Whitcoulls

A shake-up among New Zealand book sellers is looming with the Paper Plus chain poised to launch itself as a serious player and industry veteran Whitcoulls tries to become a trans-Tasman Amazon.com.

The A&R Whitcoulls group, owned by private equity investor, Pacific Equity Partners (PEP) since 2004, is expected to snap up the cream of the Borders stores that were put up for sale last week by their US owners.

Whitcoulls is continuing to expand as it prepares for a share float scheduled for March next year.

Whitcoulls group managing director, Ian Draper, told the Herald on Sunday last week that the company would be looking at cherry-picking some of the better Borders stores.

The American book retailer sent a ripple through the global book industry last week when it announced it was selling its shops outside America.

The bad times might come to New Zealand as they have in the US, says retail analyst Tim Morris from Coriolis Research.

"The market here could be doing very well now, but there might be clouds on the horizon because all of these industries have got a bit going on globally," he says.

Borders has done good business in the buoyant New Zealand book market, achieving an annual turnover of $17 million, which represents almost 2 per cent of the New Zealand news-stand and bookstore retail book market of $935 million. It opened a new store on Thursday at Sylvia Park and is on track to open another in Albany in October. Borders opened its first New Zealand store in Auckland's Queen St in 1999.

Borders regional manager in New Zealand, Justin Barratt, says he is sure buyers would want all the Borders stores and to keep the brand in New Zealand. The American company has franchise operations in Asia which could be used here too, he said.

According to Statistics New Zealand, New Zealand households spend $16-$17 a week on publications and stationery. In a recent survey, Kiwis voted reading as their favourite activity, said Booksellers New Zealand, the association which represents both book retailers and book publishers.

Meanwhile the major players in the book retailing market, Whitcoulls and Paper Plus, with 40 per cent and 30 per cent market shares respectively, believe there is room for more growth.

According to Paper Plus figures, the publications and stationery market, including office products, is worth around $1.5 billion a year.

Rob Smith, the managing director at Paper Plus, who came in 18 months ago from Warehouse Stationery to change the direction of the company, says Paper Plus will be raising the profile of books and reading in the coming months.

The 200-store franchise announced to its suppliers a week ago that it would be stepping up its book offering, and had appointed Kerre Woodham as its media spokesperson.

The retailer's target market will be women aged 29 and over who relate well to Woodham, says Smith.

"Kerre's choices will be like Richard & Judy's [popular chat-show hosts] picks in the UK. Richard and Judy grew the market. It is not about selling the latest new release," says Smith. "It's about a higher exposure of books."

The new-look Paper Plus with greater emphasis on books will be unveiled in its Sylvia Park store opening in July.

"By Christmas 2007, this business is going to look completely different to how it looks now," says Smith.

Stationery will be another area to be ramped up.

"Stationery is the last Aladdin's cave," says Smith. "Individual stationery is part of the lifestyle choices we are looking at."

Whitcoulls' Ian Draper, confirms the company is working to a schedule that will mean an initial public offering (IPO) in March next year.

PEP may well hold a stake in the business for a period after the public listing, which he says would be a good thing for Whitcoulls.

"There has been a significant investment in store fit-outs, we have not lacked that kind of investment."

Whitcoulls is the most acquisitive of the book retailers in New Zealand.

The group opened 22 new stores in Australia last year under A & R (Angus & Robertson) last year.

With 80 Whitcoulls stores in New Zealand, plus eight airport stores and 190 company owned/franchised stores in Australia under the Angus & Robertson brand, the chain will continue to grow, says Draper.

In the next couple of months, the company will relaunch the Whitcoulls website, where it will sell not only books but also stationery, DVDs and games, setting itself squarely against online competitor, amazon.com.

"We want to be the Amazon of Australasia," says Draper. "The amount of money invested is significant enough to back that."

The company has identified another key area of growth. The retailer's store at Botany Town Centre has a floor dedicated to children interacting with toys and books.

Draper says 70 per cent of book sales were in children's books under $20, followed by lifestyle books.

More retailers are jumping on the book bandwagon with supermarkets and The Warehouse also selling best-selling titles.

