BOOK EXTRACT: Serious Fun - The Life and Times of Alan Gibbs, Chapter 11
BOOK EXTRACT Serious Fun - The Life and Times of Alan Gibbs, by Paul Goldsmith (Random House; Kindle edition here)
Chapter 11: The big one: Telecom, 1989–1993
"You can only see the big picture and great opportunities if you’re free to look. Too many people are busy fools. It’s better to make sure you have time to look for discontinuities and the spare energy to do something about it when one comes into view." - Alan Gibbs
For Gibbs, the art of business is doing a few big things in a concentrated way. Just as the lion doesn’t waste its energy catching 100 rabbits when one zebra provides as much meat, leaving plenty of time for lying about in the sun, Gibbs’ approach to deal making was low-volume, high-yield.
But he wasn’t the type to fritter away the lengthy downtimes between jobs. Exploratory travel to remote and obscure foreign lands, reading, working away on projects of interest, such as converting the population to free-market policies, designing the perfect boat, or figuring out where he could drive his new armoured vehicle, have been the sorts of things that occupied his restless mind.
Announcing the sale of Telecom for $4.25 billion (an inflation-adjusted $7.10 billion) in 1989. From left: Gibbs, David Richwhite, Richard Prebble, David Caygil, Peter Shirtcliffe and representatives from US shareholders Bell Atlantic (now part of AT&T) and Ameritech (now Verizon). [Today - Dec 20, 2012 - Telecom and the spun-off Chorus are worth a combined $6.11 billion. the privatisation is now being reversed, at least to a degree. Through Crown Fibre Holdings, the current government is in the process of investing $929 million in Chorus via the purchase of shares and an interest-free loan. - CK]
Having prospered through the period 1979–87 on the back of five or six sizeable deals, Gibbs had no need to return to the field. But his experience as a depressed hippy in the mid-1970s alerted him to the dangers of idleness. Enjoyable and stimulating though all his non-business pursuits were, none provided the thrill of a major commercial deal.
His time as chairman of the Forestry Corporation gave him an appreciation of the scale of the challenges and opportunities in the other state-owned enterprises. The two colossi amongst the group were Telecom and the Electricity Corporation of New Zealand (ECNZ). As the policy to corporatise old government departments evolved through late 1987 and 1988 into one of selective privatisation, Gibbs watched and thought.
ECNZ was a non-starter, notwithstanding the hopes and aspirations of its chairman John Fernyhough and CEO Roderick Deane. Telecom was chaired by Sir Ron Trotter, and at its formation as a state-owned enterprise in April 1987, Trevor Farmer had been appointed to its board. He brought back reports of Telecom’s copious cash flow to Gibbs that quickly pricked his interest.
If one looked over the horizon, beyond the company’s appalling historical reputation for customer service, beyond the fact that it took weeks to put in a new connection and every time Radio Hauraki had a big competition the Auckland telephone exchange would collapse, this was something worth getting excited about. But would the government sell this particular piece of the family silver?
In February 1988 Trotter appointed an Englishman, Peter Troughton, to run Telecom. A tough Cockney who had previously run London’s telephone network, Troughton quickly concluded that staffing levels, which ran to more than 23,000, would need to halve during the next 20 years.
Methodically he set about installing proper business practices that, as had been the case with the Forest Service, had been entirely lacking. There had, for example, been no real asset records. Meantime, after the usual wrangle, Telecom’s board and Treasury officials had settled on $3.2 billion as a suitable book value for the assets being vested in the new corporation.
Whether it was still worth that in early 1989, after the government had removed Telecom’s monopoly over all aspects of telephone services, was far from clear.
Telecom hadn’t been included on the privatisation list in Douglas’ 1988 budget speech but it was clearly a possibility down the line. As early as February 1989 the Treasury had quietly put out feelers to potential buyers, to test the market.
Gibbs picked up on the early chatter and formed the view that the privatisation of Telecom would be the biggest and most exciting deal in New Zealand for many years.
Freightways was already in the telecommunications business. With something like 30,000 consigning notes and 30,000 bills to be sent throughout the country every week, Freightways had developed a powerful computer system with effective networks, including rudimentary email.
Trevor Farmer was keenly interested in all aspects of technology and had little doubt that Freightways’ systems were considerably in advance of anything Telecom possessed at the time. One or two other companies had joined Freightways’ system, and after a while Telecom noticed the massive quantities of line capacity they were using and the hundreds of connections.
Their enquiries led to talks between Telecom and Freightways from late 1988, eventually leading to Netway Communications, a joint venture between the two companies, announced in September the following year. It wasn’t a big deal for Freightways, but the drawn-out exercise leading to the joint venture agreement was useful since it deepened both Farmer’s and Gibbs’ understanding of the industry and of the leading players.
With a likely price tag of at least $2.5 billion, Telecom itself was beyond the capacity of any New Zealand company to buy on its own. Gibbs thought Fletcher Challenge, the biggest local conglomerate, might be interested — ‘Hugh Fletcher,’ he says, ‘wanted to buy everything, at a bargain price’ — but even they would need to partner with someone.
The task therefore was to find a suitable international partner. So while Farmer was concentrating on negotiations with Telecom over Netways, Gibbs began to search on his own in the early months of 1989. He soon got wind that merchant bankers Fay, Richwhite were also tapping the walls.
Michael Fay and David Richwhite had established their own merchant bank in the early 1970s and by the late 1980s had become business celebrities, known for their astute deals and for Fay’s pursuit of America’s Cup yachting glory, starting with a meritorious effort at Fremantle in late 1986 and early 1987.
Gibbs knew Richwhite a little through the Business Roundtable. He’d seen him in action at close quarters during late 1987 and early 1988 when Fay, Richwhite used its strategic holding in LD Nathan Ltd to extract a healthy premium for its shares during the merger of LD Nathan and Lion Breweries.
It provoked a celebrated court case driven by some disgruntled Lion shareholders, which, once solved, allowed the merger to proceed. As a Lion director Gibbs watched the saga unfold and he was later drawn to observe: ‘David Richwhite is one of the most aggressive businessmen this country has ever produced, and I mean that as a heartfelt compliment.’
