Capital markets kaumatua Rob Cameron goes into bat for Feltex
Capital markets veteran Rob Cameron told the Feltex Carpets shareholder lawsuit that he disagreed with allegations the failed manufacturer misled investors in its 2004 prospectus or left out information that might have scared them away.
Cameron, the founder of Wellington investment bank Cameron Partners and former chairman of the politically bi-partisan Capital Markets Development Taskforce, is an expert witness for Feltex's former directors, Credit Suisse Private Equity and Credit Suisse First Boston Asian Merchant Partners, the first three defendants.
He was being cross-examined in the High Court today by lawyers for Eric Houghton, who is suing former directors, owners and sale managers for $185 million on behalf of 3,639 former shareholders who say they were misled by the 2004 prospectus.
Cameron reiterated the opinions in his written brief of evidence from February, when he said that due diligence carried out by the company in preparation for the prospectus "were entirely consistent with the best practice I have seen with other IPOs."
As a defence witness he had been asked to give his opinion on eight matters: whether there was 'market efficiency' in the New Zealand share market; the standard of due diligence; whether prominence given to earnings before interest, tax, depreciation and amortisation (ebitda) as a measure of financial performance in the prospectus was misleading; and whether the use of 'normalised' net profit was misleading.
He also reflected on whether an anticipated sales shortfall was an adverse circumstance that needed to be disclosed; whether theoretical breaches of debt covenants in earlier years should have been disclosed; whether disclosure of an equity incentive plan between the vendor, managers and directors was adequate; and whether enough was said about looming tariff cuts on imported carpets in Australia.
Cameron disagreed that Feltex should have disclosed in the prospectus that the interest cover ratio of 2.5 times and debt cover ratio of no more than 3.5 times it was required to maintain in May 2004 by lender ANZ Bank wouldn't have been met in any of the previous three years.
The IPO had changed the company from a heavily leveraged, private equity-owned business to a public company with less debt, lower interest payments and the prospect of improving earnings, Cameron said. He said the use of ebitda in the prospectus made sense because it stripped out items that wouldn't be repeated and gave a clearer picture of the 'new' Feltex.
"This was a company in private equity going through a transformation," Cameron said. "People in my profession do not care about the past. What I want is for them to strip out non-cash, one-off items so I have a basis to measure the company going forward."
He said companies also needed to juggle the competing needs of giving investors enough information in a prospectus to make an informed decision while keeping private aspects of business strategy that could give rivals a competitive advantage, especially in "aggressive industries" where firms have to react quickly to market changes.
Cameron gave evidence that, based on the trading, the market for Feltex shares had been "sufficiently efficient for the share price to be a reliable estimator of Feltex value." He cited three occasions in 2005 when the company released bad news and the stock fell sharply before finding a new base.
By contrast, when Feltex released its 2004 results on August 24, 2004, showing a $7.7 million shortfall in sales, or about 2.8 percent of annual revenue, compared to the IPO forecast, the stock fell 2.3 percent, which was just within its typical daily trading volatility, Cameron said.
Brokerages First NZ Capital and Forsyth Barr, the fourth and fifth defendants in the suit, both issued reports after the 2004 results noting the shortfall but didn't amend their 'outperform' and 'buy' recommendations, given Feltex kept its 2005 earnings forecast intact. Taken together it suggested the shortfall in sales, which the due diligence committee had known about on June 2 of that year, was not a "material adverse circumstance" that should have been disclosed, Cameron said in evidence.
Asked about Feltex's equity incentive plan, Cameron said as an investor he was "not too interested in what these people got for the work they did when it was a private company." But looking forward, he would advise a client to see what wealth is at stake for directors and managers and that they had appropriate incentives aligned with the interests of the shareholders.
"Private equity-owned firms are highly leveraged, high risk - you would expect high rewards," he told the court.
Houghton, the plaintiff, paid $20,000 for 11,755 Feltex shares in the IPO, drawn to an investment that offered a gross dividend yield of 9.6 percent. All up, vendor Credit Suisse First Boston Asian Merchant Partners raised $193 million, selling 113.5 million shares, and Feltex raised a further $50 million to repay bondholders.
Within a year the stock was virtually worthless, thanks to a series of warnings that the company would miss its prospectus forecasts, and receivers were appointed in September 2006. Australian carpet maker Godfrey Hirst ended up buying the assets.
The case before Justice Robert Dobson is continuing.