Kerry Stokes’ Westrac-Seven empire is a unique business model, but what will happen to it when he moves on?
IT is easy to imagine China, with its phenomenal growth rates, being more important than Australia to the Westrac industrial equipment business controlled by Kerry Stokes, though the man himself says that’s not necessarily so.
“I would have said that two years ago but expansion in Australia is so strong I’m not sure now,” Mr Stokes told Bystander.
China versus Australia, as the prime driving force behind Westrac, was one topic covered in a wide-ranging conversation I had with Mr Stokes last week, just after another successful Telethon charity fund-raiser on the television station he controls, Channel Seven.
Also on the agenda for a chat were:
• the status of the unusual merger between Westrac and Seven;
• issues confronting Westrac’s growth;
• integration of print and screen in his media assets;
• problems at a small side investment in the iron ore industry;
• whatever happened to his promise to retire after the Sydney Olympics; and
• currency moves and what they mean to Westrac.
On the merger, which created a curious corporate beast with interests in industrial equipment and media, Mr Stokes repeated a line first used at the annual meeting of Seven Group Holdings last month – that he’s happy with the performance, so far.
But has Australia’s most unusual conglomerate gone as well as its chief architect (and the man sitting on $1.7 billion worth of Seven Group shares) expected?
“Indeed it has,” Mr Stokes said. “We announced increased profits over expectations so I guess it’s going better than other people expected, but it’s certainly what I expected.”
Since the $3 billion deal was approved in April the investment community has been holding its collective breath, and withholding institutional support, for a business which has no parallel, making valuations difficult.
No matter how Mr Stokes tells the story there is no logical connection between a heavy-duty earthmoving equipment business (Westrac) and a separate division with investments in television, newspapers and magazines.
In fact, the only substantive link is Mr Stokes himself, and his desire to create a business that liberates trapped value in the previously unlisted Westrac, which traded until the 1980s as the stock exchange-listed Wigmores.
Never a man for philosophical discussions, Mr Stokes dismisses the doubting Thomases saying that both Westrac and Seven Media were performing “exceptionally well” – a comment based on the ongoing boom in mining and oil developments.
“Australia is in a sweet spot, and Caterpillar is enjoying the sweet spot and we’re enjoying the rub off,” he said.
That remark leaves open the obvious question: is it the same in China for Caterpillar equipment and Westrac’s business in northern China?
“China has traded to expectations,” Mr Stokes said, in what sounded like a softening up remark.
And it was.
“Not above it. We’re meeting our budgets. Our biggest problem, and always has been, is getting stock. We keep running out of stock.
“Caterpillar is gradually getting on top of the problem, and I’m pretty happy with that.”
Mr Stokes said China was a notoriously seasonal business, more so than anywhere else. He then put the equipment businesses in China and Australia into perspective.
“Last year in Australia we had a total market for equipment called wheel loaders, which are ... essentially four-rubber wheels with a bucket on the front, of 6,000 items,” Mr Stokes said.
“In China, the total sales for that range of products was 248,000 items. Just the question of supply and infrastructure has been a challenge. Over 10 years of experience we’re getting better but it’s always going to be a challenge.”
Big numbers for sure, but failing to meet demand is surely an example of lost opportunity for Westrac as the agent, and Caterpillar as the equipment maker?
That’s a question too close to the bone because it implies missing profits. Mr Stokes tries a different tack.
“Let’s look at that another away,” he said. “Caterpillar has said sales in China last year were just over $US1 billion. The expectation is that sales will grow to $US5 or $US6 billion over the next five years.
“I guess we represent about 20 or 25 per cent of China sales.” (A guide to the potential for Westrac in China to one day dominate Westrac in Australia.)
This leads to a feature of Westrac in China that has eluded most outside observers – the fact that it’s a big winner from the currency war being waged around the world.
For decades American exporters, such as Caterpillar, have been fighting a marketing duel with Japanese rivals. In the case of industrial equipment it has been Caterpillar versus Komatsu, with the Japanese winning – but not now.
“Big machinery makers in Japan are struggling,” Mr Stokes said.
“You have to remember that, back in the ’80s, Caterpillar had a 30 per cent price differential with Komatsu, now we’re trading on similar prices. It’s quite sweet.”
That remark leads to the logical question as to whether Caterpillar equipment in China will be much bigger for Westrac/Seven than Australia? His answer (given earlier), is that he might have agreed two years ago.
“Australia is (also) expanding rapidly and our biggest problem (here) is our mining customers getting government approvals and additional port infrastructure,” Mr Stokes said.
If the equipment side of his interests is going well, what about media, and the challenge of getting print and television interests to work in harmony – with the first trial of that experiment under way in Perth, where the Seven network and The West Australian newspaper are effectively under one management team.
“We seem to be achieving our targets,” Mr Stokes said. “Certainly from the perspective of helping each other that seems to be going well.”
But then comes a subtle shift in his remarks, which highlight his primary love for television, a business that has been part of his life for 50 years.
Rather than talk about newspapers, he introduces the topic of multi-channelling, the ability of free-to-air television to offer more than one channel.
“I’ve maintained for 15 years that multi-channelling would give a new lease of life to free-to-air,” Mr Stokes said. “Everyone fought us, but they’re now recognising that’s probably true.”
Is he referring to the heated takeover struggle under way inside the Channel 10 network involving the Packer and Murdoch families?
Laughter follows, which is a sure-fire way to dodge a tricky question.
Is he saying, then, that he was prophetic regarding this issue?
“I don’t know about that, perhaps a prophet by necessity,” Mr Stokes replied.
That’s enough about industrial equipment and media. Time to talk about a few controversial matters, such as what’s going on Iron Ore Holdings (IOH).
IOH hit the headlines for the wrong reason earlier this year when a rail haulage deal with Rio Tinto fell over – despite Rio Tinto’s WA boss, Sam Walsh, sitting on the WA Newspapers board alongside Mr Stokes. Surely that was a bit embarrassing?
“We have a great relationship with Rio,” he said – before an unusually long series of ums and ahhs for the, up to now, clearly spoken Mr Stokes.
“All I can say is we and Rio enjoy an excellent relationship, as I do with all of our customers.”
A nerve touched? Perhaps, because IOH is small beer for Mr Stokes. A bit on the side. Rio Tinto is an important customer for Caterpillar and Westrac, perhaps a reason why the answer sounds evasive.
But, then comes the closest thing to a share tip for Mr Stokes’ followers.
“As for Iron Ore Holdings we’re pretty excited about its prospects over the year or two,” he said.
If the multi-faceted relationship between Walsh, Rio, IOH, and Stokes is in the delicate category, why not go one step further and ask the ultimate question of a 70 year old – whatever happened to the great furphy told about retiring after the Sydney Olympics in the year 2000?
“I am retired,” is the retort, delivered with a chortle that echoes down the line.
Pull the other one, is the response.
“No, this is how I always expected my retirement to be,” Mr Stokes said.
Serious for a second, how long will he wear the Seven/Westrac harness?
“I have a different role these days,” he said. “We have great executives running the businesses, which means I can actually ring you back – something I would have struggled to do five years ago.”
Yes, he did ring back, and yes he sounded relaxed – but it would be an unwise executive anywhere in the Stokes camp who imagines that it’s time to play because the big cat says he’s away.
And that, from an investment perspective, is why institutional fund managers will always treat Seven Group, with its media and equipment divisions, with a double dose of doubt.
The divisions do not fit (despite what Mr Stokes says) and it remains the personal creation of a uniquely talented man, who will eventually go the way of all men. And then what?