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equity of 13 percent in June 1995.


BUSINESS
BIL was formed in Wellington, New Zealand, in 1961 by Ron Brierley to invest in un-
dervalued assets. The company acquired an Australian subsidiary in 1964 and was ¬rst
listed on the New Zealand Stock Exchange in 1970. Brierley™s grew rapidly throughout
the 1960s, 70s and 80s: by 1987 its assets under management were almost NZ$11.3 bil-
lion, owners™ equity was NZ$1.8 billion, and net income was NZ$342 million. The com-
pany was arguably the most successful ¬rm in New Zealand during this period, growing
into the nation™s third largest publicly traded company.
BIL owed its success to its management™s ability to identify companies that were ei-
ther undervalued or poorly managed. BIL would acquire a stake in these companies, re-
place poor management, and wait until the market appreciated the real strategic value of
the business. Consequently, BIL generated income from two sources: the operations of
companies in which it owned stock and the sale of its investments at a price different

.........................................................................................................................
Professor Paul Healy prepared this case as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. Copyright © 1999 by the President and Fellows of Harvard
College. Harvard Business School case 9-100-014.




761
762 Case: Brierley Investments Limited




32 Part 4 Additional Cases




from purchase. BIL thus performed the same role of corporate investor and takeover spe-
cialist in New Zealand as T. Boone Pickens and Carl Icahn performed in the United
States, and Sir James Goldsmith and Lord Hanson performed in the United Kingdom.
1990 proved to be a critical turning point for BIL. During that year it embarked on a
successful takeover of Mount Charlotte Investments PLC, the UK™s second largest hote-
lier. Mount Charlotte owned 104 hotels under its own name, including 24 located in Lon-
don, as well as Hospitality Inns and the recently acquired Thistle Hotels. BIL initially
Brierley Investments Limited




acquired an 11 percent stake in Mount Charlotte in 1988, and gradually increased its
stake to 30 percent. The Gulf War in 1991 presented the ¬rm with the opportunity to pur-
chase an additional 10 percent from the Kuwait Investment Of¬ce. As a result of this
holding, BIL was required by The City Code on Takeovers and Mergers to make an offer
to all remaining shareholders. Upon successful acquisition of the remaining shares out-
standing, BIL sold a 30 percent stake in Mount Charlotte to the Government of Sin-
gapore. As a result of its acquisition of Mount Charlotte, at the year ended June 30 1991,
NZ$5.2 billion of BIL™s assets were invested in the U.K. hotelier, a NZ$4.2 billion in-
crease over the prior year.
Almost immediately after the acquisition, performance at Mount Charlotte deterio-
rated. The Gulf War adversely affected tourism in London, driving down occupancy
rates in Mount Charlotte™s London hotels from 80 to 62 percent in 1991. A severe reces-
sion in the United Kingdom during the early 1990s led to a steady decline in revenues
for Mount Charlotte through 1994. Financial information on Mount Charlotte is re-
ported in Exhibit 1. This poor performance acted as a drag on BIL™s performance during
the same period. Financial information for BIL is presented in Exhibit 2.
Following the Mount Charlotte acquisition, BIL™s management vowed to focus the
¬rm™s investment activity in Australia and New Zealand, where it had been more consis-
tently successful, and restricted any future investments to no more than 20 percent of
shareholders™ funds. Its New Zealand investments in the 1990s proved more successful.
For example, it acquired stakes in Air New Zealand (the largest domestic and interna-
tional airline in New Zealand), Sealord Products (New Zealand™s largest seafood catch-
ing, processing, and marketing company), Carter Holt (the country™s largest plantation
forest owner), Skellerup (a diversi¬ed manufacturing and distribution company), and
Sky City (a newly created casino company). Each of these companies showed signi¬cant
improvements in operating performance and market valuation following their acquisi-
tion by BIL. For example, the NZ$326 million investment in Carter Holt was sold for
NZ$468 million. The Sky City investment of NZ$152 million generated sale proceeds
of NZ$122 and a remaining interest valued at more than NZ$300 million.