The number of internet book sales is still relatively small in New Zealand. Whitcoulls and Paper Plus both sell online. Real Groovy has one of the more mature online book selling businesses and runs Paper Plus's online book business.

Real Groovy book manager, Doris Mousdale says to have an effective online business it has to be regularly maintained.

Mousdale will go to a lot of trouble tracking down a book and may suggest a second-hand copy if that is all that is available.

"We would be profitable if there were another 2 million people in the country," says Mousdale dryly.

Competition for books is being under-estimated, she says.

A $36.99 book purchase competes with an outfit at Glassons or a concert ticket to the Red Hot Chili Peppers.

Independent book stores, meanwhile, are holding their own in the market, according to Booksellers NZ. Dymocks, the Australian retailer which has five stores so far in New Zealand and sees itself as a "large independent", says it is "very happy" with its trading, including that of its latest new store in Queensgate, Lower Hutt.

"I would say that there is more potential here. There are areas where we believe the market is under-served and we are looking to fill these gaps," says Dymocks NZ general manager, Perry Lennon.

"We concentrate 95 per cent on books, our staff are totally book orientated," he says.

"A book is still a very good way of presenting a point of view."

One of the key challenges for book retailers in coming years is the growing trend for readers to digitally download their books.

Michael Moynahan, managing director of Random House and chairman of the Book Publishers Association of New Zealand, said he thinks people will continue to read books but the question is what form it will be delivered in.

"As publishers we need to find different ways of delivering them to people providing authors are recompensed and the public gets what they want," he says.

The publishing sector in New Zealand grew at a rate of 31 per cent last year to $255 million compared with 36 per cent growth in 2005.

"What we are finding in the market is there are multiple opportunities for more than one distribution channel for more than one type of reader," says Moynahan.

He thinks a mix of readers is keeping the market strong. "It's a combination of strong book readers who are buying across a broad range of books, over a variety of genres."

Books buying is viewed by the book sector as a lifestyle choice, up against some stiff competition.

"Why sit down and read a book when you can pick something up that is cordless and shoot?" asks Smith. "We are seeing a swing from parents, saying we've got to get them back into reading."

Linda Henderson, chief executive of Booksellers NZ says a recent survey showed reading is New Zealand's favourite activity.

"We are competing with other leisure operations, with Playstation 3s selling for $1200. You have to sell a lot of books to match that. Booksellers have to be competitive, and always be a step ahead."

Private equity's ongoing raid on publicly listed companies continued yesterday with a consortium led by Australian giant Pacific Equity Partners (PEP) getting a foot in the door at transtasman credit services firm Veda Advantage.

Veda, formerly Baycorp Advantage, yesterday said it had received a proposal to privatise the dual-listed company from a consortium comprising PEP and Merrill Lynch Global Private Equity.

In the past 18 months PEP and its partners have acquired New Zealand companies Tegel, Griffins, and Independent Liquor. It also owns A&R Whitcoulls and is believed to be working on a bid for The Warehouse with supermarket co-operative Foodstuffs.

The consortium proposes to pay A$3.61 a share for 100 per cent of Veda Advantage, less any dividends paid to shareholders before the deal is completed. The price is at a 20 per cent premium to the company's Monday close of A$3. Should it proceed, the offer values the company at approximately A$814 million.

Veda's shares rose 53c to A$3.53 on the ASX and climbed 58c to $3.90 on the NZX.

Veda said the proposal followed a period of "preliminary interaction" between its board and the consortium. The board had agreed the proposal had sufficient merit to provide the consortium with due diligence access and a definitive proposal was expected within six weeks.

However Veda emphasised: "There is currently no proposal capable of the board considering recommending or putting to shareholders for consideration, nor is there any certainty that any binding proposal will be received from the consortium or any other party at any future time. "Despite the ongoing nature of discussions with the consortium, shareholders should be cautious about whether any proposal will eventuate, including potential pricing."

PEP managing director Anthony Kerwick said the "significant work" on the proposal suggested "this is an interesting opportunity and the right kind of company for us to invest in".

