We were quite alarmed when this question was first put to us, but with a bit of explaining we were convinced there is enough merit to put something up on the blog. This is a serious question, but the following will unfortunately indicate it is well worth asking.
As it was explained to us the first issue to consider is the one that was raised by Reese Hart in his letter to the Board, which are the results of the strategic review conducted by PGC in 2010/2011. The results were announced in April 2011.
It is important to understand exactly what a strategic review is. It is not the tinkering or fine tuning of an existing strategy. It is an extensive review of the heartbeat of the business and the future direction into which the ship will be steered.
It was explained to us by means of the following example, which we found helpful. A company is a bit like a bus and investing in a company a bit like going on a Contiki tour. The main difference between the Contiki bus and the PGC bus is that investors usually intend to take a tour that last several years, rather than the 4 weeks the longer Contiki tours last. It is also acceptable for the driver (The Board) to stop the bus and announce, after a few years of traveling through Asia, that it has now decided to review the trip and decide whether we continue seeing Asia or whether we will rather all see some other part of the world. The Board goes into a little huddle and then announces the decision to now leave Asia behind and drive across Europe, Russia was also considered, but eventually the Board decided on Europe. All passengers now have the opportunity to decide whether they want to stay on the bus and see Europe or rather get off and join some other bus. However, what is not cool is for the driver to tell everyone he is driving across Europe and then sets off for Russia! Should the driver (the Board) really be all that surprised when there is total outrage when after the first night of all night driving the passengers wake up and shout, what the hell, are we doing in Russia!!
Either the driver lied to the passengers or he mistakenly took the wrong turn. It seems that with the PGC Board the comparison is too close for comfort.
So to get back to the real world, what did the Board tell shareholders after the strategic review? After the strategic review, the Board announced in April 2011 that the following strategy will now be followed by PGC (see page 15-19. PGC – THE NEW GROUP).
And then on page 19.
The Board made the new destination very clear, from now on,
a. The focus will be on the wealth management business, and
b. The non core SURPLUS assets (Heartland and PGG Wrightson stakes) and SURPLUS cash will be returned to shareholders.
So the question to ask is, did the Board say we are crossing Europe, but are taking shareholders to Russia? Well if you read Reese Hart’s letter and speak to shareholders you can clearly see that shareholder are shouting, what the hell are we doing in Russia!
We asked shareholders, why they feel the strategy changed?
1. On 14 June 2011 PGC management announces that instead of returning surplus cash to shareholders PGC will be participating in the Heartland share placement and $55m capital raise plan. What leaves one gob smacked is that Heartland shares were returned to shareholders on 30 May 2011!! So 15 days after returning Heartland shares to PGC shareholders, management goes straight back into Heartland. At this point shareholders should have realized that the driver is either smoking something or had one too many. Especially considering it happened less than three months after the announcement of the strategic review in April 2011. And if you were still not convinced then consider that as Heart pointed out in his letter, management funded this with borrowed money!!
2. On 1 July Bryan Mogridge announces PGC will participate in the EPIC bank restructuring to the tune of $14m.
3. Not only that, but before you can say “How quickly can you blow all surplus cash” did Kerr start making noises about rights issues.
The following is from page 2 of his takeover offer document.
Now here Kerr is talking through his neck. In Oct, when he wrote that, PGC was not a bus that has been travelling through Asia for years and everybody is still assuming we are all doing India. This is a bus that was stopped in April 2011 and everybody was told we are done with Asia and going to cross Europe, not Asia, not Russia, but Europe. PGC had a strategic review after which the Board (including Kerr) stated that the focus is on the wealth management business and all surplus cash and shares will be returned.
As one party puts it; “In most parts of the world, including the South Island, if a guy tells you he has surplus cash and assets and are returning it to you in April, only to blow all that money in less than three months and then goes on to tell you that on top of that he will very likely be asking you for more cash in future, he will be called dodgy. For guys like Baker Street that might not get the word ”dodgy”, outside of New Zealand it means “liar”.
Strong words from shareholders, but we have to agree, we struggle to see how the above cannot be construed as misleading. What we find particularly interesting is how the Board now seems to try and tell shareholders that they never said the bus is going to Europe, in fact they have not even decided yet. Remember in April 2011 the results of the above strategic review were announced and to us it is clear that a) the bus was stopped and b) a new destination (Europe) was set. We were therefore quite surprised when Mogridge slipped in the following at the AGM in November,
“At the SGM on May 18th I addressed shareholders briefly and said that we would conduct a strategic review of PGC and report at this Annual shareholders’ meeting. I will provide that information now”
We had quite a chuckle at the AGM when we heard that, but it is definitely no laughing matter. So apart from being total nonsense, Mogridge will have shareholders believe he announced a strategic review on 18 May, less than one month after announcing the results of the previous one in April 2011!
This looks more like trying to cover your, you know what. Now that the driver finds himself in Russia he says, “you remember 5 minutes after I said we are going to Europe I said I will think again about where we are heading and tell you this morning. Hey, I’ve decided. We’re going to Russia!
This brings us to our final destination and yes we did take you on a bit of a ramble. Now consider this. Here you have a Board with clear inconsistencies between what they say and do. They say they will return cash and then they don’t and they then go ahead and tell you that they might even ask you for more cash.
Some argue that this leaves them open to accusations of manipulating affairs at the company to force PGC into a rights issue, which will clearly benefit Kerr, which is trying to squeeze out shareholders. As brazen as that statement might seem, we have to admit we do find the following to be a clever piece of thinking in light of where things stand today. Rights issues are usually necessary for when companies run into trouble and have to raise cash to get out of them. With PGC the Board and director Kerr already announced the prospect of a rights issue, but also management announced last week (13 Dec) that the $14m EPIC loan was repaid.
So when you ponder those two facts, the prospect of a rights issue and the $14m payment then you realise that the Board is at a very important juncture. Their decision of what to do with the $14m will clearly tell you what motivates them.
If they are on the side of ALL shareholders and not just on the side of Kerr then they will do what Baobab and other shareholders suggested, to buy back their shares, because their shares are clearly undervalued; even according to Grant Samuel. Either that or they will hold the cash in reserve to shore up the PGC balance sheet.
Conversely, if PGC goes out and quickly do another hot headed deal with the blessing of the Board then we agree with the notion that the Board opens itself up to accusations of manipulation if also at some point in the not too distant future they announce a rights issue.
jA
