21/08/2007 - 22:00

Breweries a test for investors

21/08/2007 - 22:00

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The aftermath of a stock market correction is always a marvelous time for pondering some of the deeper investment questions, such as whether a business is better off following the public-listed route or the private equity route – and what better way to do that than with a beer (or two) in hand.

Fortunately, recent events have provide readers of Briefcase with a perfect opportunity to study the market, and beer, because one of the brewers planning to list on the Australian Stock Exchange has made a last minute switch to the world of private equity.

Big Island Brewing had been seeking $20 million to help pay for a brewery designed to produce 14 million litres of beer a year.

Sadly, the reaction of public investors to the original float plan seems to have been as lukewarm as English beer – which is hardly surprising as most other recent brewery floats have been as flat as English beer.

Beer jokes aside, what’s now happening contains lessons for how the investment world will behave in the future, because we now have four local micro-brewers listed, and one going private.

In terms of setting up a scenario for professional comparison, this is about as good as it gets because sometime down the track investors will be able to judge what’s best for their money – put it onto the stock market, or place it with a private equity operator who can grow a business far from the wild valuation gyrations of the stock market.

Right now, effectively at the start of the analysis, it might be argued that private is the way to go because the performance of the four public brewers is three down, one up – or, mathematically, 25 per cent pass and 75 per cent fail.

Little World Beverages is the only stock market success, so far. It floated at $1 in late 2005 and is now trading around $1.63.

The failures are:

• Empire Beer, floated at 35c, briefly traded at that price and then sank to a low of 15c, and when Briefcase last looked had perked all the way up to 15.5c.

• Gage Roads Brewing, floated at 40c, got as high as 42, and then sank to 19c before rising to 19.5c.

• Oz Brewing, floated at 20c, got as far as 21c, sank to 7.6c, and has recovered to 11c.

It’s little wonder that Big Island opted to disappear from the hot blast of the public market, especially as the wheels fell off small-cap stocks last week, and might take some time to be re-attached.

The key point in all this is to note that investors now have the luxury of looking at how five companies in the same business perform – four as public vehicles and one as private.

In terms of helping future decision making, this is an excellent test of the private equity world because, in theory, the people at Big Island should be able to quietly go about their work, grow the business and perhaps re-emerge at a later date better ready for a stock market listing.

To stretch this point to the ninth degree it’s worth considering whether Coles, the business Wesfarmers is trying to acquire, might also be better “disappearing” for a while so that the blood bath at head office is not carried out in the full glare of television lights.

The brewers experiment, and the Wesfarmers/Coles deal, while being interesting case studies, does not really address the underlying question of private versus public equity – or the even deeper question of investors being able to keep an eye on what happens with their money.

In the recent correction (or crash, depending on the structure of your portfolio) there was a clear flight to quality, and the abandonment of small stocks and “opaque” investments.

 

Hedge funds, those classic black box structures, where a team of young guns promise to make you a fortune by playing roulette on commodities and futures markets, were devastated in the flight to quality – for two reasons.

• Firstly, a lot of the funds simply made incorrect bets on their chosen markets and were going backwards.

• Secondly, investors discovered what Briefcase knew all along, that the young guns were charlatans and the rightful owners of the money demanded that it be returned.

• Oops”, said the fund managers, “we’re having trouble locating your cash, we seem to have it invested it in a rather exotic oil v gold v interest rate swap which is offset against the price of steel in Lichtenstein”

Briefcase exaggerates, but not by much. The young guns really did do incredibly stupid things with other people’s money in a spectacular variation on the “greed is bad” theory that this column routinely rants about.

On the question of greed, what’s happened with the so-called sub-prime crisis in the United States is really nothing more than a “professional” version of what we’ve seen countless times before in the property sector.

The local versions of a property crash have generally been six per cent.

In the US it was the banks foisting money on people who could not repay it – hence, on this occasion, it was the managers being greedy by selling financial services too cheaply, in order to book a sale, and then discovering that the customer couldn’t pay.

A nifty twist to all this is that the bankers, as well as being greedy were also stupid, defying one of the greatest rules of banking – never borrow short and lend long.

A lifetime ago, when building societies ruled the home lending roost in WA, breaking this rule led to a series of crises.

Briefcase never thought it would see the “borrow short, lend long” rule broken again, but that’s exactly what’s happened.

In terms of things not seen before this is a final item, in the category of “it could only happen in Cottesloe”.

Down at the Eric Street Shopping Centre, on a public noticeboard close to the entrance of the local IGA supermarket, are the usual collection of used car, house cleaning, and dog walking advertisements from the locals.

But, pride of place is a hand-made poster reading “plane for sale”.

Yes, dear reader, in the heartland of boomtown, they sell planes as well as cars via the local shopping centre noticeboard.

For anyone interested, and as far as Briefcase can remember, the plane in question is an old Eagle, priced to go at just $59,000 – and perfect for a quick trip to Margaret River to see how the blossom is setting at the vineyard.

 

“The quest for riches darkens the sense of right and wrong.” Antiphanes (about 400BC – proving, yet again, there’s nothing new in life)

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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