Having been hired by several of the new SOEs, including Telecom, to raise capital on international finance markets, Fay, Richwhite had deep relationships throughout the Wellington commercial and government worlds.
Gibbs’ general preference was to do things on his own and his mode of operation was clearly very different from Fay, Richwhite’s, with their large workforce and high profile. But in this case he needed the visibility that only a decent-sized investment banking operation could bring.
Fay, Richwhite had a ‘mob of 50 or so people’, Gibbs remembers, and impressive facilities, including an amazing office in Wellington, which Gibbs thought looked like something built for a Turkish harem.
It was a far cry from Gibbs’ little office in the West Plaza building, with only Jacquie Turner to keep him company. Trevor Farmer’s office was scarcely any bigger.
For David Richwhite, meantime, Gibbs was an intriguing and formidable figure.
Alan Gibbs first really entered my consciousness one day during the Muldoon era, probably early 1984, when Michael Fay returned to the office after a lunch with the deputy prime minister, Jim McLay, and a few businessmen. He was fizzing.
Apparently Gibbs had let rip at McLay ￼￼about Muldoon, it was an amazing situation; he just went for it. Michael was impressed, shocked, and in awe of his courage. Then a few years later I saw it myself at an informal meeting of business heavy-hitters a couple of days after the 1987 share market crash.
Chase, Equiticorp and those sorts of businesses were all going downstairs and someone, maybe Alan Hawkins, called a meeting. They wanted us to stump up $20 million each to support the market, like JP Morgan had once done in the US. I sat there listening.
Then suddenly Gibbs just launched into it. ‘The notion that you can throw a few million together to support a market is just nonsense; you guys have been cowboys for your investors and you’re getting what you deserve.’
When he goes for it, he combines the precision of a scalpel with the power of a chainsaw. The delivery is brutal, but what he said was right on point. So I knew Alan Gibbs was razor sharp and terribly impressive.
Gibbs and Farmer called Fay and Richwhite in early 1989: ‘We think we should buy Telecom. There’s a huge play here, we can probably get it for a good price, but we can’t do it ourselves; we’d love to work with you.’ Gibbs said that he’d handle the deal from their end; after a short discussion at the other end, Richwhite was nominated as their leader.
Alongside Gibbs and Richwhite, two Fay, Richwhite men, Rob Cameron, a former senior Treasury official, and Steve Walker (‘Wakka’), a young thruster, rounded off the core of the team. For a while they called themselves the ‘Steam Team’, after a local brew in San Francisco (Anchor Steam) which they’d drunk in large quantities on American visits.
In May 1989, a few months into their quest for Telecom, Gibbs was stunned to learn that Michael Fay had successfully obtained a 30 per cent stake in the Bank of New Zealand for Capital Markets, a public company Fay, Richwhite controlled.
Richwhite remembers Gibbs yelling, ‘Why the hell did you want to buy a bloody bank?’ ‘He rang up a few hours later to apologise and said it was an amazing deal, well done; but Gibbsie’s first reaction was right.’ It emerged that the BNZ was laden with bad debts, mostly in Australia, making the investment a sour one.
Gibbs and Richwhite pared back the Telecom task to its essentials. Rob Cameron’s team carried out a very detailed and robust valuation exercise; Richwhite thought they’d have to pay at least $3 billion, a lot more than their resources.
The primary object, then, was to find the hungriest potential buyers overseas, since they’d pay the most and thus were most likely to win the tender.
Gibbs and Richwhite divided responsibilities; Richwhite dealt with Telefonica in Spain, BT and several American companies, while Gibbs concentrated on other Americans. As early as May 1989 Gibbs had met with Bell Atlantic. He quickly concluded that they and Ameritech, another US firm, were ‘the hottest to trot’.
Both Bell Atlantic and Ameritech had been formed in 1984 after the giant AT&T had been forced by the courts to form regional operating companies. Both were amongst the 30 biggest US companies, and they had an appetite for expansion.
The New Zealanders suggested the two American firms might like to work together and despite the fact there were no particular synergies for anyone, they agreed. Freightways and Fay, Richwhite were hired as investment bankers to the Americans’ prospective bid.
Early interactions revealed wide cultural differences between the Americans and New Zealanders. Gibbs recalls:
The American telephone executives were used to being treated with enormous, almost oriental, deference, which is not something we’re instinctively good at. We were not dealing with interesting, entrepreneurial people; it was more like dealing with a government.
They were vast bureaucracies, although they were competent and very good technically. So we spent time wooing them, trying to be as nice as possible, but it was hard, since the Yanks were very sensitive. They didn’t like friendly abuse.
In the meantime, Richwhite, Gibbs and their PR adviser, former journalist Ian Fraser, conducted an intensive lobbying campaign to neutralise the threat of elements within the Labour Party organisation and caucus who were opposed to the sale and who were trying to delay it long enough to make it impossible to conclude any deal before the 1990 election.
The opposition didn’t amount to much and on 20 March 1990, Richard Prebble, the recently reinstated State-owned Enterprises Minister, introduced the necessary legislation into the House.
Having found the hungriest potential buyers, Gibbs and Richwhite now had two tasks: to win the bid, which meant ratcheting the Americans up to a price that would blow any competitors out of the water and sorting out the endless problems that an international deal of that size generated; and, secondly, to make as much money as possible from the deal.
Each step required the meticulous preparation of a world cup campaign, and the excitement mounted as each hurdle was overcome.
A significant problem to sort out related to international telephone services. The two American firms were barred by US law from being involved in international toll calls which originated or terminated in the US. This meant that in any deal to buy Telecom they would be immediately required to divest the international side of the business.
The Americans had applied to their regulatory authorities for an exemption and, in the meantime, were making plans with a Spanish telecoms company for it to handle the international issue.
But Trevor Farmer spotted an opportunity for Freightways and devoted a lot of time and effort into devising a scheme whereby Freightways would buy Telecom’s international toll call business. This was a very exciting prospect.
