Smiths City paying $20M for Smith and Brown

Press, 16 September 1987, Page 35

Smiths City paying $20M for Smith and Brown

By

NEILL BIRSS

Smiths City Group is paying about $2O million for the Smith and Brown chain of retail shops.

But based on the sharemarket value of Smiths City at the end of last month, the value of Smith and Brown is close to $BO million, Smiths City shareholders were told yesterday.

Mr Kevin Smith, chairman and managing director, and Mr Peter Leeming, group general manager, fielded questions from shareholders on the purchase at the annual meeting of the company in the Chateau Regency, Christchurch. Asked how much cash was being paid, Mr Smith said part of the price would be met by a share issue, but ahead of approval for the deal by the Commerce Commission declined to say what proportion. Mr Leeming, on the potential of the purchase, said that last year Smiths City had sales of $2OO million. At the end of August the sharemarket capitalisation was about $lOO million. Smith and Brown had sales of SISOM, and the price was “approximately $2O million.” If the shareholders had faith in the directors, the

purchase would have great potential for Smiths City, Mr Leeming said. However, because of difficult trading conditions, the potential would not be realised in the short term.

A placement of shares would be made with a number of institutions, some existing shareholders in the company. “The value of the equities to be placed will not be substantial relative to the equity of the company at the moment.”

The expansion was “in our own field,” and Smiths City could do other things with the assets acquired.

Mr Leeming said he and Mr Kevin Smith a few years ago had flown to Auckland to see Mr Alan Hawkins, chairman of Equiticorp Holdings, which had bought a controlling stake in Feltex, which owned Smith and Brown.

“The couple of lads from North Sydenham, shopkeepers, sat in front of the mogul in his boardroom for 15 minutes,” Mr Leeming recalled. Equiticorp was not interested in selling Smith and Brown then, and the idea had gone into the background when Smiths City took over Irvin and Stern, another northern retailing group. “Since then Hawkins came back to us,” Mr Leeming said. A shareholder asked Mr Kevin Smith whether he was confident diversification was the best policy for the company. Mr Smith said the highlight of the 1987 year was the profit achieved from the high volume of sales recorded in the period before the introduction of GST. This culminated in a record firsthalf profit of $4,182,000, an increase of 134 per cent on the corresponding period of the previous year. “We did make comment that it would be unrealistic to expect profits to continue at that level. While a downturn was budgeted for in respect of the second half, the extent and term of that downturn has been greater than anticipated. "However, we are confident that as from October 1 this year, profits will increase significantly oyer those achieved during the same period last year. This increase will, subject to consent of the Commerce Commission, be supplemented by profits from our recently announced acquisition.” Smiths City would strive to achieve its objective of a compound annual growth rate of more than 30 per cent, he said. “With the acquisition of the Smith and Brown chain this objective should be achieved, however, the proportion of profit generated during each half will vary from last year.” The group held its property assets within the balance sheet. This meant Smiths City shares were an investment in two sectors: property and retailing. Mr Smith emphasised the value of the company’s property. “Most of Smiths City’s retail stores throughout New Zealand are sited centrally on prime or valuable real estate. These property assets share in the growth of commercial property values while providing the company with retail outlets. Generally these assets are not given full recognition in a company share price.” However, the importance of cash flow from retailing could not be over-emphasised, Mr Smith said. The cash would be particularly important to shareholders with the introduction of imputation. On Commerce Commission approval of the Smith

and Brown purchase, Smiths City will- have more than 130 sites and a staff of more than 1100.

“In 1973, the year in which we reported our first profit as a public listed company, Smith and Brown declared a tax paid profit of $2,010,884, seven times our own profit of $289,988 in that year. At that time Smith and Brown had the highest profit of any public listed retailer. In the same year we ranked twelfth in profit performance out of the 13 companies listed in the retail sector. Since that time there have been significant changes in the structure and the operations of both companies.” One of the critical elements of the purchase agreement with Feltex International, Ltd, the present owners of the Smith and Brown shares, was that Smiths City progressively phase the finance profit from CFC, a company owned jointly by Feltex and Fisher and Paykel into Smith and Brdwn.

Within the two groups there are a number of locations where stores were duplicated, Mr Kevin Smith said. “This must be seen as a positive factor. Present zoning restrictions make it difficult to acquire large premises which can be used for retailing. While virtually all Smith and Brown sites are leased they are, nevertheless, real assets in that they are generally large, well sited retail premises.

“In areas where there is duplication our first objective will be to use the asset we have acquired for our own benefit. This could be by expanding the existing product range or by taking the opportunity to introduce new products into the group.” He pointed out that the properties included in the

accounts were valued on an empty-shell basis: the value unoccupied. The revaluation was not included in the profit. Of the group’s investment in the Wairau Park industrial and business development on Auckland’s North Shore, Mr Smith said the value had increased $2 million since balance date. "Mr D. R. (David) Smith, a former chairman and chief executive of the company, retired as a director ’and did not, seek re-election,. His place on the': board , will hot be filled in • the meantime.

The company approved a change in the firm’s name from Smiths City Market to Smiths City Group. Mr Leeming told shareholders that the old name did not fit the company so well outside Christchurch. In Auckland, the newspapers listed fruit and

vegetable market reports under the heading, “city market.”

Mr Hugh Beatty, the deputy chairman, paid tribute to Mr Smith, saying he began working for the company 59 years ago, in 1928. Before that he had worked in the firm, established by his father after school and in the holidays. Under his chairmanship, Smiths City hgd become a listed company 'in the early 19705.

As previously reported, tax-paid profit for the year rose 41 per cent to $6,452,000. The meeting approved a final dividend of 5 per cent, bringing the total for the year to 10.5 per cent (2.1 c 5 per cent cash and 5 per cent by a share issue. This is payable on last year’s one-for-10 bonus issue (there was another 1:10 this year).

About 250 shareholders attended the meeting.