IMAGINE investing in a company guaranteed to make profits for the next 70 years, guaranteed to win government, industry and union support, and to have a structure which is virtually takeover proof. Stop imagining, because it exists, and its name is James Hardie.
In what must rank as the greatest conversion since St. Paul walked to Damascus, James Hardie has emerged from its pariah status as the company which tried to avoid its obligations to asbestos victims into a business that everyone wants to see grow.
A few canny punters have already picked up on this remarkable situation with the James Hardie share price picking itself up from a low of $4.95 as recently as mid-August, when the asbestos controversy was at its height, to trade around $6.60, not far short of the 12-month high of $7.02 set last February.
The share price recovery, which flies in the face of a widespread downturn in other companies making building products, can be expected to continue simply because James Hardie has become a very special company, a business which has made the transition from being an endangered species into a protected species.
If in doubt, consider this investment recommendation from the secretary of the Australian Council of Trade Unions, Greg Combet, who said it was “time to ensure James Hardie remained financially strong enough to fulfil its pledges to compensate anyone who falls ill from its asbestos products”.
“We don’t want to see any further harmful action taken against James Hardie or adverse criticism of the company,” Combet told The Sydney Morning Herald newspaper on December 22.
What has happened is that the unions and government have created a situation where they must ensure the future profitability of James Hardie to, in turn, ensure that asbestosis sufferers can get their compensation.
This might sound like James Hardie has been converted into a business controlled by government and unions, but that’s not the case. The terms of the settlement, which followed years of protest, limit payments to victims to a maximum of 35 per cent of the company’s operating cash flow in any one year - with the other 65 per cent available to shareholders, and that’s a worst case scenario.
Unions and government will, naturally, be keen to see “their” 35 per cent at the highest possible dollar level. They will insist on buying James Hardie products and they will give preference in State building contracts - and the biggest winners will be the people who get the other 65 per cent, the shareholders.
Briefcase, as per the laws of giving investment advice, is not suggesting you rush out and tank up on James Hardie shares. But, there does seem to be a screaming logic to the whole deal which has an initial life of 40 years, and could run as long as 70 years.
During that time it is extremely unlikely that anyone would bid for James Hardie because it has become a ‘pet’ of government and the unions. It has, in effect, swallowed a so-called poison pill.
But, rather than being poisoned by a deal which will see payouts of around $1.5 billion (in 2004 dollars) over the next 40-to-70 years, James Hardie has written itself a future which other companies dream about.
The trick now will be for James Hardie management to actually drive the company as if nothing has happened, which will be hard. They will need to continue investing in research and development, and in growing the business – while all the time knowing that the twin angels of the union movement and government are looking over, and protecting, the business.
Remarkable.
ON a less upbeat note it is interesting to report that the ghost of Peter Malone continues to haunt one of the companies he used to run, Advanced Engine Components (AEC). Hailed by management, and a slick public relations campaign, as one of the great revivals of 2004, AEC is struggling to gain traction.
On three separate occasions over the past six weeks AEC has been forced to extend the deadline for a $3.5 million capital raising. The latest takes the closure date out to January 21.
In theory, funds raised would be applied to help pay for AEC’s ambitious expansion plans into China where it proposes to make its electronic fuel injection and engine management system which is earmarked for a fleet of Beijing buses.
Briefcase can’t pin down the reason for the slow filling prospectus but reckons that there are a number of factors at work. First, it is always hard to raise cash at the end of the year. Second, the broker being used, DJ Carmichael and Co, is better known as a broker to the small resources sector, third, there is something about engine-technology companies from Perth and, fourth there is AEC’s pedigree.
For readers with short memories, AEC was part of the mini-empire developed by Perth entrepreneur, Peter Malone. Flagship of that realm was the telephone company, NewTel, a business which collapsed in a shower of accusations in late 2002.
AEC was a survivor of the Malone mess, but put its shares into suspension while the Koo family of Taiwan propped it up, the recapitalisation plans were fine-tuned and a return to trading on the stock exchange keenly anticipated.
All of this can be traced through a snowstorm of press releases and breathless media reports. The Australian newspaper boldly told its readers last August that AEC “is emerging from the rubble of NewTel”. The West Australian chimed in on the same day with a similar story. The Australian had another bite in mid-October. Melbourne’s Age newspaper weighed in on November 12 with an optimistic story that said AEC was “looking to kick some goals in Beijing”, and Perth’s Sunday Times told its readers on November 28 that AEC was “motoring along” despite having to extend its prospectus closure deadline.
Briefcase, which is as guilty as anyone in getting the odd story wrong, imagines there are a few red faces around Perth right now as they contemplate all those promises that date back to mid-August, only to be slam-dunked by a burst of reality that can almost certainly be traced back to a promising business choosing its parents badly.
“Murder is always a mistake - one should never do anything one cannot talk about after dinner.” Oscar Wilde