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little change on last year™s $9.1 billion, the underlying pro¬tability of individual assets has
materially improved. In addition, the recent sales of shareholdings in Carter Holt Harvey
and Wilson & Horton have resulted in the Group being highly liquid with cash deposits at
balance date of $874 million. At the same time debt maturing within one year of $922
million has been extended on to a term basis with the average maturity pro¬le for senior
debt now exceeding seven years. Overall, net debt to total capitalisation was steady at
32%, which further reduces to 26% if the capital notes of $449 million are treated as
quasi-equity rather than debt.
In the early 1990s, the opportunity for BIL to maximise shareholder value was severely
constrained due to high debt levels and inadequate pro¬tability. Today the situation is
reversed and the Group now has substantial ¬nancial ¬‚exibility and is well placed to best
optimise shareholder value.
The term shareholder value is now widely referred to in investor circles and forums. As
an investment company, BIL has always been acutely aware of what constitutes value. In
our own planning processes we focus not so much on the underlying book net worth of
BIL but rather our assessment of BIL™s intrinsic value and the strategies required to ensure
that there is continuing growth in that value. More recently we have also given consider-
able thought as to the actions which the Company can take to best ensure that the value
which is created is mirrored in tangible shareholder returns”whether it be from higher
share prices, cash dividends or share buy backs.

While the notion of value creation is a fundamental underlying business principle, it is
particularly relevant in the context of an investment company such as BIL.
Case: Brierley Investments Limited

Part 4 Additional Cases

In its simplest form, value creation comes back to quality asset management:
• existing assets”increasing returns while at the same time minimising the capital
required to achieve these returns;
• new investment”careful evaluation of and commitment to new investment;
• harvesting”where appropriate, selling assets when returns can be maximised and the
funds more effectively invested elsewhere;
• minimising risk”by focusing on core management competencies and maximising
comparative advantages in the geographic regions in which we invest.

Brierley Investments Limited
While the ¬nancial statements measure the movement in value in an accounting sense,
the resultant answer, while in itself a precise number, does not normally represent the
underlying intrinsic value of the business or in other words what is today™s market value.
While assessing the intrinsic value is a more dif¬cult and somewhat imprecise exercise, it
is nevertheless highly relevant for an investment company. In BIL™s case intrinsic value is
established by reference to the underlying market value of listed securities and the dis-
counted earnings and cash ¬‚ows of unlisted assets. No account is taken of the very real
but somewhat more intangible assets such as the Group™s tax losses, skilled people
resources or its strong balance sheet and resultant capacity to make new investments.
Over the next three years, BIL™s objective is to increase its intrinsic value by $2 billion
equivalent to an 18% per annum increase on the June 1995 intrinsic value of $3.7 billion
($1.25 per share). In assessing whether this target is credible and achievable it is neces-
sary to review where BIL has come from, its current position and future direction. In this
regard during the last decade there have been two watershed events for BIL. The ¬rst was
the sharemarket crash in October 1987 and the second, the acquisition of Mount Char-
lotte Investments in late 1990. Each of these events had a fundamental impact on the
intrinsic value and external perception of BIL and it is, therefore, relevant to use these
periods for comparative purposes:

December 1987“ June 1991“ June 1995“
June 1991 June 1995 June 1998
$ millions
Opening Intrinsic Value 2,045 3,107 3,717
New Capital 422 293 ”
2,467 3,400 3,717
Increase in Intrinsic Value 1,061 1,622 2,000
Foreign Currency Translation ” (540) ”
3,528 4,482 5,717
Cash Dividends (421) (765) (717)
Closing Intrinsic Value $3,107 $3,717 $5,000
$ millions 1991

1185# 1,334*
Reported Pro¬t
Book Value 3,231 3,605
Market Capitalisation 2,857 3,335
* 4 years
#31„ 2 years
768 Case: Brierley Investments Limited

