24/10/2013 - 11:40

Success driving succession plan

24/10/2013 - 11:40

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John Hughes has convinced a lot of people to buy his cars over the years, but will investors be similarly enthused about his plan to float the business?

Success driving succession plan
TIME FRAME: John Hughes says he plans to stay in control of his business empire. Photo: Grant Currall.

A couple of years ago, car dealer extraordinaire John Hughes casually batted away questions about his succession plans at one of our Success & Leadership events.

It was the obvious question back then, when Mr Hughes was 75, and the audience had just learned how much of the business he had built was sustained by his incredible energy and focus.

Mr Hughes is not just the face and name of the company, he is the walking, talking brand with an attitude to work that ensures the whole business lives and breathes the culture he has created.

It is so powerful it is a pity you can’t bottle it.

And that is why I was perplexed by news that Mr Hughes was considering an IPO, backed by broking firm Euroz, as part of a so-called succession plan.

While it is good news for work-starved investment bankers in Western Australia, especially having a real operating business to float not blue sky, just how such a move amounts to a succession plan will have to become clearer near March or April when the float is reportedly due to occur – a long lead time compared to most IPOs.

Unlike Automotive Holdings Group when it listed in 2005, Mr Hughes doesn’t appear to have an anointed successor and is giving no indication of stepping back from the helm. In contrast, AHG’s Vern Wheatley had taken a take a back seat prior to floating, handing over the chairman’s reins to Bob Branchi who, in turn, vacated executive management in favour of Bronte Howson.

The experience in the business, which had been started by Mr Wheatley’s father, Syd, 50 years earlier was tremendous , widely spread and, most importantly, relatively well known in the wider business community.

When I spoke to Mr Hughes about his IPO plans last week, he said he was limited in what he could say due to legal restrictions that could see him pinged for spruiking. The imposition of such discipline must be testing for Perth’s best salesman.

He said he planned to build a strong and experienced board of executives and independent directors that would put in place the appropriate succession planning.

When asked about which two or three executives would compare to well-known executives like Mr Branchi and Mr Howson at AHG eight years ago, Mr Hughes was adamant that his management had plenty of talent but he could not be singling people out at this stage.

“It is not a one-man band,” he said.

“I have some very good people who have been with me for a very long time.”

“There are more than two or three.

“It is probably half a dozen.

There are some lessons from history to draw upon, as Mr Hughes and his advisers undoubtedly would have done. AHG, for instance, had separated its freehold land, as Mr Hughes reportedly proposes.

Looking back at AHG’s prospectus, its market capitalisation was based on a multiple of 4.7 times its most recent earnings (EBITDA). While it was not purely an automotive business, the motor vehicle operations represented the majority of its EBITDA, showing a margin of about 2.5 per cent. Using those numbers and John Hughes Group’s latest published data, the Victoria Park business would be valued at around $75 million.     

It is possible that listing the John Hughes Group does allow executives and staff to take a stake in the business, possibly even establishing the conditions for them to conduct a management buyout backed by other investors sometime in the future. But that is not yet obvious to those outsiders keeping a close eye on developments.

While having a strong leader such as Mr Hughes might be good news for investors in the short term, there are clearly risks in having a 77-year-old single-handedly heading the business and being the human brand, even in television advertisements.

That is especially the case if, as has been suggested, outside investors will be in the minority and the group’s extensive land holdings won’t be part of the float. I’m not sure investors can be fully convinced by Mr Hughes’ claims of two years ago that he has good genes with significant longevity in his bloodline. It is hard to imagine seeing that in a prospectus.

Another challenge is not just John Hughes’s rapport with customers. What about suppliers? Perhaps the most extreme example of this in the car business was the fact that Stan Perron’s multi-decade WA Toyota franchise was only formalised in writing a few years ago. Prior to that it was on a handshake.

I am quite sure Mr Hughes isn’t planning to cash in. He clearly enjoys his business with a passion that won’t be diminished if he sells part of it. He is also known for his focus on customer service, so I can only expect that would translate into fantastic investor relations. Nevertheless, investors are different to retail customers and, sometimes, keeping both sets of stakeholders happy can also be a challenge.

Right now I am struggling to think of a company listing where so much of the core business energy, culture and brand assets revolved around one person.

Perhaps Gerry Harvey, from consumer goods retailer Harvey Norman comes closest? 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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