have been 18.9% for periods of between 12 and 36 months. There was an establishment fee of $60. Once repayment insurance was added at a cost of $180, we would have paid $3771 in total, increasing the price by 31%.

Vodafone, St Lukes: For a $999 Palm Treo 750v smartphone we were told repayment insurance was compulsory. We were also accidentally shown the password for getting into the Finance Now secure website, which was written on a piece of paper taped to the inside of a cabinet. There was a $50 booking fee, and initially we were given the staggering finance rate of 27.9%. That turned out to be a mistake, and the rate we were finally offered was 23%. The insurance added $75 to the bill, though the Finance Now website clearly had it as an optional item. There was no extended warranty available. The monthly repayments would have been $138.58, though they would have been much higher for customers who did not take out a 24-month calling plan. We would have also needed a data plan to send emails. In all we would have paid $1663 for the Palm Treo (excluding calling and data plans), an increase on the shelf price of around 60%.

Telecom, St Lukes: The Palm Treo would have cost us $999 at Telecom, too, and again the finance terms depended on taking out a monthly plan. The finance rate for the loan would have been 0% over 12 months, with no booking fee. Mobile phone insurance would have cost $9 a month ($85 excess), and we could have extended our 12-month warranty to 24 months at a cost of $79.95. Without the warranty and calling plans, we would have paid shelf price.

Harvey Norman, Albany: Shopping for a $719 Xbox360, we were offered 18 months' interest-free credit, with payment deferred, meaning we would not have to pay anything until the second half of 2008. Anything not paid off after that would have attracted interest at 24.2%.

Danske Mobler, Albany: Buying a rimu dining set of table and six chairs for $4290 would have got us six months' interest free and deferred payment, followed by 19.95% interest on the balance until paid off. Finance offered by GE Money.

The Warehouse, New Lynn: Finance provided by Gilrose Finance. The only store that would not quote a finance rate until they ran a credit check. The result was a 0% rate for 12 months' finance on a Transonic 32-inch TV, when the sales woman had guessed I'd be paying about 22%, close to the 23% interest used by the calculator on the Gilrose Finance website. The booking fee would have been $35 and there was no mention of insurance.

CARD GAME HIRE PURCHASE sometimes comes disguised as store cards, on which the interest sometimes even beats the 19.95% charged on standard credit cards.

The highest interest on storebranded cards are those backed by GE Money's Credit Line. They charge nearly 24%, according to figures from www. interest.co.nz.

Farmers Card, backed by Fisher & Paykel Finance, isn't far behind, though it does not charge a $25 annual fee and there is an attractive package of additional benefits like exclusive shopping days and offers for diehard Famers enthusiasts.

The Red Card from The Warehouse shows not everything in the Red Sheds is a bargain, with interest of 22.45%. The bestrated card is issued by Smith & Caughey, which charges 15% and has no annual account fee.

Unlike the Q Card, all purchasers with store cards pay the same interest rates, regardless of their credit histories.

Graeme Hart and Eric Watson have little in common except that they are both extremely rich and have made recent takeover offers for their listed vehicles.

As the accompanying table shows, the 21st century has been particularly prosperous for both individuals with Hart's net worth leaping from $200 million to $2.75 billion, while Watson has jumped from $110 million to $500 million (the latter figure has recently been revised up from $350 million).

But the two businessmen have travelled different paths to achieve their wealth. Hart has been hands-on, focused and has built a team of extremely competent associates while Watson has been a relatively passive investor with little focus and has failed to build a competent support team.

In addition, Hart has created wealth for minority shareholders in his listed companies whereas a large percentage of individuals who invested in Watson's numerous stock exchange vehicles have lost money.

This is the reason why investors will be hoping that Hart returns to the sharemarket if his bid for Burns Philp is successful. It is highly unlikely, though, that the NZX will see Watson again after he completes the PRG Group acquisition.

There was only the faintest sign of Hart's impending success at the Whitcoulls annual meeting in the Kupe Room, Aotea Centre, on October 25, 1995. No more than 20 or 30 shareholders attended, the meeting was over in a flash and the highlight was Hart's young son making happy noises at the back of the room.

Whitcoulls had just reported a 16 per cent reduction in net earnings to $20.2 million, mainly due to the disappointing performance of the Australian acquisition Angus & Robertson. Hart's 64.5 per cent Whitcoulls stake had a sharemarket value of $170 million at the time (the listed entity was called Rank Group until Whitcoulls was acquired from Brierley Investments in 1991).

