PAUL MCBETH: The end of the empire affair

Paul McBeth is the editor of The Bottom Line and Curious News, having worked at BusinessDesk for 15 years.

The big end of town often goes through periods where it can’t buy new shiny toys fast enough.

The existing footprint is never big enough and branching out into new and unfamiliar territories is often too exciting – and potentially lucrative – to ignore.

The problem with the endless landgrab is that those uncharted lands aren’t always as fruitful as first thought, and potentially more treacherous than executive teams had imagined.

Take Fletcher Building for example.

The storied building materials and construction firm has been a whipping boy for agitating investors and agitated commentators for years.

There was a time when there didn’t seem to be a business it didn’t want to buy, despite the fact that it’s never really shown the greatest execution in integrating the vast array of firms under one big umbrella.

On reflection

Much was said of the red ink in its latest annual result, with another $700 million or so of impairment charges – better thought of as past money poured down the drain.

But to the new leadership team’s credit, Fletcher seems to have found a new purpose – that of being a focused building materials business.

Not content with signalling plans to find new homes for its vertical and civil construction arms, Fletcher is also rethinking its role in residential development, uttering the sacred phrase “strategic review” in relation to Fletcher Living.

This is not a flash in the pan. The Fletcher board and its management team have rightfully been under immense pressure to come up with a new plan after the empire-building of the Ralph Waters, Jonathan Ling and Mark Adamson no longer worked.

The transformation each one imposed on the building materials firm may well have been right for the times, but ultimately added too many albatrosses to a sagging neck that have needed to be shed as the old firm gets back to something more manageable.

We can see that in dairy giant, Fonterra Cooperative Group too.

The sale of its Mainland consumer business to France’s Lactalis for $3.85 billion is the latest recognition that Fonterra never really lived up to the ambitions back in 2001, when politicians rewrote the law to pave the way for the formation of a vertically integrated beast able to take on the world’s best.

Protesting too much

There’s been much wailing and gnashing of teeth that Fonterra’s selling the family jewels – remember when it gave TipTop the heave-ho? – but it’s simply never made enough cream out of consumer businesses, nor been able to make the case to its owners for an appropriate capital structure to back those kinds of forays.

You can’t blame the cooperative for sticking to what it does well in food service and ingredients.

Spark New Zealand is a similar empire-builder going in a new, or perhaps old, direction.

Having cast off control of the datacentres dream in selling a 75% stake to that canny Aussie investment firm Pacific Equity Partners, Spark almost pulled out the neon lights in declaring itself focused on connectivity and annuity style returns for investors.

For anyone struggling to work out what the old Telecom had been doing for the past decade or so, that was a welcome return to a utility-style business that’s easy to understand and should have no problem spitting out cash to a dividend-hungry investor.

Much like Fletcher, Spark’s various pipedreams weren’t necessarily wrong to chase, but the timing and execution meant they simply didn’t pan out.

An executive team and its board shouldn’t be slapped around for assessing the risk and having a go, although a little humility wouldn’t go amiss in recognising missteps. After all, the sky’s not going to fall just because you were wrong about something.

Know when to walk away

At first blush, it was easy to look at the highly dilutive capital raising by SkyCity Entertainment Group as an example of a gambler’s hubris, or desperation, to win back their losses.

That was until the casino operator lifted the veil and pointed out it’s also selling the Auckland car park concession and Albert Street building to repair a delicate balance sheet.

Sure, there’s a fair argument to make that SkyCity should really quit its Adelaide operations and focus on the flagship Auckland casino but given the local economy’s doldrums it’s hard to blame a senior leadership team for wanting to spread their regional risk ever so slightly.

And fair dues to the relatively new chief executive Jason Walbridge and his chief financial officer Peter Fredricson in admitting it’s not where they wanted to be after a year in the job – doubly so for not laying their predicament on the substandard oversight their predecessors in letting SkyCity’s debt and regulatory woes get out of hand.

Laying out a vision to conquer the unknown can be an exciting affair, but this week we’ve had a lesson on what to do when you realise your corporate map is upside down.

Image from Curious News.