Allco, which holds 17.3 per cent of Veda and a seat on its board, yesterday said it had noted the proposal, and would keep the market informed about its own position "as any material developments occur".

Allco made a A$3.52 a share offer for 50 per cent of the company in 2005 after acquiring a cornerstone stake from a New Zealand institutional investor. The bid lapsed in October 2005 after gaining little traction.

A source close to the current PEP proposal noted that it was at "a significant premium to the Allco bid on an adjusted basis". It was also at "a very comfortable premium" to the valuation provided by independent experts Lonergan Edwards at the time of Allco's offer. The valuation was one of the grounds on which the Baycorp board rejected Allco's bid.

Baycorp's management defended the company against Allco's offer by promising hefty capital returns to shareholders.

Since Allco's failed bid, the company has returned about A$280 million to shareholders through capital returns and share buybacks. The latest capital return, a special dividend, followed the A$97 million sale of the BayCorp Collection Services business to a consortium comprising Allco and Deutsche Bank Capital Partner last May.

After the sale, the company changed its name to Veda Advantage but will continue operating under the Baycorp Advantage brand until the end of next month.

Consortium bid
* Pacific Equity Partners has teamed up with Merrill Lynch to bid A$814 million for Veda Advantage, the company formerly known as Baycorp Advantage.
* Veda Advantage's board has given the consortium the green light to perform due diligence.
* The proposed offer at A$3.61 ($4) a share is at a significant premium to Allco Equity Partners' failed A$3.52 bid for the company just over a year ago.

Their move follows the recent decision by the Commerce Commission to bring its own court proceedings over the alleged price fixing of interchange fees by the institutions.

The retail parties are Foodstuffs, Progressive Enterprises, Dick Smith Electronics, Farmers, Noel Leeming, Whitcoulls and Mississippi.

In a statement of claim filed in the Wellington High Court, they allege that the fixing of interchange fees is anti-competitive and should not be allowed to continue.

The group is also requesting that the court award damages to reflect the losses they have incurred as a result of the breaches of the Commerce Act and compensate for alleged over-payment of fees

If successful, the legal actions brought by the commission and the retail group will enable all retailers to reduce their cost of operations to the benefit of their customers.

John Albertson, NZ Retailers Association CEO said credit card fees cost NZ consumers and businesses more than $A300 million annually.

The separate actions brought by the Commerce Commission and the retail group follows recent regulatory action by the Reserve Bank of Australia in relation to interchange fees and the scrutiny of such fees in a number of other jurisdictions around the world.

The Commerce Commission filed High Court proceedings against MasterCard and Visa, as well as 11 banks and finance companies which are their customers, claiming the companies were anti-competitive in setting interchange fees of up to 1.8% on each transaction.

The retailer is charged the fee, but cannot recover it directly from cardholders so is left to raise prices across the board to recoup the costs, leaving customers who paid by cash or eftpos to subsidise credit card users.

The action follows similar investigations into the size of the fee in Australia, Britain and the US.

The commission proceedings are against Visa International and MasterCard International, as well as Cards NZ, ASB, BNZ, Westpac NZ, ANZ, TSB, Kiwibank, HSBC, NZ Post, The Warehouse Financial Services and GE Finance and Insurance.

Visa and MasterCard, said they would contest the charges.

Albertson said Australia’s fees were now less than half those in NZ, after the Australia Reserve Bank regulated for the fees to drop from 0.95% to 0.5% of the transaction.

NZ retailers pay the fee but are not allowed to charge customers extra to pay by credit cards, so the cost was passed on in price increases to all customers, including those who paid by cash or eftpos.

MasterCard Australasia said the commission’s action did not reflect the vigorous competition that existed between different payment systems in NZ. It said MasterCard operated in the best interests of its cardholders and merchants. Visa also said its payment system benefited cardholders.

Meanwhile David Tripe, director of banking studies at NZ’s Massey University, has warned that customer loyalty reward programs could be a casualty of any clampdown on the fee.

Penalties for price fixing in NZ’s Commerce Act are up to $10 million per breach or 10% of the company’s turnover. IRW

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.