Then there was the problem of potential competitors. Fletcher Challenge could be dangerous, so at one stage Gibbs tried to draw them into the tent, but Hugh Fletcher wasn’t giving anything away. This simply reinforced the need to persuade Bell Atlantic and Ameritech to make the best offer possible for Telecom.
Parallel to Cameron’s valuation effort, Gibbs did his usual single piece of A4 paper analysis of how much Telecom might be worth: ‘It wasn’t hard for Telecom,’ he says. ‘It was a lovely, fat company, with huge margins and a lazy balance sheet. It was obvious that if you could keep the margins it would be a fantastic business.’
He told the Americans that they wouldn’t get it for less than a price-to-earnings ratio of 12, which with earnings a little over $300 million, put the price around $4 billion. It was a long, steady process to reveal to them the value in the business.
Meantime, Gibbs and Richwhite ruminated constantly on how they could make the maximum amount of money out of the deal. Initially, reflecting their different mindsets, Richwhite concentrated on extracting the largest possible merchant banking fee from the Americans, while Gibbs focused on gaining an option to take an equity stake in the business.
‘The real value opportunity is to become a principal,’ he repeatedly said. Later Gibbs joked that he was happy to ignore the fee if he got an option, but Richwhite quickly decided that they needed the option and the fee.
But Gibbs’ quest for a slice of the action was critical to their relationship with the Americans; as merchant bankers seeking only a fee, they were servants and the Americans were masters; as partners they stood more as equals.
Richwhite negotiated the fee, which, if they were successful, would be very lucrative. Gibbs’ efforts to gain a slice of the business took longer to bring to fruition. Initially they thought in terms of joining the bid as fully paid-up partners with the Americans.
In that scenario, their aim was to persuade the Americans to apply plenty of leverage to the deal. If, say, they bought Telecom for $4 billion with 75 per cent debt, only $1 billion worth of equity would be required.
Freightways and Fay and Richwhite’s Midavia Holdings would need to find $100 million to take a 10 per cent stake. If the Americans went in with only 40 per cent debt, however, the New Zealanders would be scrambling to find $240 million for a 10 per cent stake. That would be distinctly less attractive.
They held several meetings to discuss the issue, where Gibbs, sweat flying as he drew graphs on the whiteboard, tried to explain his ideas to the Americans. With each repetition of this ‘dog and pony show’, his language became increasingly purple and eyes in the audience widened.
None of it had any effect, however; the American firms operated conservative balance sheets away on this idea, arguing that even though the New Zealand government hadn’t included any formal requirements for New Zealand equity at the start, it could be politically smart and likely to help the bid if they did.
Tension rose as the date for making bids, 6 June 1990, drew closer and the Americans still hadn’t granted them an option. They gained some useful late leverage, however, in that the Americans still hadn’t received a waiver on the international calls issue from the US authorities and their negotiations with the Spaniards had fallen through.
So the Freightways solution was potentially crucial to their bid. Then a few days before the bid was due, Gibbs ‘had a brainwave’. He now offered to commit to buying 10 per cent of the shares at the purchase price.
They’d put down $20 million on settlement day and the rest, $380 million assuming a bid of $4 billion, would be due three years later. The Americans would fund them for those three years, while the New Zealanders would pay them interest on the outstanding money until they paid for the shares. Gibbs recalls:
That got the Americans’ attention. ‘Oh that’s a different deal,’ they said, ‘you’re committed to buy.’ And there it was: the greatest coup of my business career, the chance to make serious money.
We’d own the shares but didn’t have to pay for three years; we’d put down $20 million, but that would represent only part of our merchant banking fee; we’d have to pay interest, but dividends would probably cover that, and unless something went badly wrong, in three years’ time the shares would be worth a hell of a lot more than the original purchase price.
But what if something did go badly wrong and Telecom shares went down over the following three years; what if Gibbs and his friends had to stump up another $380 million in 1993 for shares that were worth only $200 million?
Gibbs hadn’t been prepared to take that risk. Under the deal that he prepared, Freightways and Midavia would buy the shares through a company, Carla Nominees, which only had $100,000 capital and they would give no personal guarantees.
Furthermore, Gibbs took the precaution of securing their $20 million down payment against the shares. Bell Atlantic and Ameritech, for all their lawyers and checkers, overlooked doing the same for their $380 million, so if for any reason the New Zealanders didn’t pay they’d get their $20 million back before the Americans received any of their $380 million. And they were risking only $100,000.
Carla Nominees had entered a binding contract to purchase the shares, but the New Zealanders had no risk. It was effectively still an option.
Now the Bell Atlantic, Ameritech, Freightways and Midavia Holdings consortium had to win the tender. Four other rivals were also in the hunt, including Brierleys, Southwest Bell and Australia’s OTC; Fletcher Challenge and Cable & Wireless (UK); and a separate solo bid by Cable & Wireless.
Apparently an Irish telephone company had sent its application by mail and someone had forgotten to put an airmail stamp on it; it arrived at the Treasury two months late.
Southwest Bell looked the most dangerous. In early June 1990 as many as 250 overseas experts roamed Wellington in great packs as they inspected Telecom’s books in one of five due diligence rooms set up for the deal.
Bell Atlantic and Ameritech had 110 people in Richwhite’s office at the peak. The rules of the offer were that it was a sealed tender. Bids were due on 6 June and were to be opened in formal circumstances in Wellington. Offers would be accepted for all or part of Telecom.
Gibbs and Richwhite were convinced that the best policy was to meet all the deadlines and offer to buy 100 per cent of the company with cash and with no conditions.
Like many partners buying an asset, Gibbs and Richwhite differed over the price they should submit as the time came to confirm their formal bid: Gibbs wanted to pay no more than $3.75 billion; Richwhite was adamant that $4 billion was needed ‘to provide the knock-out punch’. They finally agreed on $4.01 billion, with the extra $10 million in case someone else bid $4 billion on the day.
After months of toil, everyone was exhausted. The American teams sloped off to Fiji for some R&R while they awaited the outcome; Gibbs returned to Auckland. The next morning, however, Richwhite took a call from Peter Thomas of CS First Boston, who was handling the deal for the Treasury. ‘Good bid,’ he said, ‘but you’ll have to sharpen your pencil.’
