HNZ and PGW shares secure loan to buy more Heartland shares.

We promised to start digging in our previous post and guess what? Dig and you will find!

We believe the reason Bryan Mogridge specifically and the Pyne Gould board, at the time made up of George Kerr, Bruce Irvine, John Duncan and Mogridge, changed their story is because although they promised to return the assets “surplus to core business requirements” (cash, PGW and Heartland shares), they used it as security to a loan to purchase more Heartland shares.

Someone was kind enough to send us the following information with the following advice,

If you are in a hurry and assume someone is trying to hide something in a dustbin then a bright spark will turn the bin upside down and dig through the garbage from the “bottom up”; read this report starting on the last page. 

The report is the target company statement and we followed the advice and turned the “dustbin” upside down, starting on page 37 of the PDF document. There are two schedules at the back, which we skimmed through. The serious reading starts on page 23 (PDF) clause 24, which sets out the cross shareholdings of John Duncan, Bryan Mogridge, George Kerr and his companies in PGC, Heartland etc. It is the last line of 23.4 (b) that delivered the “aha moment”.

Bear in mind that we had the benefit of getting some good advice to read the document starting on the last page first. Most readers would miss this, simply because it is mentioned towards the end of a lengthy, boring document; at the bottom of the bin. You can legitimately argue that you cannot read anything into the fact that it is at the end of the document. We are not so easily convinced.

Let us continue; it says the underwriting obligations were specified in a deed on 14 June 2011, which indicates that the board, Bryan Mogridge, George Kerr, John Duncan and Bruce Irvine knew in early June 2011 that the non-core assets were in fact tied up as security to borrow money to underwrite the Heartland share purchase. Usually the reason you borrow money is because you do not have any spare cash lying around and usually if you post security that security cannot be sold.

Here you have the PGC board using the non-core cash and posting the PGW and Heartland shares to take out a loan to buy even more Heartland shares. Also remember that all four directors have shares in Heartland and two of the PGC directors Bryan Mogridge and Bruce Irvine sat on the Heartland board at the time and Bruce Irvine is the chairman of Heartland. It strikes us as very peculiar that these board members have no problem to take Heartland shares, which they promised to return to shareholders and use it to secure a loan to buy even more Heartland shares. In this case they also requested a waiver from the New Zealand stock exchange to have shareholders vote on this related party transaction without mentioning that they have not told shareholders that those Heartland shares the board promised to return to them have been used to take out a bank loan to buy even more Heartland shares. We will soon look at the waiver in detail.

Pay attention to the fact that the signatories to this document is Bryan Mogride, Bruce Irvine, John Duncan and James West, while the last document and one with the most legal significance (it is a prospectus) that “promised” to return the Heartland was signed by Bryan Mogride, Bruce Irvine, John Duncan and George Kerr. 

Now that we know that as early as the beginning of 1 June 2011 and no later than 14 June 2011 the board knew the non-core assets were tied up as security to buy more Heartland shares it is insightful to revisit some of the board’s statements. 

• 25 Jul- a waiver is received for underwriting Heartland’s capital raising efforts and it is not mentioned that the Heartland and PGW shares were used to secure a loan to finance the underwriting of this deal. The waiver is granted “On the basis that the information provided to NZXMS is complete and accurate in all material respects”. What? This loan and the way if was secured is not material, especially in light of the fact that the board promised to distribute these share to shareholders in a prospectus.
• 1 Sep – board tells shareholders that it used $16.5m to buy Heartland shares and although it does say it used bank debt to do it, it does not say anything about the fact that it used PGW and Heartland shares to secure the bank loan.

• A very peculiar thing happened on 12 Sep and 16 Sep. On 12 Sep the board releases a market update, dated 9 Sep and on 16 Sep it released the same statement, but it added another paragraph. The 2^nd release has been removed from PGC’s website in the meantime. We were able to obtain a copy and post it below. You can verify that the document was removed by clicking on the link for the press release for 12 Sep (Market Update for PGC) on PGC’s website or by clicking here. The added text is relevant and reads, “Since balance date PGC has purchased a 6.02% shareholding in Heartland New Zealand Limited and that holding, along with the 9.5% PGG Wrightson Limited the group owns, is under review within the context of PGC’s strategic plan, which will be presented at the AGM on November 1st…” Why does the board not just come out and say it is unable to distribute the shares, because it serves as security to a loan?
• PGC published its financial statements for the period ending 30 June 2011 on 19 Sep and note 9  says “In addition, as discussed in note 22, the Company sold 8.8% of its investment in PGG Wrightson Limited (PGW) during the year ended 30 June 2011. As at 30 June 2011 the Company retains a 9.5% investment in PGW. This investment has been classified as a held for sale asset as at 30 June 2011.” Come again! The PGW shares that are tied up as security is an asset held for sale.
• At the AGM on 2 Nov Bryan Mogridge gives shareholders a long list of reasons why the Heartland shares and PGW shares cannot be distributed, but does he mention that these shares are used as security for a loan? No.

Cheerio!
jA
2011PR