38 Part 4 Additional Cases

In the 1991 to 1995 period, BIL™s intrinsic value grew by $1.62 billion. Adjusted to New
Zealand dollars, value grew by $1.08 billion or 9% per annum. This simple statistic hides
three key issues:
• With the bene¬t of hindsight, the June 1991 assessment of BIL™s intrinsic value was
somewhat ¬‚attering given the weak economic activity and capital markets which subse-
quently eventuated in 1992 and 1993. This is evidenced in the performances of many
of the Group companies at that time. By way of example, Mount Charlotte was on
course for a virtual break even result (1995: £35 million), Air New Zealand™s operating
Brierley Investments Limited

pro¬t was $18 million (1995: $286 million), Skellerup™s earnings before interest and
tax were $12 million (1995: $64 million) and funding costs and overheads were $378
million (1995: $130 million). There are other similar examples such as Magnum Cor-
poration and Carter Holt Harvey but the simple reality is that the then market capitali-
sation of BIL gave the Company more credit than it deserved, whereas today the
reverse is the case.
• Although Mount Charlotte™s operating returns have re¬‚ected its continuing outperfor-
mance of the UK hotel industry, depressed trading conditions until 1994 and its own
high level of indebtedness have resulted in inadequate returns to BIL. While the price
paid in 1990 would represent good investment value if made in 1995, it does not com-
pensate for holding costs and foreign currency movements which have denied the
Group additional growth in intrinsic value of in excess of $1 billion.
• Foreign exchange”70% of BIL™s Parent Company assets are invested internationally
which is roughly equivalent to all the Group™s shareholders™ funds being invested off-
shore. During the last four years the New Zealand dollar has appreciated by 25%
against the currencies of the countries in which we invest. As a consequence BIL™s over-
all returns have been higher in those countries but lower on translation to New Zealand
dollars. To put it another way, notwithstanding the strong New Zealand dollar and with
70% of the Group™s assets invested offshore, the value of the Company has still grown
by over $1 billion in New Zealand dollar terms”a considerable achievement given
both the quality of the assets and the ¬nancial position of BIL in 1991. In reality the
growth in value of $1 billion was largely achieved over the last two years as the weak
economic conditions and capital markets which prevailed throughout 1992 and 1993
depressed pro¬ts and asset values at that time. Strong economic growth over the last
two years and a more robust outlook have contributed to a sharp rise in corporate cash
¬‚ows and pro¬ts. These factors have yet to be fully re¬‚ected in asset values and augur
well for growth in BIL™s intrinsic value.
Looking to the future we have every con¬dence that we can continue to create value
as we have done in the past. Factors which underpin this con¬dence include:
• BIL™s sustainable pro¬t (after funding costs and overheads but before investment sur-
pluses) is now $225 million per annum and will rise to $300 million per annum in
1997. This compares to $70 million in 1991.
• Over the last eight years in what can best be described as challenging times in equity
markets, BIL has achieved investment surpluses (net of ordinary dividends, tax provi-
sions, write-offs and minority interests) of $2,083 million or an average of $260 million
per annum. In the ¬rst two months of the 1995/96 year, over $80 million in investment
surpluses have already been generated.
• BIL is well placed in its core Australia/New Zealand markets with very little competition
and a great deal of knowledge and expertise. With its strong ¬nancial position BIL is
well positioned to take advantage of the relatively static investment markets in these
Case: Brierley Investments Limited

Part 4 Additional Cases

• BIL™s reported earnings for the last two years total $862 million. Assuming a continua-
tion of but no improvement in this trend over the next three years, earnings of $1.3 bil-
lion or 65% of the targeted $2 billion would be the outcome. This takes no account of
the growth potential in the wider BIL Group or any new investment strategies.
• Intrinsic values at June 1995 have been conservatively assessed. Mount Charlotte
achieving its pro¬t forecasts and Air New Zealand being re-rated to 80% of the aver-
age market P/E would alone contribute the balance of $700.million or 35% of the $2
billion target.

Brierley Investments Limited
Obviously, achieving expectations such as these to some degree depends on macro eco-
nomic factors beyond BIL™s control. For the above scenarios it is assumed that in¬‚ation,
bond yields and economic growth rates in the major economies in which we operate will
remain around present levels. It also assumes no major change to BIL™s capital structure.

