15/03/2005 - 21:00

Tim Treadgold: Briefcase - The private to public path to pain

15/03/2005 - 21:00


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If Len Buckeridge needed another reason for not floating his BGC Group on the stock exchange then John Roberts has just given him one.

If Len Buckeridge needed another reason for not floating his BGC Group on the stock exchange then John Roberts has just given him one.

Heavy losses on London’s Wembley stadium, and the awkward way with which the Roberts family handled the release of the news, has made their business, Multiplex, the target of some very pointed criticism.

Among the less hurtful things being said is that Multiplex has struggled to make the transition from being a big private company to the status of a publicly-owned business with considerable responsibilities in keeping all shareholders and the wider financial community fully informed of material events.

John, Andrew, Tim and Denby Roberts will have hated the experience of a public debate about whether they are doing a good job, or otherwise.

Not only is it a novel event after 40 years of privately handling problems, it will be taken as an insult by a very rich family which is used to getting its own way.

This lesson will not be lost on Len Buckeridge who has toyed over the years with the concept of listing BGC.

His only excuses so far delivered, Briefcase suspects, with tongue firmly in his cheek, is that he would have to (a) “buy a new suit” and (b) “make a speech at the annual meeting”.

Given Len’s habit of occasionally dosing his language with extremely ripe words that annual speech would have been a highlight on the annual media calendar. Briefcase, for one, wouldn’t have missed Len’s appearance for anything, if only to see the normally leather-clad architect-turned-builder in a slick new three-piece suit.

On a more serious note there is the very important question of why do big private companies, especially those in the contracting business, struggle when listed.

The painful exposure of Multiplex to the public gaze is nothing compared to the melt-down of an equally well known Perth business icon, Clough Engineering.

Since floating a few years ago, Clough has lurched from crisis to crisis, and is now on the way to being acquired by a South African contractor – and no prize for guessing what Briefcase reckons will happen when the chaps from Jo’berg get their hands on the levers and finish the job the Clough family started.

Analysing what goes wrong in the transition from private to public is almost certainly a wonderful subject for an academic study, perhaps by a doctorate student at one of Perth’s universities.

However, to help the students (and save readers waiting five years for the academics to do their bit) Briefcase offers these possible explanations for the private-to-public mystery.

1. When you’re private you can bury your mistakes. Going public means hanging them up for all to see.

2. The contracting and building industry is notoriously cyclical with mistakes and losses just part of the background noise.

3. The stock market is driven almost totally by short-term fund managers who want a profit now, not in 12-months time.

4. Choosing senior managers by their surname is not necessarily the best method of judging ability.

5. Public company reporting standards are onerous, expensive and the transition means that managers take their eyes off the ball.

Set against those reasons for not listing on the stock exchange is the very big lure for making the move – multiples.

When you’re private your business is valued at a much lower multiple. In the case of Multiplex, when it was private, its bankers probably valued it at a 10-to-12-times multiple on its profit. Today, it is valued at 30-times, using the latest price-earnings ratio as a guide.

So, where does that leave our Len. Well, the dollars must be attractive. Using his group sales estimate of $1.15 billion (according to WA Business News Book of Lists) and assuming a profit margin of, say, 7 per cent, then BGC produced an annual profit of $80.5 million (at a 10 per cent margin the annual profit is $115 million).

At a 12-times multiple and using the $80.5 million profit as a notional guide, BGC is worth $966 million. At the 30-times currently being assigned to Multiplex then BGC is worth $2.4 billion.

The numbers, of course, are an example of GIGO (garbage in, garbage out) – but they are indicative of the difference between private and public values.

There is also a flipside to this. What happens when a public company, such as Multiplex, commits a blooper, such as being slow in delivering bad news. Well, the Wembley fiasco has knocked the best part of $1 off the share market price of Multiplex which, with 843 million shares on issue means a paper loss of $843 million – another lesson not lost on Len as he contemplates private v public, and the fate of all men.

On the question of money there is a very heated debate raging in financial markets about value – more specifically, where can it be found.

The resources sector is at a high, and probably only has one way to go. Bank stocks are feeling the heat of rising interests (and reduced lending).

Property has definitely peaked and is on the verging of a very painful slide, and quality fixed-term deposits are still in the 5-to-6 per cent range.

Briefcase does not give investment advice (and is not allowed to) but believes that the best value today, even with low rates, is in cash, for two reasons.

First, now is a good time to park your money because values are likely to descend across all asset classes. The price of oil is enough to knock the stuffing out of most economies and the pain from the looming property market collapse will affect everyone from home owners to retailers.

Second, cash has a marvellous quality that shares and property do not confer – you can enjoy it, spend it, buy something new, or go on a holiday.

And, apart from all that cash is cash and will still be cash after any asset-value shake-out.

“The English instinctively admire any man who has no talent, and is modest about it.” James Agate.


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