Institutions should stick with F&P

Why doesn’t Tower Investment’s Sam Stubbs round up a few institutional investors in Fisher & Paykel Appliances and go pay a call on Haier at its China HQ and say they want to stay in with the company for the long haul?

How hard would it be for the mercurial Stubbs to muster a coalition of the usual suspects and go tell the Chinese whiteware manufacturer these words:

We believe in the Chinese growth story. We’re happy enough for you to have control of Fisher & Paykel Appliances. Plenty of retail shareholders will simply sell out on the basis of their brokers’ recommendations and some of our colleagues will also book a quick profit and bonus on the way.

That’s just the way of our short-sighted Kiwi sharemarket, and we know you’ll get control because you already have nearly 40 per cent through your lock-up deal.

But we want to keep an exposure to F&P Appliances – how can we make this work for the long-term benefits of our investors?

Right now I’m scratching my head to think of any prominent fund manager who is taking a seriously long-term view of F&P Appliances’ potential to expand much further over time in partnership with major shareholder Haier – including Stubbs.

Stubbs did rather elegantly put the boot into the Haier offer by saying the NZ whiteware designer and manufacturer was at risk of being sold for “a steal”.

But he appeared more interested in pushing the offer price well above the current $1.20 to at least $1.50 a share than rounding up a posse of like-minded investors with sufficient shareholdings to block the takeover and stay in for the ride.

Haier has a 20 per cent stake in F& P Appliances. It has already signed a lock-up deal with Australia’s Allan Gray whose modus operandi is to build stakes in companies whose share price is much lower than their underlying value suggests.

The Allan Gray stake – held through Orbis – is 17.46 per cent of the East Tamaki-based company.

The Australians will book a considerable profit, as will many of those who will accept the Haier offer.

But what happens next?

The great thing Stubbs did do was to go out himself and kick the tyres at F&P Appliances HQ, reporting back to the market that Haier was “getting a steal” at the current $1.20 a share offer.

Management had done a great job and the company was on the verge of realising huge value from its technology – further “game-changing technology” was coming down the pipeline from a company which had R&D in its corporate DNA.

As the Herald further noted, F&P Appliances already supplies direct-drive washing machine motors to Haier and Whirlpool, and in 2010 the firm unveiled a new refrigerator compressor it claims has the potential to revolutionise the industry.

So with all this upside, why are fund managers focused on the old game of extracting as much immediate value as they can instead of on how much more could be achieved over time if they stayed for the ride on the Chinese firm’s coat-tails?

Here’s the thing.

When Chinese Premier Wen Jiabao and Prime Minister John Key first met in Beijing in 2009, the Chinese leader spruiked a future where Kiwi firms and Chinese companies could marry-up their respective skills and joint-venture into third markets as well as each other’s.

It was the story of marrying New Zealand IP and “can do” innovative smarts with Chinese capital, manufacturing scale and product access, not only to the world’s fastest-growing consumer market but also other rapidly growing Asian markets.

That story still stands. The F&P Appliances board is expected to recommend that shareholders accept Haier’s takeover offer.

Haier has advised its “current intentions” are to retain F&P Appliances brands and businesses in NZ, Australia and the US, support F&P’s existing business strategy, keep the CEO and HQ New Zealand-based, retain key personnel and material businesses (other than a potential divestment of F&P Finance), retain the company’s product development base here, jointly manage secondment programmes to F&P, retain the existing ratio of NZ or Australian resident independent directors for two years after the takeover, maintain open lines of communication, and retain the organisational culture of the company.

In other words the same bums will be on the same seats – for a while.

Yesterday, Haier’s local PR agent sent me a note drawing my attention to the Chinese firm’s stated intention.

“Some commentators are dismissive of, or are ignoring, the stated intentions, perhaps not fully understanding [the] truth in [the] takeover obligations. You will understand in stating such intentions, Haier considered its position very seriously.”

Let me note here Haier’s commitment is simply its current intention. The Overseas Investment Office can and should firm up Haier’s intentions through the approval process.

Haier obviously deserves a plaudit for injecting $82 million into F&P Appliances in May 2009 when the Kiwi firm was drowning in debt, stopping the iconic Kiwi firm from collapsing.

But Haier clearly plans to sell F&P Finance to help fund its takeover, giving it control of the company on the cheap.

Haier’s global strategy is focused on targeting the middle and upper ends of the appliance market.

The Chinese appliance market has slowed down. But this is merely cyclical. The wheel will turn again and Kiwi institutional investors should stay on it.

Take F&P Appliances out of the equation and that is one less stock for the country’s KiwiSaver funds (and even the NZ Super Fund, which has a pathetically passive approach to such investments) to place the country’s retirement savings.

I think the Super Fund should amend its strategy.

It had $210 million invested in the Chinese stock market at June 30, 2011. But its investments in NZ firms with significant Chinese shareholdings are minuscule – just $6.3 million shares in F&P Appliances.

The fund won’t be taking an aggressive approach in this takeover, as it outsources management of the holdings.

But it is time we had a Government-led entity that took strategic stakes in our iconic companies and held them for the long-term where prospects were good.

If not the Super Fund, then what else?

  • This NZ Herald column is republished with permission of copyright holder APN NZ.



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