By David Hargreaves
Okay, somebody mentioned the 'C' word. Now it gets serious.
Some people may have been bemused, while I suspect some may have been amused, by the travails of Fletcher Building in the past year.
Remember though, this is a company that employs 10,000 people in New Zealand. Countless thousands more are probably at least partially dependent on it through a kind of chain-link effect that any big company produces. It is a big corporate citizen (though no longer the biggest by market value) and its health is important to the health of the country.
An ailing Fletcher Building could potentially light the fuse for a shock to our economy - depending on what becomes of the company.
And once the 'C' word - yes covenants, or breaches thereof, are mentioned then whatever might be happening with Fletcher sure as hell ain't funny. So any amusement or schadenfreude should cease. Bemusement I suspect will continue.
More to the point, though, is what happens next. The next explanation from the company better be a good one. The whole future of Fletcher Building and its employees now probably rides on it, now that the company has got itself very much on the back foot with the people it has borrowed from. There are now a lot of potential permutations. And many are not good.
Fletcher, according to its 2017 annual report owes over $1.9 billion, some of this is to the usual range of banking suspects, but intriguingly the vast majority - over $1 billion - is owed to private investors, mostly in the US and Japan.
Usually the banks will be prepared to issue a waiver over a breach of covenants. But with groups of private investors, will this be quite so straight forward? Will this group of lenders behave in quite the same orderly manner that the banks presumably will?
What is clear is that Fletcher will have to get down on its knees and tug its forelock.
I certainly wouldn't rule out the possibility the company might be forced to raise more capital - which may not be looked on that kindly by existing shareholders. It may have to look at paying down some of that debt - which could see the need for sale of assets, with obviously uncertain outcomes for employees.
The other thing is, if the share price sinks a reasonably long way once the shares start trading again next week, Fletcher may attract some of the vulture-type private equity operators - possibly in Australia - who love nothing more than grabbing a bloated, confused company, stripping and filleting it, selling off various bits, and making themselves money. What that would do for the existing businesses within the company - and the employees - is anybody's guess, but would be of no concern to the money-grabber private equity types.
I have reckoned since Fletcher got into these difficulties that the kind of spark-up point for such activity would be if the Fletcher share price gets down to about $6. Bear in mind it was over $7.70 before the latest trading halt, but it will obviously open lower than that when next traded. How much lower depends on what is said.
So, the explanations from Fletcher when it updates the market on Monday had better be good. The plan for what happens next needs to be pretty good too.
With things having been going pretty well in our economy, we didn't and don't need a sharp internal shock to upset things. But, Fletcher is still big enough to cause some serious shockwaves if it can't manage its way out of this situation.
Chairman Ralph Norris has copped some flak for how he has handled things so far. But as the man who piloted Air New Zealand through stormy skies after it went broke and was bailed out by us taxpayers, he does at least have hands on experience in handling a business in strife. And no doubt at a time like this having been the CEO of a very big bank will also help.
I don't particularly care if Fletcher Building as such survives this. I thought even before it got into strife last year that it was looking like a big, shapeless, low-tech, conglomerate ripe for a break up.
There is however a big difference between a business that is rationally and sensibly restructured and perhaps yes over time broken up into separate parts - and one that is carved up in a debt-fuelled firesale. The latter would be bad for New Zealand.
A lot of people will want to know just how on earth Fletcher got so badly into trouble at a time when there's a big demand for building activity. My best guess would be simply putting its hand up for contracts at any price in order to dominate the country's building workload and then worrying about making up shortfalls later. Be that as it may. It doesn't really matter at the moment. Recriminations later. Maybe.
The big question for the moment is: What is Fletcher going to do about the situation it faces now? That's the important question that Fletcher's employees, and the country as a whole, need answering.
30 Comments
Later 2016 and Jan 2017 FBU shares were trading around $11. In the first quarter of 2017 there was a sell off. I watched people move millions of dollars in shares (as if people had inside information). Now you're talking about a potential $6 pricing. FBU has been a good way to halve your money (ignoring the dividends paid in that period).
Perhaps if they had accurate accounting they wouldn't have been paying out dividends over the past year or so when they need the money to service their debts.
i sold mine not long after the last CEO took over, the final straw for me was the buying back head office 2014 to refurbish then selling again afterwards on a long lease 2015, it was just creating work for a division while moving costs to a non existence profit
he tried to change the culture and structure and instead created a nightmare which will take the next CEO years to sort.
the last board should wear a lot of the blame for not only appointing him but not following up to make sure things were being run well
this is something that happens every now and again, bad management, sloppy board,
and as the old saying goes if it smells like a fish, looks like a fish then generally its a fish.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=113…
https://www.stuff.co.nz/business/industries/69627418/fletcher-building-…
The entire board should be gone after essentially halving the share price. They've provided sufficient demonstration that they have no competence at running a public company and have no concept of what a business is.
Now buying a building and converting it to apartments would make sense and plenty of money. Buying an office building just to refurbish it and sell it is throwing money away. What planet was the CEO on? It sounds more like a typical corporate ego trip that the board should have kept in check.
They're still a massive leap away from Carrillion. Carrillion has a net worth of about -1.3b pounds and owe the pension fund another 1b pounds. If Fletchers cut away the construction and interiors unit they'd be profitable. Well I hope that's the case and that they haven't lied.
I've heard both Ralph Norris and Rob Fyfe talk on the Air NZ turnaround. Key to the turnaround was the process through which they got organisation-wide buy-in to the turnaround process, including by seeking the input of all in the organisation via a very interactive come-to-Jesus process.
