Report to Shareholders
The last twelve months have probably been the most difficult in the Company’s
history. The dramatic decline in asset values, initially triggered by the Asian
economic crisis, was the catalyst for significant structural change to BIL. These
changes were well documented in last year’s annual report to shareholders.
The abandonment of the Thistle Hotels sale process in August 1998 exacerbated the
effects of the Asian crisis. In combination with a deteriorating New Zealand dollar,
which increased debt levels significantly but did not have a uniformly similar effect on
asset values (primarily because of the Asian economic crisis), by 30 June 1998 BIL
had an unacceptably high level of gearing.
The Board has taken a number of steps to stabilise BIL’s financial position and begin
restoring value to the key assets controlled by the Group.
These actions include:
The appointment of Sir Selwyn Cushing as Executive Chairman;
Embarking on an aggressive asset sales programme, which to date, including
capital returns and special dividends, has realised almost $1.8 billion;
Negotiating a new senior debt financing package with the Group’s banks;
Significantly reducing overhead costs;
Restructuring BIL’s involvement on the boards of its key investments; and
Reviewing the Company’s business and operating policies including its foreign
As a result of these actions BIL’s financial position has improved considerably and
the Board is actively working on a business plan that will direct BIL’s investment
activities for the foreseeable future.
While BIL’s full recovery will take some time and there remains much work to do,
however this recovery is achievable and already well underway.
1998/99 Interim Result
BIL reported a net loss for the first six months of the 1998/99 financial year of $151.3
million, almost entirely as a result of the Board’s decision in the third quarter of 1998
to realise its investment in the Central North Island Forest Partnership (CNIFP). This
action resulted in a loss of $139.9 million.
BIL sold its investment in the CNIFP to its joint venture partners. The consideration
for the sale was 46.6 million Fletcher Forests letter stocks and cash of $26 million.
In addition BIL was repaid debt from the partnership of approximately $47 million.
BIL had provided for the diminution in value of the CNIFP investment in the $664
million general provision made in the 1997/98 accounts. In assessing the
provisioning for the half year result the Board believed that no provision should be
released. The Board will reassess provisioning in its entirety at 30 June 1999.
Excluding CNIFP, investment realisations over the period resulted in a surplus of $33
million. Commentary on the asset sales programme follows later in this report.
Based on the assumption that the recently announced sale of the Group’s
shareholding in Sky City via an Instalment Receipt programme, is a success, the
Board is projecting a net surplus of at least $70 million for the full year.
During the period under review, the Board was most concerned with the condition of
the Group’s balance sheet and in particular the level of debt within BIL. At 30 June
1998 BIL had total senior debt of $2.9 billion and breached one of its lending
covenants. This resulted from the decision by the Board to provision asset values by
almost $1.2 billion. To restore BIL’s balance sheet the Board and management have
focused on selling assets that do not meet the Group’s longer term investment
criteria, the result being that at 31 December 1998 BIL’s senior debt position had
improved to $1.8 billion.
Following the sale of the Group’s shareholding in Sky City, the second capital return
payment from Thistle Hotels and the special dividend from James Hardie Industries,
BIL’s net debt will fall considerably further again by 30 June 1999.
In December 1998 the Board announced a series of corporate objectives which
focused on achieving a sound balance sheet and finalising a new financing package
with senior lenders. We are confident that both objectives will be achieved by the
end of April 1999.
The table below outlines the investments realised since 30 June 1998.
Asset Sales $ millions
Beverly Prescott Hotel 56
Austotel Trust 182
Creative Publishing 41
De La Rue 34
W.D & H.O Wills 84
Other Investments 188
TOTAL : 1,649
Three asset sales in particular deserve comment:
John Fairfax Holdings – BIL’s subsidiary Australian Consolidated Investments
Limited (ACIL) received $702 million for its 24 percent stake in Fairfax. While this
represents a modest surplus on both cost and the market value at 30 June 1998,
this sale was the single largest by the Group since 30 June 1998.
Ibstock – The sale of Ibstock at 66 pence per share ($290 million), via ACIL, was
extremely well transacted at a 53 percent premium over the market price of 43
pence per share prior to the announcement of the sale.
The Austotel Trust – Austotel was acquired several years ago as a result of the
rationalisation of BIL’s New Zealand brewing interests. At the time of its
acquisition Austotel had virtually no earnings and a portfolio of property assets
that could not be regarded as particularly desirable. Over the course of the
Group’s involvement Austotel’s assets were improved considerably, higher
earnings were generated and ultimately an excellent sale price of $182 million
In addition to these investments the Group disposed of a number of smaller assets
including Aetna Health, Australia-New Zealand Direct Line and W.D. & H.O. Wills
Holdings. None of these investments fit within the Group’s longer term investment
strategy and shareholders can expect several other smaller investments to be sold in
the coming months.