Gibbs hurried back to Wellington and at about 11pm that evening they were summoned to a meeting at the Treasury with Richard Prebble in attendance. Gibbs recalls:
It was supposed to be a clean auction — the highest bidder wins, simple. This was really important, because so many of the other privatisations had proved dirty, with the government negotiating afterwards.
Treasury had assured us it would be clean this time. Richard Prebble, the SOE minister, was not supposed to get involved personally. But Preb being Preb, he set out to tweak our noses for some more.
We were called down to the SOE offices to find the Treasury guys with Prebble, who told us that despite the fact we were the highest bidder with no conditions they wanted more. In the circumstances it was my job to do the beating up.
I abused him for half an hour — telling him he was a unconscionable crook trying to change the deal, New Zealand’s reputation would be damaged by this double dealing approach, it was entirely unprofessional.
The Treasury guys sat there squirming. After this I said we’ll talk to America and see. We rang up the two companies to tell them about this outrageous turn of events, that the government was cheating on what was supposed to be a clean auction.
Everyone was bloody angry. The chairman of one of the companies had a former US Secretary of Defence with him, who immediately said that he would bomb the bastards for less than that.
It was immoral conduct. We quoted all this back to Prebble, with some embellishment. So it went back and forth along these lines late into the night.
In the end we worked out a deal: we’d give him $4.25 billion but defer the payment. The interest saved equalled the increase in price. It was a clean wash, but Prebble could show off a better price to his cabinet.
Jenny Gibbs can’t recall seeing her husband more irritated and tense in a lifetime of business than that morning when the Treasury and Prebble had started quibbling over the price. Eighteen months’ work and a potentially life-changing deal hung in the balance; he felt as though he were the plaything of politicians.
Prebble concedes that his haggling had nothing to do with the economics of the matter:
I was thinking of the politics. One of the caucus critics of the sale was Richard Northey, who had been reading what media commentators were saying about the value of Telecom, that there was no way that the government would get more than $2.5 or 3 billion.
So Richard Northey went out publicly and said that Telecom was worth a lot more than what the commentators were saying and he wouldn’t vote for its sale unless someone paid more than $4.2 billion. So I knew that if I could get it up to that figure, it would put him in an impossible position.
That’s why I waded in, and I’m not sure Gibbsie’s ever forgiven me. They yelled and screamed, and I just said, ‘If you want to buy it, that’s the price.’ I thought it was the best contribution Richard Northey has made to New Zealand.
The crisis was resolved and when David Caygill, the Finance Minister, announced to the House on 13 June 1990 that the Ameritech, Bell Atlantic, Freightways and Fay, Richwhite bid of $4.25 billion had won, most observers were thunderstruck at the price (adjusting for inflation the figure is around $6.5 billion in today’s terms).
No one thought the government would receive as much. Although the matter was obviously secret, Prebble had received approval from his caucus in March to accept anything over $2.5 billion.
Brierley’s chief executive, Bob Matthew, admitted his company’s bid was well short; Michael Andrews, Fletcher Challenge’s manager in charge of its bid, said publicly that the government and its advisers should be congratulated on achieving such 'an excellent price'.
The value of the business hinged partly on the extent to which it was regulated; to gain the best price the Labour government had committed to virtually no regulation, aside from requiring certain things under the Kiwi Share obligation.
Andrews says that at Fletchers they didn’t believe future governments would leave it unregulated and valued the business lower accordingly. Gibbs and Richwhite were bolder.
The formal purchase agreement would be signed and sealed in September. The two American firms would take 100 per cent of Telecom, but were required to reduce their combined holding to 49.9 per cent within three years; Freightways and Fay, Richwhite would take 5 per cent each and the other 40.1 per cent would be sold to the public in a series of stock exchange floats. Complaints were relegated to the political fringes.
In a decade of deal making, this one had brought Gibbs close to heaven. The $4.25 billion privatisation of Telecom proved to be the sixth largest deal done anywhere in the world in 1990. The merchant banking fee that the Americans would pay Freightways and Fay, Richwhite, which they calculated at $52 million, was unmatched internationally that year.
Gibbs was cock-a-hoop. It had been a great team effort that combined the determination and deal-making brilliance of Gibbs with the breadth of talent and relationships that Richwhite had fostered at his merchant bank.
The Telecom deal was also Richwhite’s proudest moment in business. He summed up their collaboration: ‘Gibbs wouldn’t have won it without us; we wouldn’t have made so much money without Gibbs.’
The world was indeed a sunny place for Gibbs in mid-1990. An earth-shattering event had taken place while he had had his head down crafting the Telecom deal; the Berlin Wall had suddenly been breached in November 1989.
As the Soviet empire toppled, there could no longer be any debate that communism was a failed system; capitalism was triumphant.
Even Bruce Jesson, New Zealand’s most articulate socialist, admitted the centralist socialist model of Eastern Europe had been ‘discredited’ and that ‘no immediate alternative appears to exist to the platitudes of free-market capitalism’.
Gibbs was desperate to get over there to witness these fast-moving currents of human history first-hand. A Mont Pelerin Society meeting in Munich was perfectly timed for September 1990.
After the meeting Alan and Jenny left with Roger Kerr for 10 days to explore East Germany, Czechoslovakia and Hungary. A happy party, they set off in search of some of the curiosities of a dying system, while driving around in a dreadful, smoke-filled Trabant.
Grass grew rank beside the streets, paint peeled from walls, everything was decrepit. Kerr was keen to see some real communist pollution. They found some at Bitterfeld, a chemical town about an hour out of Berlin, which boasted a lake that looked like pure oil. A spark would have set the place ablaze.
The Gibbs wanted to find a genuine East European queue, in which it was fabled women would wait all day for the essentials of bread and fatty meat. But less than nine months after the Wall had come down, Western goods had flooded into the market and much was available. It wasn’t until they reached Prague that they found a sizeable queue, but that was outside a new Adidas shop.
Back in New Zealand, the formalities of the Telecom deal had passed smoothly. But almost immediately after the deal was sealed relations with Bell Atlantic and Ameritech came under strain. Put bluntly, Gibbs says, ‘as soon as we’d done the deal, the Americans decided that we’d screwed them’.
