Beautiful one day, rich the next

City Pacific's founder Phil Sullivan and MFS co-founders Michael King and Phil Adams have become very wealthy thanks to Queensland's population and property booms.

City Pacific’s bid for funds management business MFS is very much a Queensland story.

Both companies rode the population and property booms that made the Sunshine State one of Australia’s hottest markets over the past five years. Both companies have operated at the pointy end of the financing and properties sectors, dabbling in mezzanine financing and alternative investments. And both companies have made their founders – City Pacific’s Phil Sullivan and MFS’s Phil Adams and Michael King – very, very wealthy. Sullivan’s stake in City Pacific is worth $154.5 million, while Adams and King own $109.9 million and $112.7 million MFS shares respectively.

Sullivan, a veteran Gold Coast property developer, established City Pacific on the Gold Coast in 1998 with former bank executive Stuart Kissik. The company is basically a non-bank lender, raising funds from investors through managed funds and mortgage trusts to lend to property developers.

City Pacific listed in July 2001, using the proceeds from the $5 million float to start a mezzanine financing fund. Sullivan’s timing was perfect. Increasingly affluent Queenslanders poured money into the company’s funds and the property market sizzled as the state’s population growth rate soared.

Just six months after the float, City Pacific shares raced past $6. Sullivan attributed the company’s success to its ability to read the south-east Queensland market. "The developers are dealing with the people who make the decisions – they're not waiting for officials in head offices in Brisbane or Sydney to process paperwork and make up their minds,” he said in early 2002.

The company expanded rapidly, adding a property trust and investment arm, CP1, which hit the boards in January 2003 and rose from $1 to $2.80 on its first day of trade. City Pacific’s share price was propelled by a string of profit upgrades and Sullivan debuted on BRW’s Rich 200 list in May 2004 with a $285 million fortune.

Then, in May 2005, the company hit a speed bump. The float of its leisure company SunLeisure (created in a joint venture with fellow Gold Coast developer Sunland) was pulled after analysts criticised the vehicle’s structure and valuation. A month later, ASIC launched an investigation into whether City Pacific’s mortgage trust met the liquidity provisions of the Corporations Act (the company eventually accepted that it had to change the redemption period of its term investments). The stock was dumped after the collapse of mezzanine finance company Westpoint in 2006 and dumped again in March 2007 after the collapse of Fincorp.

More recently, things have been looking up. City Pacific reported a 17.9 per cent jump in full-year profit to $73.2 million for 2006-07, and unveiled profit upgrades in December 2007 and again in January.

These days Sullivan, now 63, is seen as one of the wily veterans of the Queensland property scene, while King and Adams are often painted as the young guns. The pair met while working as Gold Coast law firm McLaughlins, together creating a small funds management business called McLaughlins Financial Services. And in 2000 – when the Howard government introduced reforms to the management-investments industry – King and Adams spun their little business out. They acquired the management rights to a listed trust and set about expanding via a steady stream of acquisitions.

MFS has concentrated on the property, tourism and funds management sectors, but has also openly tried to portray itself as a wheeling, dealing mini-Macquarie Bank. It has invested in everything from water assets to hedge funds and aquariums, but the eclectic model hasn’t always thrilled investors or analysts, who have complained that MFS’s structure had become too complex and that its ASX releases and reports lacked detail.

The growing feeling that MFS had become too big for its boots was not helped when Phil Adams, the public face of the company during its development, left Australia in June last year to run the company’s Dubai operation. King, who has an abrasive manner and dislikes talking to the media, is not exactly a market favourite.

The aborted sale of a 50 per cent stake in its Stella tourism business confirmed many observers’ worst fears about the company. MFS started shopping the stake around in early 2007 and boldly promised it would be sold by the end of June 2007. The company said it had buyer in August (at a rumoured price of around $1.2 billion) but by November the deal had fallen over. The credit crisis has only made things harder for MFS and the stock has dropped by 35 per cent since the start of November 2007.

Most observers expected MFS to be bidding for City Pacific, not the other way around. So while details about the management structure of the merged entity are yet to emerge – King, Adams and Sullivan could all potentially have roles – it appears that King and Adams’ dream of building a mini-Macquarie Bank is over.