New Zealand Accounting
The most obvious difference between New Zealand and U.S. ¬nancial reports was their
format. Income Statements were called Pro¬t and Loss Accounts, and typically did not
separately report revenues, cost of sales, and SG&A expenses (even in footnote disclo-
sures). The cash ¬‚ow statement used the direct method of reporting Cash from Operating
763
Case: Brierley Investments Limited




33
Part 4 Additional Cases




Activities, showing cash in¬‚ows and out¬‚ows rather than the reconciliation of net in-
come and cash from operations (which was reported in a footnote).
New Zealand accounting standards relating to investments were quite similar to those
used in the United States. For example, BIL investments of less than 20 percent stakes
in publicly traded companies were recorded at market values, similar to U.S. GAAP
treatment of securities available for sale. However, in New Zealand any unrealized hold-
ing gains or losses were shown on the balance sheet in the liabilities section under the




Brierley Investments Limited
title “Investment Fluctuation” and were only transferred to income when the gains or
losses were realized. Under U.S. GAAP, unrealized gains and losses were included as a
reserve in owners™ equity, and were also included in net income when realized. Invest-
ments in associate companies, where ownership is between 20 and 50 percent, were re-
corded using the equity method. Investments of more than a 50 percent stake were
consolidated using the purchase method. Pooling of interests was not permitted in New
Zealand. For BIL this implied that the investment in Mount Charlotte was fully consoli-
dated, and the interest of the Government of Singapore was included as a minority inter-
est on both BIL™s balance sheet and income statement.


FINANCIAL ANALYSTS™ QUESTIONS
Given the lackluster performance of BIL™s stock, many analysts were cautious in their
recommendations. For example, in October 1995 Raymond Webb of ANZ McCaughan,
stated that:
As we see it, ultimately the only way for BIL management to end the long period
of underperformance is to realign the portfolio by extracting value and then cap-
ital from those assets which are underperforming, and by reinvesting in assets with
more identi¬able growth prospects. . . . We recommend that clients seeking short-
term gains look elsewhere and that longer term investors underweight BIL until
the company™s performance justi¬es rerating.
By late 1995, many analysts were anticipating that the ¬rm would soon sell all or
some of its stake in Mount Charlotte. The key question was what would the ¬rm do with
the proceeds. Many analysts advocated a targeted share repurchase program, which
would effectively downsize the ¬rm.


MANAGEMENT RESPONSES
In response to the ¬rm™s stagnant stock price, in 1995 BIL™s management attempted to
show how value had been created for stockholders by reporting estimates of intrinsic
value of the business. Intrinsic values were estimated by summing the market values of
shares owned in listed companies and discounted cash ¬‚ow estimates of market values
of nonlisted shares, and deducting outstanding liabilities. In the ¬rm™s 1995 Annual
Report, Paul Collins committed that “Over the next three years, BIL™s objective is to
764 Case: Brierley Investments Limited




34 Part 4 Additional Cases




increase its intrinsic value by NZ$2 billion, equivalent to an 18 percent per annum in-
crease on the June 1995 intrinsic value of NZ$3.7 billion (NZ$1.25 per share).”
Management considered that this goal would be achievable provided the market rec-
ognized the value that BIL created in capitalizing on undervalued businesses as an inves-
tor and takeover specialist. As Paul Collins considered this challenge, he wondered what
tangible actions would best help the market appreciate the ¬rm™s operating and trading
performance in the New Zealand market during the ¬ve preceding years. One approach
Brierley Investments Limited




would be to separate out the ¬nancial results for Mount Charlotte from the remainder of
the ¬rm™s investments, so that analysts could better appreciate its exceptional perfor-
mance. A second approach would be to undertake a stock repurchase program using the
¬rm™s $874 million in cash and marketable securities. Finally, the ¬rm had been
approached by a consortium of Malaysian investors interested in acquiring a stake in
BIL. Paul Collins wondered whether New Zealand analysts would view such an agree-
ment positively.