They were very irritable about the way the fee was calculated. They hadn’t realised how it worked. That’s always the difference between people who have got their own money on the line and people who are representing a fat client.
Their advisers probably got beaten up when they returned to the US, so their reputations were on the line. It rapidly became really hairy, to the point where these two giant American corporations said, ‘We don’t need these guys any more, let’s beat up on them.’
Gibbs found himself defending their fee at a negotiating session at the Halekulani Hotel in Hawaii. At times the process was seriously unpleasant. Once again, it was three or four New Zealanders across the table from a line- up of dozens of Americans.
Working on the principle, however, that ‘the art of a good deal is to make the other guy feel he’s won’, Gibbs concentrated on yielding, after much anguish, concessions that made his partners feel like they had made substantial gains, while at the same time proposing seemingly innocuous gestures in return that actually more than balanced in value everything that he had conceded.
At the last session Gibbs tried a new negotiating technique. The big issues had been agreed, but 18 outstanding matters remained on the table. He feared they could drag on for another two days when he wanted to catch a plane home.
So he announced to the assembled Americans that he had to leave in an hour to catch his flight: ‘I propose we auction the last 18 matters: you have the first one you want, I have next choice, then you next, and so on.’ The room broke up hysterically.
Ameritech’s Jeff White said you can’t resolve serious things like a lottery. I said, why not? Someone piped up, ‘We’ll take this.’ OK. There was uproar. Half the room was screaming it was cavalier; the other half was enjoying the fun.
White realised it wasn’t the end of the world and started playing the game and it was resolved just like that. And since I knew the ones I really wanted, we gained a few points and gave away nothing of consequence.
At length all the issues were resolved and Gibbs was free in the New Zealand summer of 1990/91 to celebrate by taking his brand-new boat, Laissez Faire, on its maiden voyage, a circumnavigation of New Zealand. It was a powerful beast, capable of cruising at 30 knots.
With Dave Giddens and some of his usual yachting crew, Gibbs left Auckland at 2pm on a Thursday, refuelled at Gisborne at 2am, Friday morning, and arrived in Wellington at 5pm on Friday, flying the skull and crossbones. Gibbs had found a bronze cannon in New York and had it mounted on the bow.
Rob Cameron had been with Gibbs when he bought the cannon and remembers his irritation when the store wouldn’t provide him with any cannonballs.
But in New Zealand they did get blanks made which held plenty of gunpowder and made a decent bang. On a calm evening in Wellington Harbour Gibbs let one off; the explosion was followed by a cacophony of sirens.
Gibbs had good cause for celebrating at the end of the 1990. The Telecom deal lifted him to another league financially; he’d joined the Telecom board and could look forward to a seat at the table of what promised to be one of the most dynamic industries of the 1990s.
With rapidly expanding cellphone networks, emerging possibilities for email and countless other technological innovations in store, the telecommunications industry offered no end of stimulation.
But if that wasn’t enough, 1990 had also brought Gibbs another wonderful business opportunity. Earlier in the year he’d taken a call from Craig Heatley inviting him and Trevor Farmer to invest in Sky Television, his latest business venture.
Heatley, 34, had been one of the stars of the 1980s, having started out with a mini-golf course on Tamaki Drive. By 1987 his public company, Rainbow Corp, controlled 55 per cent of New Zealand’s supermarket trade through Progressive Enterprises, 20 per cent of Woolworths in Australia and significant property investments.
Cannily he’d sold the business to Brierleys a few months before the stock market crash of October 1987. Casting about for something to do in 1988, he started talking to someone who had a horse racing television channel in Australia called Sky.
At that time, he was on Brierley’s board and they owned Dominion Breweries. He came up with the idea of having a horse racing channel exclusively in DB pubs. When his Brierley colleagues passed on the opportunity, he followed it up personally.
Heatley travelled about, talked to cable TV operators in the United States, and soon became convinced that the opportunity for pay television was far larger than mere horse racing.
Television New Zealand’s (TVNZ) state monopoly would be broken by TV3 in November 1989, but even so, with only three channels there wasn’t sufficient scheduling time to satisfy the public’s desire for programming, particularly in the areas of sport, movies and news.
When the government auctioned off frequencies on the relatively unused UHF band, Heatley and his business partner Terry Jarvis took three and prepared to launch Sky with three channels in May 1990, starting in Auckland, the Waikato and the Bay of Plenty.
Most people thought they were crazy. The idea that New Zealanders would pay for something that they’d always been able to get for free was held to be ridiculous, like paying to have a swim at the beach. That didn’t trouble Heatley, but he knew that since it was a fixed cost business, requiring a substantial upfront investment well before it would pay dividends, he needed to find a couple of investors to share the risks.
He approached only two: the Todd family and the Gibbs and Farmer pairing, both of whom readily agreed to join him. The shareholding would be Heatley 30 per cent, TVNZ 25 per cent, Gibbs and Farmer (through Tappenden) 18 per cent, the Todds 15 per cent and Jarvis 11 per cent.
Heatley had known Gibbs and Farmer for a while. He’d watched their buyout of Freightways in 1985 with much admiration. He’d socialised with Gibbs at the house at Judges Bay and had been impressed by his intelligence and energy.
I always thought of Alan as someone I could learn from. He struck me as highly intelligent, I’m sure his IQ reading would be off the chart, which is something a lot of people don’t see because they’re overwhelmed by his strident opinions.
He can talk about so many things with insight, and in business he could get to the crux of the issue, cutting through all the bullshit, and think laterally. He wasn’t scared to go against conventional wisdom, which is what I needed, and I knew he and Trevor had some significant resources.
Heatley had plenty of credibility in Gibbs’ and Farmers’ eyes, but before they invested their money they commissioned accountants Coopers & Lybrand to undertake a scoping study on the proposition. This advised Gibbs and Farmer that they’d be mad to put their money into Sky.
The gist of the report was that Sky would never attract more than 100,000 subscribers and would go broke trying. Gibbs and Farmer decided to invest anyway. ‘It was an example of Alan saying, “Stuff it, everyone says go left; I’ll go right”,’ says Heatley.