As previously mentioned, in February BIL announced it would sell its shareholding in
Sky City via an Instalment Receipts programme. The sale is expected to be finalised
by 31 March 1999. Sky City has been an extremely successful investment for BIL
generating an internal rate of return of approximately 39 percent.
While the sale proceeds will reduce debt further the primary reason for selling Sky
City was a belief by the Board and management that BIL could add little further value
to this investment and as a result it was an appropriate time to realise its
The Group’s three largest investments – Thistle Hotels, Air New Zealand and James
Hardie Industries are continuing to report strong profit levels. The Board is of the
view that the current market prices of these investments do not reflect the true value.
Thistle Hotels achieved a record profit before tax and exceptional items of £86.6
million for the 1998 financial year, a 9.2 percent increase over the previous financial
Turnover for the year increased to £322.5 million, up 0.9 percent from £319.7 million
in 1997. This was impacted by the disposal of 34 hotels and on a like-for-like basis
turnover increased 4.6 percent driven by a 6.1 percent increase in average room
rates to £68.87 from £64.88. This more than offset a 0.4 percent fall in occupancy
from 72.3 percent to 71.9 percent.
In the group’s 24 London hotels, which generates 65 percent of total hotel gross
profits, turnover increased by 3.3 percent from £182.1 million to £188.1 million and
hotel gross profits increased by 7.2 percent from £84.2 million to £90.2 million.
Progress continues to be made in establishing Thistle as a strong full service, 4-star
brand with hotels in key locations throughout the United Kingdom.
Following the sale of 34 smaller regional hotels the group now operates 61 hotels of
which 44 carry the Thistle brand. Of the remaining hotels there are plans to convert
a further seven to the Thistle brand.
Air New Zealand recorded an interim after tax profit of $82.8 million for the first half
of the 1998/99 financial year, an increase of $0.8 million or 1 percent over the
previous corresponding period. The result included an equity accounted contribution
from Ansett Australia of $37.1 million, which was a 16 percent increase over the first
half of the previous financial year. Air New Zealand’s principal operating strategies
allocate greater capacity to markets where economic performance and
currency strength provide better prospects for revenue growth;
strengthen regional networks and links with global alliance partners; and
restrain costs against currency – including imported US dollar cost increases.
The airline continues to control its costs and retains a strong balance sheet position
allowing it flexibility to expand its route network where returns are justified.
Both Air New Zealand and Ansett Australia (50 percent owned by Air New Zealand)
gained full membership of the Star Alliance in March 1999. Both airlines expect that
membership of the Star Alliance will greatly enhance the choice and convenience of
inter-connecting services and facilities to their customers.
James Hardie Industries is enjoying strong revenue and earnings momentum,
primarily as a result of the performance of its United States fibre cement and gypsum
For the first three quarters of the current financial year, James Hardie achieved
earnings before interest and taxation (Operating Income) of A$122.8 million from
continuing businesses, a 29 percent increase over the previous corresponding
However James Hardie recognised an abnormal charge of A$123.5 million during
the year, mainly relating to expenses associated with the company’s reorganisation
including the consequential writeoff of accrued tax losses. As a result BIL realised
an equity accounted loss on its share of James Hardie’s earnings of $22.8 million
during the period.
The re-organisation of James Hardie is now almost complete and it is expected that
shares in James Hardie NV will begin trading on the New York Stock Exchange in
Regardless of their market ratings, the strength of earnings of Thistle Hotels and
James Hardie has allowed these companies to return capital to shareholders.
Thistle Hotels will return approximately £85 million to BIL in two tranches. £43
million was returned in November 1998 with the balance expected in April 1999.
This obviously further improves BIL’s debt position while also reducing the book
value of the Group’s shareholding in Thistle.
As part of James Hardie’s corporate re-organisation BIL subsidiary ACIL will receive
a special dividend of approximately $40 million.
While these key investments are fundamentally sound and encompass 58 percent of
the Group’s assets, there are a number of investments receiving considerable
attention from the Board and management in order to restore shareholder value.
Vox Retail Group has been a problematic investment for BIL since its acquisition
and it is therefore pleasing to note a much improved result for this half year. The
progress alluded to in the last annual report has continued, with the $6.8 million loss
for the half significantly reduced from the prior year’s $34.4 million comparable loss.
While favourable trading conditions assisted this result it was pleasing to see the
improved bottom line. Management continues to work positively on the business
and this good progress is expected to continue through the second half.
Molokai Ranch reached an important milestone recently when the Water
Commission of the State of Hawaii granted the Ranch the right to drill a new well and
draw some 650,000 gallons per day, enough potable water to sustain the
implementation of the Ranch’s master development plan and projected build out over
the course of the next 15 years.
The Board is reviewing the options which can improve the value of this asset.
