Tractors and television
Kerry Stokes has done it again. Ian Verrender reports.
KERRY Stokes didn't become a billionaire by throwing his money away. So when the inevitable question arose yesterday of why on earth anyone would want to merge tractors with television, it was difficult to avoid the superficial conclusion that this was a deal designed to benefit the man behind the wheel of both companies.
Selling your privately owned business into the public company you control has never been a great look and is always guaranteed to trip the shark alarm.
The one ace Stokes (pictured) had up his sleeve in the proposed merger of his privately owned WesTrac - and its Caterpillar earthmoving equipment franchises - with Seven, the company of which he is executive chairman and major shareholder, was that he would not be taking cash from the transaction. Instead, he will emerge with absolute dominance of Seven, with 68 per cent, as opposed to his current status of mere unquestioned control with 48 per cent.
Stokes and entourage fronted analysts and reporters yesterday to spruik the deal, the latest in a string of surprising corporate manoeuvres - some baffling, most hugely profitable - that have catapulted the Perth mogul into the stratosphere.
As the analysts sat there, poring over the wad of documents outlining the proposed merger, most were desperately searching for what they love to call synergies.
These are the projected cost savings that are forecast to flow from the marriage of two similar businesses. Sadly, there seemed to be few obvious ones on offer.
But the synergies are more financial than operational. In fact, from a bookkeeping point of view, this may well be a merger made in heaven.
Seven is a business with about $1 billion of spare cash in the kitty. And WesTrac has debts of close to- ahh, you guessed it, $1 billion. Put those two together and what have you got? A business with no debt.
In recent weeks, Stokes no doubt would have taken a keen interest in the rapidly unravelling fortunes of his contemporary Ric Stowe. It has been the talk of Perth.
An intensely private man, Stowe was the epitome of discreet wealth, spending most of his time in Monaco while pulling the strings on his vast, privately owned business empire with interests in mining, power generation and pastoral pursuits.
Privacy, however, comes at a cost. If all your equity is employed in the business, the only way to expand is either through debt or selling equity to others. Stowe opted for debt and it proved to be his undoing.
For years, Kerry Stokes has ring-fenced WesTrac. It was his personal business domain, his private fiefdom. Its results were never made public; its successes were only hinted at through the financial reporting of the Caterpillar group in the US.
But it was always assumed, reasonably as it transpires, that his Caterpillar business was as valuable to Stokes as his media interests, or more valuable.
Yesterday the veil was lifted for the first time. And what treasures were revealed. Apart from its respectable earnings, which not surprisingly took a huge knock last year as commodity prices tumbled, there was the debt; the $1 billion of debt that sheets back home to Stokes himself.
And buried in those documents was this little gem, a footnote attached to a sensitivity analysis on interest rate movements: ''The FY11 calculation assumes that approximately $600 million of WesTrac group loan facility is repaid on July 1 2010 using Seven's cash.''
That's a mighty handy assumption, particularly given the repayment deadline is just four months away.
Global credit markets have recovered somewhat since the dark days of 2009. And WesTrac, which has Caterpillar franchises in six provinces in northern China, where a mining and infrastructure boom is in full swing, along with its West Australian, NSW and ACT franchises, is the star franchisee of the Caterpillar group.
It would be reasonable to assume WesTrac would have no difficulty refinancing that loan.
But the days of easy credit are gone and interest rates and terms are far more onerous now than they were prior to the global financial meltdown.
Banks and financiers suddenly have discovered the concept of risk and are charging for it. And risk has again risen to the fore as bankers begin to shut the doors, particularly on cross-border transactions.
Sovereign debt, normally considered a haven for lenders, has taken on a riskier proposition with the threat of Greece defaulting, raising the stakes all the way down the lending line.
WesTrac is heavily exposed to China, which, if the conventional wisdom is correct, will continue its long march to economic dominance this decade. But it is not without risk, either political or economic.
Then there is the risk with the Caterpillar franchise. A fairly loose arrangement, the franchise can be terminated by either party within 90 days simply by writing a letter. Unlikely but still possible.