The company launched on 18 May, and Gibbs now had a stake in a media business. Sky didn’t fit the usual Gibbs profile. For a start, he’d paid for it with his own money, rather than receiving a shareholding as a commission for a deal.
It was also a start-up company, rather than a sick company waiting for a dose of Gibbs’ medicine. Nor was Gibbs expecting to play much of a role in running or guiding the company. Tappenden had one seat on the board, with Trevor Farmer attending regularly.
In essence, they were simply investing in Craig Heatley’s dream and trusting his talents. Gibbs’ primary contribution came in mid-1991, a year after Sky was launched. As Coopers & Lybrand had predicted, the fledgling business was taking longer to get established than initially estimated; the New Zealand economy was in deep recession and subscribers were signing on in a trickle rather than the steady flow that Heatley had confidently anticipated.
The business was losing $1 million a week, which gained everyone’s attention. Heatley hadn’t lost confidence but admitted that he’d underestimated the start-up costs.
He remembers Gibbs calling him up at home one evening and saying, ‘Craig, you promised me that if I put a little bit of money in Sky I’d have lots of fun; I’ve now got more than a little bit of money in it, and it’s no fun at all.’
Their solution was to bring in more investors to contribute around $100 million in fresh capital. They started talking to Gibbs’ partners at Telecom, Bell Atlantic and Ameritech, sowing the idea that this could be a useful experiment for them.
In the United States telecommunications companies were barred from investing in cable television, so New Zealand would provide an opportunity for them to explore potentially interesting synergies between the two industries.
Soon a consortium was drawn together comprising Bell Atlantic, Ameritech and two cable companies, Time Warner and TCI, and they began negotiating an appropriate price for 50 per cent of Sky.
Gibbs was in his element. Once more, negotiations were held at the Halekulani Hotel in Hawaii. Heatley arrived first with his lawyer Roger Craddock and together they faced the usual cast of dozens of American executives and lawyers, this time representing four American corporations.
A couple of days later Gibbs arrived, running late because of a delayed flight. Heatley, who had been stalling negotiations so Gibbs would still have time to enter the fray, was summoned to his business partner’s room the moment he arrived.
There he found Gibbs stark naked jumping into the shower, wanting to be brought up to speed on negotiations so not a minute would be wasted. Gibbs fired off questions as he washed his hair.
At the conference room, a well-scrubbed Gibbs soon found himself in a classic piece of negotiating theatre:
We agreed on $108 million, a bloody good price, and they said, ‘Well, we have to refer to our HQs and consult before we give you the final answer, but basically we’ve got a deal.’
Then they came back with the classic tack and said, ‘Oh dear, the due diligence was not as thorough as it should have been and our boards have told us we can’t go that far.’
So they offered us 20 per cent less. I knew that they really wanted it, but they were just trying it on. I said to Craig, ‘No way!’ Then I dictated a letter from our lawyer responding to the offer, which had only one line: ‘Your offer is of no interest whatsoever to our clients.’
We were losing money and they were still offering us $80 odd million. Craig was a bit nervous, but, sure enough, the phone line began to buzz a few hours later and we got the full amount.
Heatley concedes that Gibbs was a much better bluffer. ‘We were in a weak position,’ he says, ‘and Alan convinced them we were as strong as an ox; he knew they were just being bullies, trying to chisel us, and that they’d give way if we held firm.’
The American money gave Sky Television a massive boost, not least by providing the company with the additional capital it needed to get established, but also by adding two excellent executives, CEO Nate Smith and chief operating officer John Fellet.
Fellet’s first memory of Gibbs provides a classic example of his unique method of appraising the quality of executives:
TCI didn’t believe in business class. Since this was its first venture outside the United States, it had no view on 12-hour flights. So I flew to New Zealand in an economy seat and arrived early after an uncomfortable flight and went straight to a breakfast with Alan Gibbs, Trevor Farmer and two of the American directors.
After exchanging pleasantries someone said, ‘John, talk a bit about your background.’ Halfway through my story Alan cuts me off. ‘You bloody Americans had the chance to do everything perfectly after World War Two, but you didn’t have the guts to take on Russia.’
Then he launched into a tirade against America’s lack of courage. I was aghast. I mean, I was born in 1953. I fought back a little bit, as best I could when I could get a word in, which wasn’t easy. I think I said, ‘Well, I’ve just met the only guy in the globe who thinks Americans aren’t sufficiently tough.’
Afterwards I said to my colleagues, ‘Jeez, that didn’t go well’, but the Americans who knew him said, ‘Oh no, I think he likes you.’ Thereafter, when things were going OK, Trevor Farmer would be there, but if Gibbs turned up we knew we were in trouble.
Fellet’s observation that ‘Gibbs is a very entertaining guy and great fun to be around, so long as he’s ripping into someone else’, is probably shared by many executives who have dealt with him. But mercifully, such interrogations were relatively rare.
Over the next few years Sky Television grew into a major force in New Zealand television and cultural life, while also creating good value for its shareholders.
Meanwhile, Gibbs’ nephew Andrew Wall, his sister Wendelin’s oldest boy, had been investing in commercial property in Wellington and spied another good opportunity in May 1991. The New Zealand Railways Corporation
was selling a large parcel of surplus properties, some 2700 in all, scattered throughout the country.
The tender documents said that, all together, the leases generated just over $7 million a year, but information about the individual properties was sketchy.
Everyone knew the parcel would include ‘the good, the bad and the ugly’.31 Having seen the mismanagement of assets in the Forest Service, Gibbs knew that the Railways Corporation’s property book would be a mess.
As well, since the country was in the middle of a severe property slump, he knew that there wouldn’t be much competition from other bidders. Wall and Gibbs combined with Gibbs’ former Unity colleagues, Mark Wyborn and Adrian Burr, to take the lot for around $55 million.
Gibbs and Wall took all the properties south of Taupo; Wyborn and Burr took those to the north.