BIL’s major assets in Asia are AsiaPower Limited and SEABIL Pacific Limited.
BIL is in the process of rationalising its investments in SEA Holdings and SEABIL
Pacific in conjunction with its partner SEA Holdings. In December 1998 BIL and
SEA Holdings agreed to split the assets of SEABIL Pacific with BIL acquiring full
ownership of Overseas Exchange Square, an 88,675 square metre, dual tower,
commercial property development in Chengdu, the capital city of Sichuan Province in
the People’s Republic of China.
SEA Holdings will retain the remaining assets of SEABIL and has agreed to
repurchase BIL’s 44.5 million shares in SEA.
AsiaPower’s principal asset is a 110MW geothermal plant in Indonesia and the
project is scheduled to be completed in July 1999. AsiaPower is currently
negotiating with its various counterparties. We will make a more detailed
assessment of AsiaPower in the 1998/99 Annual Report.
Economic Value Performance
In the 1998 annual report the Board published a ‘Shareholder Value Scorecard’
which showed that BIL’s economic value was estimated to be 90 cents per share at
30 June 1998. Since then BIL’s economic value has been influenced by the fall in
value of Thistle Hotels and James Hardie Industries:
Thistle Hotels share price dropped from £2.18 at 30 June to £1.07 at 31
December. As a result the value of BIL’s investment in Thistle fell by
approximately $870 million over this period. Thistle’s share price has improved in
recent weeks to around £1.40 recovering approximately $258 million of market
James Hardie’s share price fell from A$4.51 at 30 June 1998 to A$3.33 at 31
December, wiping $152 million off the market value of the Group’s shareholding.
However, more recently the company’s share price has recovered to a slightly
Air New Zealand’s value has improved considerably in recent months. The airline’s
‘A’ shares have risen by approximately 65 cents per share and its ‘B’ shares by
approximately 85 cents per share since the middle of December restoring some
$170 million in value.
Therefore, since 31 December there has been a material improvement in BIL’s
The Board has resolved not to pay a dividend for the first half of the year. However,
the Board is conscious of shareholders’ expectations and will review a dividend
payment for 1998/99 later in the year.
BIL’s wider capital structure and shareholder distribution policy, which may include a
share buyback programme, will be considered as an overall package when the
Board has completed its negotiations with senior lenders on a new financing
At the annual meeting in November several changes were made to the Board as Ms
Fran Wilde, Mr Richard Longes and Mr Peter Dodd were not re-elected as Directors.
The Board would like to extend its thanks to these individuals for their contribution to
Prior to the annual meeting the Board appointed Sir Selwyn Cushing and the
Honourable Philip Burdon as Directors. Sir Selwyn Cushing was appointed
Chairman upon the closure of the AGM.
Sir Selwyn returns to BIL as Chairman and Chief Executive following his retirement
from the Company on 30 June 1993. He is an extremely experienced New Zealand
business leader and the Board has every confidence that he will lead BIL out of this
difficult period and restore significant value to the Company.
Philip Burdon has a wealth of political and business experience both in New Zealand
and internationally and we welcome him to the Board.
The Board has adopted both a short and medium term business focus, each having
the objective of restoring shareholder value.
The Board’s priority is the completion of a re-financing package which will place BIL
on a firm financial and commercial footing. At the same time the Board will finalise
the Group’s business plan and we expect to communicate this to shareholders
before the end of April.
BIL has been working intensely on the refinancing package for some months. To put
the complexity of this process in perspective, at 30 June 1998 there were in excess
of 70 lenders to BIL headquartered in a number of different countries. Currently this
number totals 54 spread across thirty debt facilities and four currencies.
Each lender has its own credit approval process and in most cases must submit
credit recommendations to an office in another country. Despite these complexities
good progress is being made on the refinancing package.
Nevertheless an underwritten senior debt funding package is imminent and the
Board expects the resulting senior debt financing to be satisfactorily completed by
the end of April.
Overhead costs will continue to be reviewed to ensure BIL operates more
economically in the future. Significant progress has been made in reducing
operating costs with core overheads budgeted to reduce from $65 million in 1997/98
to $45 million in the current financial year.
Shareholders can expect to see BIL managing a portfolio of about a dozen
meaningful investments in the future and improving the value of these investments is
the basis for the Group’s medium term plan.
The Group has actively restructured its involvement on most of the boards of these
companies to ensure the best mix of skills are available to assist these businesses in
achieving their objectives.
The growth in value of investments like Thistle, Air New Zealand and James Hardie
Industries will immediately enhance BIL’s own value.
The Board is confident that BIL’s recovery is well underway. Debt is firmly under
control and the values of key assets are improving. With the Board uniformly
focused on improving shareholder value, the Board believes considerable value can
be restored to the Group over the next twelve months.
4 March 1999