While BIL has a clear raison d™être and a proven ability to create value, it is axiomatic that
such value creation be represented in a tangible way in shareholder returns. In 1991 I
stated that our objective over the next four years was to make BIL a $2 stock, equivalent
to a stock market valuation of $5 billion after paying our shareholders an additional $1
billion in cash dividends.
While we have largely succeeded on the dividend front, we have fallen well short on the
share price. While there are various mitigating factors such as the stronger New Zealand
dollar and an equity market much weaker than anticipated, BIL™s own improved perfor-
mance, particularly over the last two years, has so far resulted in only a modest re-rating
by the market.
In my ¬rst year as Chief Executive in 1985/86, the Company™s market capitalisation
peaked at around $5 billion. At that time shareholders™ funds were $939 million and
pro¬t $179 million. Notwithstanding BIL™s impressive performance at that time, the then
market capitalisation assumed an unrealistic growth potential and earning capacity.
Today we have the opposite situation. Shareholders™ funds (including convertible notes)
are $3.6 billion, a record pro¬t of $432 million has been achieved, the Company™s
growth prospects are sound yet today™s market capitalisation is only $3.3 billion.
While some broking houses have moved to a more dynamic basis of valuation for BIL,
many still rate the Company on their assessment of BIL™s underlying static asset value
today and then deduct a discount on the basis that BIL operates in a similar manner to a
unit trust.
This valuation approach ignores BIL™s active asset management, the very real achieve-
ments of the last few years, the substantial improvement in the quality and sustainable
earnings mix of the asset base and, in particular, the strength and ¬‚exibility now inherent
in the Company™s overall ¬nancial position. In short, BIL is given no premium for future
earnings or asset value appreciation which is a fundamental premise in any equity invest-
ment. In earlier years these attributes would have resulted in a substantially higher share
price. Today™s lower share price is perhaps as much a re¬‚ection of the implications aris-
ing from the Mount Charlotte acquisition ¬ve years ago as it is a more restrained view on
investment companies generally given the collapse of many of our so termed pretenders
in the late 1980s. However, for whatever reason, the share price today is what it is. While
BIL™s principal objective is to put “runs on the board” and create value, as important an
objective is for shareholders to reap the bene¬t of that enhanced value. In this regard, it is
important to understand BIL™s view on an optimum level of capital.
770 Case: Brierley Investments Limited

40 Part 4 Additional Cases

In March 1995 the well known investor Warren Buffett, Chairman of Berkshire Hathaway
in the United States, commented that:
”. . . a fat wallet, however, is the enemy of superior investment results . . . We now con-
sider a security for purchase only if we can deploy at least US$100 million in it.”
BIL™s optimum capital requirement is de¬ned by our existing asset base and overall
¬nancial position, the opportunities within the regions in which we invest and the people
resources available to the Group. While the level of capital required is a somewhat
Brierley Investments Limited

imprecise calculation and will change over time, our present view is that given the
Group™s current mix of assets and available opportunities, the present level of capital is
appropriate. There are two signi¬cant factors which could change this view. Firstly, over
the next three years we envisage signi¬cant growth in the overall value of the Group. To
the extent this materialises and there are limited value adding investment opportunities
available, the Group could have excess capital.
Secondly, the Group™s largest asset is its investment in Mount Charlotte. To put this in
context, if Mount Charlotte was sold today at book value for cash, the Parent Company
would have $1 billion in cash and no senior debt. Under this scenario the Group could
also ¬nd itself with excess capital, again the overall level dependent on the extent to which
attractive new investment opportunities are available.
Our present view on Mount Charlotte is that it will achieve a signi¬cant lift in its earn-
ings in each of the next three years. While Mount Charlotte has detracted from BIL™s value
over the last four years, its sale in 1995, based on current earnings, would not be in the
best interest of BIL shareholders. However, given this investment is too large in the context
of one company, one sector and one country, it will be regularly reviewed and, when
appropriate, BIL™s stake will be reduced.
In the context of an optimum level of capital, an important investment option for BIL will
be the ability to buy back and cancel its own shares. The Chairman™s Report refers to the
adoption of a new Constitution which will provide the Company with the ¬‚exibility to
undertake share buy backs if and when it is considered in the best interests of all share-
holders to do so.
In the introduction to this review I indicated that BIL has two simple objectives:
• to grow the underlying intrinsic value of BIL; and
• to ensure that such growth is re¬‚ected in shareholders™ hands through increased


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