QUESTIONS
1. What are BIL™s critical success factors and risks?
2. What are the likely benefits and limitations of management using the “intrinsic val-
ue” metric as a way to report on BIL™s business? If you were management, would you
use this metric? Explain.
3. Analyze BIL™s financial performance for 1995 using financial ratio analysis. How is
the company managing its cash flows for 1995? What would be the firm™s ROE on its
Mount Charlotte investment versus all of its other investments? What assumptions
do you need to make for these estimates? Does it make sense to separate the Mount
Charlotte and non-Mount Charlotte ROEs to evaluate BIL performance? Explain.
4. Using the ROE valuation technique, estimate what assumptions the market is making
about the company™s future performance. Do you believe that these assumptions are
realistic? Why? Use your estimate of the ROE for the non-Mount Charlotte operations
to estimate what the company would be worth if it sold its Mount Charlotte opera-
tions in 1996 at book value and distributed the proceeds to shareholders.
5. Given your analysis in the above questions, what would you recommend to manage-
ment as a way of helping the market to assess BIL™s likely future performance? Why?
765
Case: Brierley Investments Limited




35
Part 4 Additional Cases




EXHIBIT 1
Mount Charlotte Investments PLC, Five-Year Record from December 25,
1990, to December 25, 1994a

(£000) 1994 1993 1992 1991 1990
......................................................................................................................................
Revenues 241,215 214,090 217,285 226,128 241,659




Brierley Investments Limited
Operating pro¬t 74,275 60,352 60,346 72,613 88,427
Pro¬t on sale of properties ” ” ” ” 765

Pro¬t before interest 74,275 60,352 60,346 72,613 89,192
Interest expense 51,119 52,975 59,326 71,075 42,576

Pro¬t before taxes 23,156 7,377 1,020 1,538 46,616
Taxes 3,254 3,008 1,100 ” (3,475)

Pro¬t after taxes 26,410 10,385 2,120 1,538 43,141
Dividends ” ” ” ” 4,673

Retained pro¬t 26,410 10,385 2,120 1,538 38,468

Shareholders™ equity 1,184,950 1,158,540 1,148,155 1,126,035 1,101,363
Earnings per share 2.81p 1.11p 0.23p 0.17p 4.89p
Return on sales 30.8% 28.2% 27.8% 32.1% 36.6%
......................................................................................................................................
a. BIL and Mount Charlotte have different year ends: BIL is June 30 whereas Mount Charlotte is December 25. Consequently, on
June 30 each year BIL consolidates Mount Charlotte results reported for the prior year ended December 25.
766 Case: Brierley Investments Limited




36 Part 4 Additional Cases




EXHIBIT 2
Brierley Investments Limited, Selections from 1995 Annual Report
(all amounts are reported in New Zealand dollars)

CHIEF EXECUTIVE™S REVIEW

It is pleasing to report a record pro¬t of $431.7 million. While only marginally ahead of
Brierley Investments Limited




last year, it nevertheless represents another milestone for the Group. ln particular the
record results of the last two years underscore the quantum leap which the Group has
made since the early 1990s when pro¬ts of $212 million, $251 million and $271 million
were reported in 1991, 1992 and 1993 respectively. As importantly, the underlying qual-
ity of the assets today, in terms of both current and potential earnings and cash ¬‚ow, has
been signi¬cantly enhanced, providing a solid platform for future growth in value.
In a review such as this it is easy to dwell on the year™s highlights and there have been
many. These include the rapid progress on the construction of Sky City casino together
with its independent ¬nancing and selldown of BIL™s holding from 80% to 51%, the con-
tinuing improvement in the pro¬tability of Mount Charlotte, an outstanding performance
from Air New Zealand and the successful foray into and exit from Wilson & Horton to
name but a few. I will comment on these and other highlights in my review of BIL™s trading
and investment activities.
BIL™s ¬nancial position continues to strengthen. While total assets of $9.4 billion show

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