Surprises continue as board moves unsettle National 1

LAST June, Perth investor Barry Patterson surprised the market by staking $10 million to take a controlling stake in struggling office supplies company National 1.

Since then, National 1 has continued to surprise the market, and the news has been nearly all bad.

It has suffered an annual loss of $33.8 million and experienced extraordinary upheaval among its senior ranks.

Over just the past two months, four executive directors have left the board, including company founder and managing director Warren Arbuckle.

Other casualties included chief executive Paul Simpson, who lasted only 10 months with the company.

Last week, the company appointed a new managing director, but the choice has raised as many questions as it answered.

The new MD is Dan Fogarty, an experienced accountant who recently resigned from Ernst & Young.

However, National 1’s announce-ment failed to mention he is the son-in-law of Mr Patterson.

Nor did it mention that last month he established a new business, Corporate Tax Consulting, with another former Ernst & Young partner, Ian Crisp.

This hardly sounds like a smooth and orderly transition.

It’s the kind of shake up that often precedes more financial pain.

Mr Fogarty has been a non-executive director of National 1 for less than two months, and the only other director with more experience is Mr Patterson, who became chairman last June.

Kalgoorlie-born Mr Patterson made his name – and a very tidy sum of money – as one of the founding partners of mining contractor Eltin, which was bought by Henry Walker Group (now Henry Walker Eltin) in 1999.

Since then he has invested in a range of smaller stocks, including Sonic Healthcare and its technology spin-off Silex.

Mr Patterson clearly has deep pockets, having paid $9.5 million in 1999 for Alan Bond’s former home in Watkins Road, Dalkeith.

He and Mr Fogarty have been joined on the National 1 board by newly recruited finance director Mark Manderson, who formerly worked for Canadian energy utility TransAlta.

The three current directors have undoubted business acumen and will bring much needed financial discipline to National 1.

The challenge they face is to ascertain the depth of National 1’s problems and implement a turnaround solution.

When the company listed on the Australian Stock Exchange in October 2000, its core business was Perth-based Skyjack Computer and Office Supplies.

Mr Arbuckle shifted its focus from the retail market to the corporate and government market and pursued rapid national expansion.

The listing on the ASX was followed by a succession of interstate acquisitions, as the company sought to lift sales volumes through its eight distribution centres.

Unfortunately it was constantly dealing with integration issues, operational problems and cost blow-outs rather than reaping the planned longer-term benefits.

For instance, the 2002 annual report noted that: “The relocation to new [distribution] centres in Sydney and Melbourne took longer than planned with the result that cost savings were delayed”.

Another drain on the company’s resources was its investment in an online ordering system.

The company’s investment in new infrastructure ran well ahead of its actual sales.

In particular, its national distribution centre network has a capacity three times current sales levels.

In 2003 it ran into more problems with “the troubled acquisition of CPI Trading and the logistical issues of last summer’s Back to Schools program in Victoria”.

Its financial results were also knocked by the deferral of $5.75 million of revenue attributable to advertising in its catalogue program.

In addition, the company wrote off all goodwill associated with its prior acquisitions.

This increased the amortisation charge by $23.7 million and blew out the annual loss to $33.8 million.

Despite all of these problems, Mr Arbuckle was always able to put a positive slant on the company’s performance.

In June last year he wrote that the “one-off operational issues are now behind the company and the board is confidently forecasting a material uplift in earnings in the 2003-04 financial year”.

Just three weeks later it had to agree to a deeply discounted $10 million capital injection (at one-third the prevailing share price) from Mr Patterson to try and resolve its cash-flow problems.

As recently as last September Mr Arbuckle wrote: “The new board believes it has dealt with the issues that affected the 2003 result and is forecasting significant improve-ments to operational performance during the 2004 financial year”.

If the company does lift its performance, Mr Arbuckle won’t be around to share in the bright future.

He originally held a controlling 49 per cent stake in the company.

However as a result of Mr Patterson’s capital injection and the sale of five million shares last month, raising just under $1 million, Mr Arbuckle’s stake has been diluted to 26 per cent.

Mr Patterson, who holds a controlling 41 per cent stake in the company, is sitting on a large paper profit.

He invested at 10 cents per share, and the price is now around 20 cents per share.

However, given the limited liquidity in National 1 stock, he would be unable to offload his stake at anywhere near current prices, if he wanted to.

The few brokers who still keep an eye on the stock expect Mr Patterson is in for the long haul.

“He wouldn’t have taken a position of that size without taking a long-term view of the company,” said one broker.

In light of the turmoil affecting National 1 it seems Mr Patterson will have little choice but to take a long-term view.

WA Business News was unable to contact Messrs Patterson or Fogarty at the time of going to press.

Over just the past two months, four executive directors have left the board, including company founder and managing director Warren Arbuckle. Other casualties included chief executive Paul Simpson, who lasted only 10 months with the company.

NATIONAL 1’s REVOLVING DOOR

2 June  Paul Simpson             Appointed chief executive

23 June            Peter Unsworth             Resigned as chairman

            Barry Friere             Resigned as director

            Barry Patterson             Appointed chairman

1 Dec            Matthew Lamont             Resigned as executive director

            Dan Fogarty             Appointed director

15 Dec Paul Ballardin             Resigned as executive director

31 Dec Paul Simpson             Resigned as chief executive

20 Jan  Warren Arbuckle             Resigned as managing director

            Dan Fogarty             Appointed managing director

            Mark Manderson             Appointed finance director