In Gibbs’ assessment, the sale wasn’t handled well by the Crown:
The government’s neglect of the business it owned was mind-boggling. We bought blocks of land that at our purchase price yielded 14 per cent per annum and yet half the leases hadn’t been reviewed for 10 years. There were bad debts that hadn’t been collected; it was a shambles.
Then to cap it off, the government failed to deliver us some of the properties, so we sued it for incompetence. The damages we received were nearly half the purchase price. It was a perfect example of how poorly the state looks after its assets.
The big game in town, however, remained Telecom, and there the profits weren’t flowing so freely. In fact, through 1991 Gibbs was becoming seriously concerned.
As early as February the National Business Review was quoting some analysts as saying the Americans had overpaid by as much as 25 per cent and would struggle to persuade the public to match $1.81 a share, equivalent to what they paid in September 1990, when it came to floating the first shares.
In the event, they managed to float the first tranche of shares at $2.00 in July 1991. Gibbs still regarded this as a terrible result, barely covering their costs. ‘The idea we couldn’t get more than peanuts above what we’d paid the government was pathetic,’ he says.
The Americans had reappointed Troughton as chief executive at the point of privatisation and had sent Tom Burns, an older American executive, to set up an office in Wellington with a small staff to supervise progress.
Most of the board meetings, which included Gibbs, Richwhite, Troughton, Burns and the chairman, former Goodman Fielder CEO Peter Shirtcliffe, were held with satellite connections to the United States.
Meantime, Clear Communications, a new company with substantial international backers, had started business offering toll calls from mid-1991, using Telecom lines. Since this was the most profitable part of Telecom’s business, Clear had room to cut prices and rapidly gained a 20 per cent share of the market.
To make matters worse, by the end of the year Clear was waging a major public relations battle, lobbying the National government to set up an industry body to regulate telephone numbering. They had succeeded in gaining a Commerce Commission inquiry into the local telecoms market.
The uncertainty, together with Clear’s rapid progress, weighed heavily on Telecom’s share price, which by the end of the year wasn’t much over $2.20.
Over the summer, Gibbs became increasingly agitated:
Troughton thought having got staff down to 12,500, there wasn’t much more that could be done. Yet I’d done quite a bit of work on comparisons with the best US companies and they had half our staffing levels.
The New Zealanders would come up with all sorts of arguments, our topography is hard etc., but I didn’t buy it for a minute. There were plenty of US companies with small rural towns and plenty of hills to contend with. Nor did he have a decent plan to stop Clear eating his lunch.
Well, having tried to kick the hell out of us over the merchant banking fee, the Americans, when they also woke up to the problems, decided they needed me again. Suddenly they started being nice again to old Gibbsie and appointed me chairman of a board subcommittee that basically ran the business.
Troughton came along proposing a big advertising campaign to deal with Clear. ‘We’ve got this big Goliath figure climbing a hill,’ he said, ‘with a huge rock on his shoulders and he’s grunting and the rock is called Clear.’
I said, you must be crazy; the country would laugh itself stupid to think that Telecom is a poor giant carrying a terrible burden. The week after that Troughton resigned.
The resignation in February 1992, which was driven by a number of issues, didn’t solve the problems at Telecom. The Americans put Tom Burns in charge, who Gibbs was convinced was worse.
The share price slumped in the autumn, falling as low as $1.92. Anyone could have bought Telecom shares for less than the American companies paid at the point of privatisation after interest was taken into account.
Gibbs could stand it no longer. Armed with some very detailed valuation work by Rob Cameron and his team, which benchmarked Telecom against comparable telcos in other countries and showed considerable room for improvement, he and Cameron ambushed two key Ameritech executives who were visiting New Zealand and convinced them of the need for change.
Then Gibbs, Richwhite and Cameron went to Chicago to see the top four Bell Atlantic and Ameritech executives together. Their message was typically blunt: ‘You’re an embarrassment to yourselves and the world; you’re going to lose your shirt, which is ridiculous because this company is worth megabucks.’
Part of the problem was governance. The Americans had given semi-retired directors the task of looking after the new investment, while Tom Burns’ local unit, which operated to the side of Telecom’s CEO and reported back directly to the US companies, created all sorts of problems.
Gibbs and Richwhite insisted that the local unit be closed down and Ameritech and Bell Atlantic devote the best directors they could possibly spare to the task. They agreed.
Then Gibbs pulled out an A4 sheet of paper outlining what should be done, which, in essence, was a second round of restructuring to halve the staff numbers again and blow Clear away by being leaner and meaner.
The lead Bell Atlantic director, Bob Levetown, joked, ‘Alan, the only thing that worries me is when you’ve had your way, New Zealand mightn’t have dial tone.’
They were sufficiently concerned, however, to agree that he set up the ‘Telecom Futures Taskforce’, an internal team to be led by Gibbs with a blank cheque to sort out the company’s problems. It would run from August to November 1992.
Once more, Gibbs was in his element:
I said to the Americans, ‘All I want is a bright, tough, telephone man, who really understands how many people you need to do a job and who is a very experienced manager. And on the other side, I want a financial guy who really understands telecom economics. The guy you had working on the bid, Jeff White, would be perfect.’
They agreed, so along with White they sent Ben McMillen, this brilliant old telephone guy who would get in there at 6am each morning and tear into it. They each brought down some helpers and combined with Telecom’s best we ended up with 50 people in a hotel on The Terrace.
I gave them my speech: ‘We’re going to plan a reconstruction of the company within a month. The primary thing is to take labour out of it. I’ve done my analysis and I reckon we can run it with 6500 people.’ They said, ‘Alan, impossible.’
I said, ‘Bullshit. I’m sure we can do it. You’ve got to reconstruct the business as if it was yours. Not as if it’s some lazy American company, but how you would run it with your own money.’
McMillen loved the chance to organise things as he thought they should be. ‘Go to it,’ I said. I’ll be back once a week. They came back with a plan for 6300 staff. ￼￼￼￼￼￼
Running parallel with that, Gibbs worked with White on some financial engineering to gear the business up a little. Their package, which returned $400 million of capital to shareholders, also gave the share price a jolt. Investment in plant and technology, meantime, remained significant.