The next year, Hart made a successful bid for Whitcoulls, valuing it at $282 million and, shortly afterwards, onsold it to Blue Star for $320 million. Eric Watson was running Blue Star and Maurice Kidd, his long-time business associate, was its financial controller.

In mid-1997, Hart purchased 19.9 per cent of Australian food conglomerate Burns Philp for A$260 million or A$2.50 a share. Three months later, Burns Philp's share price had fallen below A$1 after a poor result and Hart's investment was worth less than A$50 million.

The National Business Review's Rich List estimated that Hart's net wealth had plunged from $200 million in 1997 to a mere $25 million in 1998.

But Hart's true qualities came to the fore during this difficult period. He played a major role in Burns Philp's turnaround, which included the acquisition and subsequent 80 per cent sale of Goodman Fielder.

The country's richest individual has gone from strength to strength and, this year, completed the takeover of Carter Holt Harvey for $3.3 billion. His offer for the remaining 42.6 per cent of Burns Philp, which values the company at A$3.1 billion ($3.7 billion), will cost Hart A$1.3 billion.

As Hart's shareholding in Burns Philp is worth more than A$1.7 billion, the Sydney-based company represents a large proportion of his wealth. If the Burns Philp offer is successful, Hart will obtain full control of nearly A$2.5 billion of cash, a 20 per cent Goodman Fielder stake worth in excess of A$500 million and NZ Snacks, which has an estimated value of nearly A$200 million.

The deal makes sense for Hart and his bankers as he will get full access to almost A$2.5 billion of cash for an outlay of only A$1.3 billion. Hart may also believe the huge amount of private equity money has inflated asset prices and there are limited attractive opportunities for Burns Philp to utilise its cash.

This contrarian approach is an important part of Hart's success, as is his ability to execute deals, make these acquisitions work and attract and keep top-quality executives.

By contrast, Watson is a deal-maker with limited operational abilities and, most importantly, an inability to attract and retain top-quality executives. A notable exception is Stefan Preston, who runs Bendon for PRG.

Watson first became involved in PRG (then called Pacific Retail Group) in 1998 when he made a takeover offer at $1.30 a share. This valued the target company at $59 million. Watson ended up with 73.7 per cent after the two major shareholders, Murray International (58 per cent) and Roger Bhatnagar/Greg Lancaster (12 per cent), sold to him.

Watson made another unsuccessful offer in 2001 at $1.76 a share. This valued the target company at $89 million.

The next year, he made a third bid at $2.25 a share. This valued PRG at $116 million, but Grant Samuel produced a strong negative response after assessing the company was worth between $223 million and $248 million ($4.31 to $4.80 a share).

Watson then turned PRG into an investment company and one of his first investments was a stake in Burns Philp.

Meanwhile, he became involved in several listed companies including RMG (in receivership), Strathmore (now Media Technology), Eldercare (Abano), Advantage (Provenco), Metlifecare and AQL (Certified Organic).

PRG made the ill-conceived PowerHouse acquisition in 2003 and as a result has had to sell Noel Leeming, Bond & Bond and PRG Finance Group. PowerHouse has been a disaster for PRG and the company hasn't paid a dividend under Watson's stewardship.

Watson's fourth offer for PRG at $1.22 a share values the company at only $76 million compared with Grant Samuel's mid-point valuation of $235 million four years ago.

This offer will be successful because the bidder started with 81.3 per cent, AXA has accepted in respect of its 12.3 per cent (AXA effectively stymied Watson's earlier offers) and Grant Samuel now values the company at between $66 million and $107 million ($1.06 and $1.72 a share).

It will cost Watson $14.2 million to acquire the outstanding 18.7 per cent and, in return, he will obtain full control of Bendon, Living & Giving and an unknown amount of cash.

It is difficult to ascertain PRG's true financial position because PowerHouse was placed in administration in the UK this month, the company has not released its March 2006 year annual report and is delisted from the NZX.

The huge spread in Grant Samuel's valuation range indicates that PRG is in a mess and there is much uncertainty over the true value of the company.

By contrast, Burns Philp is in great shape and is relatively easy to value.

Watson's stewardship of PRG has been a disaster yet his net wealth has risen from $275 million to $500 million since the PowerHouse acquisition. The main reason for this is his relatively passive holding in the unlisted Hanover Group. The true value of this holding can only be ascertained when he sells his stake through a trade sale, IPO or to the other Hanover shareholder.

The capitulation of AXA to the PRG offer clearly indicates that sharemarket investors have had enough of Watson. His PowerHouse acquisition was the last straw and he seems to have limited ability to extract himself from difficult situations, unlike Hart with Angus & Robertson and Burns Philp in the 1990s.