One suspects many on the ground also know a lot of what's going wrong in Fletchers. Perhaps Fletchers should reunited the Norris & Fyfe rockstar act and see if they can do it twice.
And if the company ever comes asking for taxpayer help like other erstwhile capitalists in strife, perhaps an exchange for equity a la Air NZ is the best bet. Could be a useful strand (and avenue for reducing costs?) in the government's ambition to ramp up housing supply.
Fair point. And 100% nationalised would not be desirable.
Perhaps access to at-cost bulk purchasing power for the bailout shareholder rather than a not for profit objective. This is assuming we see a "but we're too big to fail and you should bail us out for the greater good" call anyway...something you'd hope is unlikely.
by Cowpat | Sat, 18/03/2017 - 13:08
up2
On a weekend where you have one of New Zealand's largest companies in a trading halt, undoubtedly preparing the market for some unpleasant news on Sunday, where instead of building a conference centre it may have only costed for a carpark, only one commentator broached the subject. Our nation is so infatuated with real estate, so besotted by our recent found paper wealth, so deluded, that after two decades of incessant vested real estate drivel that buying a home is the path to success, yet oblivious to the cliff edge rapidly approaching ahead .Like Fletchers, Hunan Daking went into a trading halt last week.,, but as long as the neighbours made money on flipping a home New Zealand will be fine.
by Cowpat | Mon, 20/03/2017 - 09:45
up2
Fletchers out of trading halt, EBIT down 110 million from previous update. Reading thru the lines , more bad news will come
There is always a defined pathway . Serco, Carillion Capita are but recent UK examples. The only question remains is which company (ies) will benefit from a shrunken Fletchers. And we mock HNA
This company has been a marvellous show pony for the owners and trainers for years. Now that it has gone lame, be fecked if as a tax payer I want to be involved in the "give a little page". The people who do the hands on I imagine will be sought after,...as for the rest..dilligaf.
They stuck themselves with loss making projects. They've spent years buying jobs and then trying to make money out of variations on the projects. Essentially it's a dirty tactic to shaft the customer. Unfortunately common but it's a bad business practice. I've seen many companies go broke using the same tactic, they always end up in a cash flow crunch. If it wasn't for the rest of the company they would be in liquidation.
There's a lot of companies out there that aren't suffering from these issues and are run like businesses.
The Good Posters of Interest could see this coming last year, why couldn't the government? Then again, John Key made his exit pretty "decisively", didn't he. Captain Schettino couldn't have jumped ship so fast.
by OpenPensionResolutn | Mon, 20/03/2017 - 15:37
It's expensive to replace all that dodgy steel and dodgy concrete.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1144...
It's everywhere.
http://www.stuff.co.nz/business/industries/85508913/Opportunist-builders...
http://www.radionz.co.nz/news/national/323478/six-years-of-concrete-frau...
http://www.radionz.co.nz/national/programmes/morningreport/audio/2018028...
Surely more write-downs to come.
by OpenPensionResolutn | Mon, 20/03/2017 - 15:48
With massive materials quality frauds being exposed, earthquakes exposing substandard construction, growing rage at winky winky materials price gouging, and the property market crashing ... is Fletcher too big to fail, or too big to save?
Will our government continue to cosset Fletcher Construction, or will they cut Fletcher loose to save themselves?
I wonder what will take Fletcher's place should it topple? I wonder what will take Fonterra's should the same happen there? I think both cases are possible, I believe the reasons are different, but I can imagine who is watching the spaces carefully for the best time to jump in.
The current Minister of Ag is a staunch supporter of Fonterra as a co-op - more so IMO than the last government. DIRA requires open entry to Fonterra which in effect makes it the default processor should any corporate processor fail.
DIRA will fall over after 31 March unless the govt passes legislation before then to either change it, or roll it over. It will be interesting to see which way they go. I'm picking it will be a rollover - if their coalition partners agree.
I attended the last AGM for Fletchers in October. I was completely disillusioned by the quality and incompetence of the board then. Nothing has changed, Ralph Norris is just using his past experiences on other boards to show he is in control which he clearly is not.
The only way out for Fletchers is to sack ALL the board and replace them with people who have experience in the construction field.
My view is that they will be ripe for a takeover by a Chinese Government funded company when the shares drop further.
I still am a shareholder and the only reason I did not sell was despite an incompetent board I thought it could not get any worse which it has.
I'm not sure if Fletcher Living is part of Fletcher Construction. If it is I have had an experience of Fletcher Living which I think is insightful of the company culture.
Last year I went to a Fletcher Living show home - with a relative who was looking to buy.
Mindful of earthquakes, I asked the salesperson, 'What type of foundation does this house have?' After flicking through the glossy (if it wasn’t so vacuous it might qualify as vapid) sales brochure, she admitted that she didn't know, but did volunteer to ask her boss, the regional sales manager.
Several days later the sales person gets back to me with the news that the house has an NZS 3604 foundation. I said fine, that's the standard for timber framed buildings in NZ and it does specify some requirements for foundations, but what type of foundation does the house have. For example, does it have a raft foundation? Again the sales person said she would ask her boss.
Several days later I hear from the regional sales, and she also informs me that the house has an NZS 3604 foundation. I point out to her that NZS 3604 is not actually a type of foundation and ask if I can see the house's consent documents. Her reply: if you want to see the consent documents you can get them from the council.
This encounter did not result in a sale.
So there you have it, a company that recruits regional sales managers that seemingly don't understand the fundamentals of sales or the products they are trying to sell. What could possibly go wrong?
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