Off your trolley to buy into a basket case

Debt Man column – The West Australian (News)

For: November 13, 2009

Bruce Brammall

Debt Man

Once upon a time, there was an evil conglomerate. Oh, all right, it wasn’t so much evil, it just had a mega attitude problem that frustrated the hell out of everyone. An eternal under-achiever.

Rubbish stock price. Awful profits. Dreadful corporate culture. Boardroom in-fighting.

But no matter how well credentialed the management teams, the hodge-podge of businesses just couldn’t be worked together.

It should have been one of the most profitable companies in Australia. However, it just seemed to lurch from disaster to disaster. And from excuse to excuse.

No-one could fix it. And even when someone had some success, their bigger, stronger competitors would only expose further weaknesses.

After more than a decade of consistent failure, those in charge came up with a plan. It was an astonishingly simple plan. They decided they would throw their hands up in the air and say: “Too hard. Let’s break this baby up and make it someone else’s problem!”

We’re talking Coles Myer.

Department store Myer was a basket case. No amount of expertise could get that department store to work. Myer just struggled to be profitable.

And Coles, well, it was always light years behind Woolworths. Every time Coles caught up in one area, Woolworths would have a new game to play.

Even though it was split and auctioned off years ago, Coles and Myer are still causing trouble for listed companies and their shareholders.

Reminds me of “Master Blaster” from Mad Max: Beyond Thunderdome. Tina Turner thought that what made Master Blaster pesky and annoying would be fixed by splitting the team. So Tina hired Max (Mel Gibson) to do her dirty work. Max, too, failed.

Now, thousands of investors are groaning again following Myer’s dismal return to the ASX board. But being attracted by Australia’s prettiest face in Jennifer Hawkins to buy assets being sold by corporate barbarians should teach us two lessons.

Most importantly, when private equity groups such as TPG are exiting a business, they have no incentive at all to leave anything on the table for the next investor.

Their modus operandi is clear. Buy a beaten up brand name, rip out costs while reconfiguring the capital (ie: loading up debt), then get the hell out with maximum profit. And in this they have been spectacularly successful.

A slew of other big names are considering floating, including Kathmandu, who will now have a harder job winning over investors.

Clearly, this time around, Myer was never going to be like picking up a bargain at a garage sale. Private equity players are motivated solely by making money, while grandma would further discount her doilies just to make sure they went to a good home.

The second lesson is related, but less obvious. Don’t get suckered in by sex appeal. Jennifer Hawkins can make clothes look sexy. Jen could make wearing balding car tyres look sexy.

And having spent some time watching Hawko very closely on the dance floor in the Myer tent at Flemington on Melbourne Cup Day – the day after Myer’s underwhelming float – I can tell you that her magic is such that she was pictured picking up a gallon of motor oil, half the males in the country would change brands immediately.

But taking share tips from Jen makes as much sense as taking racial harmony lessons from Kingswood Country’s Ted Bullpit.

This week, we got another “Coles Myer” jab closer to home. Coles, bought by Wesfarmers in 2007, is still proving a tough nut to crack.

Chief executive Richard Goyder told shareholders this week that Coles turnaround remains “on the right track”.

Holy crap, Dick! The QEII has circumnavigated the globe a thousand times in the time that one complete “turnaround” of Coles will have been completed. The Coles “turnaround” started in the late 90s, years before you got your hands on it.

Pretty big detour Richard! By any chance, as the captain of the Coles ship, can you tell us whether you’re sailing anywhere near the southern Pacific? Can you see any floating iceblocks?

While this market continues to recover and investors are making money hand over fist, sins like this will be probably, largely, be forgiven, if the bets weren’t too bit. Even Wesfarmers purchase of Coles.

But life is about learning. Question why people are selling. Don’t get blinded by sex appeal. And, for God’s sake, keep a look out for iceblocks.

The author owns Wesfarmers shares.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au .

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