In the financial year after the reconstruction, Telecom’s investment at $407 million was higher than the $400 million taken by shareholders in dividends.
The next biggest problem was that the company needed a new chief executive. Gibbs came back from Chicago convinced that the best idea would be to find someone already operating in the New Zealand environment, since it took outsiders such a long time to come up to speed with local conditions.
Although he was an economist with no telecoms background, Gibbs thought Roderick Deane had the intellectual grunt and managerial skill to be an excellent candidate. Since leading the State Services Commission in 1986 and 1987, Deane had for five years been chief executive of the Electricity Corporation of New Zealand.
Gibbs and Shirtcliffe took Deane to lunch at Wellington’s award-winning Pierre’s restaurant in early September 1992 and were quickly convinced they had the right man. The American directors were similarly impressed after they met Deane in the US and his appointment was announced on 9 October, starting early November.
From Gibbs’ perspective, the primary task for the new chief executive was to implement the plan that had been drawn together by the taskforce he was leading. Deane had to satisfy himself that it was deliverable, commit to it and then make it happen.
This he did with style, taking on McMillen as his chief operating officer and White as his chief financial officer, and bringing in some of his own people to strengthen the marketing and human resources side, where the taskforce’s work was relatively underdeveloped.
In February 1993 he announced the second round of restructuring, with a goal of reducing staff numbers to 7500 over four years. It wasn’t Gibbs’ original target, but it was sufficient to ‘make the company sing’. The market responded with gusto, sending the share price surging past $3.00 almost immediately.
When critics said Gibbs was tough and mean for slashing staffing levels, his reply was always the same: ‘It’s not me that’s tough on Telecom, it’s the consumers; they want and demand cheap calls. If we hope to remain a profitable business we have to give them what they want.’
Telecom’s progress was also helped by the slow progress Clear was making in its court battles.
The threat of government regulation of the industry had also come to nothing.
Gibbs was not backward in telling National Party ministers that any government changes to the light-handed regulatory regime for telecommunications after the state had just taken $4.25 billion for the business on the promise of that regime would be tantamount to ‘theft’.
There was plenty of competition already arrived or coming, but also scope in a deregulated market for Telecom to make the most of its strong position if it did the basics well.
After six months or so of close involvement, Gibbs eased back, knowing the company was in safe hands. But, as Deane recalls, he remained an active and intensely interested director:
Around the board table he was an agitator, which is why the Americans loved him, because he was prepared to take the flak with management. But his interventions were always crisp and incisive.
What I liked the most was the fact that I knew if I stuck to my guns and my arguments were in good order, he’d listen and reason with me. Then he’d let me get on and manage the company. He never opposed me on something that he knew mattered to me.
He’d have strong reservations, but at the end of day I was the CE. Best of all, he wouldn’t keep revisiting things. He was always focused on the next issue.
In the same way, although he’d often give the staff a hard time, they enjoyed working with him because he was hugely stimulating, imaginative and creative, and he forced them to fight for their ideas.
I used to tell them, ‘You’ll never get a more outstanding low-cost consultant than Alan Gibbs.’
To Gibbs’ mind, Deane was ‘an outstanding manager, excellent at building effective teams, focused on making money for shareholders and an all-round good guy’.
The Telecom board, under Peter Shirtcliffe, was a unified and well-rounded group, spearheaded by what Shirtcliffe describes as ‘a couple of money makers’ in Gibbs and Richwhite, and a very good CEO. The company prospered.
Gibbs was happy now. As September 1993 drew near, when Freightways and Midavia Holdings had to buy their 224 million Telecom shares from the Americans at the privatisation price of $1.81, the share price was floating upwards towards the $4.00 range.
Gibbs’ and Farmer’s pay day arrived when they outlaid around $200 million for their 112 million shares and immediately sold 67.5 million on the open market for $256 million (at an average price of $3.80 a share). They’d made more than $50 million instantly and still retained 50 million shares, with a market value of $210 million.
Gibbs was convinced these shares would continue to rise in value; Fay and Richwhite, who had other pressing calls on their money, sold down their shareholding more rapidly.
Brilliant negotiations in 1990 and the insistence of a second round of restructuring in 1992 to set the company back on track had produced the highlight in a successful career of deal making.
Real money is often made at the point of discontinuities: when seismic shifts occur in the economy, such as from a regulated environment to a deregulated one, or from state enterprise to privatisation. Such conditions provide the opportunity for a few smart entrepreneurs who are in the right place at the right time to prosper extraordinarily.
But, as the purchasers of the Bank of New Zealand, New Zealand Steel and the Central North Island Forest discovered, there was nothing automatic about profiting from privatisations.
Already by late 1992 commentator Bruce Jesson had placed Gibbs at the centre of the group he named ‘The New Elite’ who had come to dominate New Zealand commerce since the 1970s. ‘Names like Gibbs, Fay and Fernyhough,’ he observed, ‘had replaced the Hellabys, Leys and Winstones.’
He lamented that the weight at the apex of the economy had shifted from producers, honest toilers like James Fletcher who built things, to financiers.
Gibbs epitomised the new breed; flexibly and unsentimentally applying his business and financial skills and his capital to whatever industries produced a good return — freight, electronics, banking, bricks, lingerie, telecommunications, television or pottery.
In this new world, Jesson opined, ‘producing a newspaper is no different in principle to producing a can of baked beans’. Quite why a fluid and adaptive style of business was morally inferior to a static one, he never made clear.
But interestingly Jesson’s rose-tinted glasses were already being applied to the older generation of businessmen. He claimed that the old elite had not been particularly political. They were content with the status quo and confined themselves to some lobbying.
Gibbs knew otherwise; they’d vigorously defended a system of import licences and protections that privileged them. Jesson was now a senior figure in the Alliance Party that under Jim Anderton was raging against the reforms and riding high in the polls.
The battle for New Zealand’s soul had reached a vigorous stage and history was being furiously rewritten. Gibbs was squarely in the frame, not just because of his astonishing commercial success, but because he was an active soldier in the ideological warfare.
Extracted from Serious Fun - The Life and Times of Alan Gibbs, by Paul Goldsmith (Random House; Kindle edition here)