Packer's private challenge

James Packer's private investment company, Consolidated Press Holdings, has had a big win in the technology security sector but its financial services sector investments through Ellerston GEMs Fund and Challenger Financial Services are struggling to deliver.

CPH has made a profit of about $40 million on its $20 million investment in internet security company PC Tools, which was sold last week to global security group Symantec for about $300 million. Symantec refused to give any financial details of the transaction but a CPH source confirmed the sale details in an article in today's Financial Review.

PC Tools was a start up that grew out of software developed by Simon Clausen, who remains chief executive. It had provided competition to Symantec, which owns the Norton Antivirus brand. However, Symantec said it would retain PC Tools as a separate brand.

The sale of PC Tools to a major American corporation is in keeping with other technology deals involving unique Australian intellectual property going offshore. Another high profile example is the sale of Radiata to Cisco Systems in 2000 for $US295 million.

The stunning performance of Packer's astute investment in PC Tools has not been matched by his investments in financial services through Ellerston GEMS Fund and Challenger Financial Services. However, there is hope that Challenger is finally in a position to deliver the performance that has been promised for so long.

Ellerston GEMs Fund was listed last year after the sale of $600 million in units. It is an absolute return fund managed by CPH subsidiary Ellerston Capital. It promised returns that were not correlated to major equity markets through a range of investment strategies including short selling.

But after trading at a discount to net tangible assets (NTA) for some time, CPH decided to delist the fund and provide unitholders with an opportunity to redeem their units. The proposal will cap redemptions at 10 per cent of the fund in September this year at a 7.5 per cent discount to NTA and 50 per cent of the fund in September 2009 at a 7.5 per cent discount to NTA. The remainder can be redeemed in September 2010 at NTA.

At the current NTA of $2.23, securityholders are facing capital losses on their original investment of about 18 per cent. The Ellerston GEMS Fund was marketed in tandem with a gearing offer from ANZ allowing investors to pay 50 cents and borrow the remaining $2 from ANZ. That strategy would have backfired badly.

The delisting proposal will allow Ellerston to retain management fees while giving frustrated investors an opportunity to either get out or wait for a turnaround in performance. CPH owns about 14 per cent of the fund but will not be participating in any redemption.

Turning to Challenger Financial Services, which is owned 20 per cent by CPH, Packer keeps a close eye on the business through his position as non-executive director. His chosen CEO, Mike Tilley, stepped down today after four years in the job. He will be replaced by his deputy, Dominic Stevens.

Tilley effectively cleaned the slate for Stevens by pulling out of financial planning at a loss of $20 million and writing off various strategic investments. Areas that Tilley could not control, such as movements in markets, caused a $270 million hit to the accounts.

Chairman Peter Polson said Tilley's departure was through mutual agreement. He said the analysis of Tilley's achievements should be seen from the perspective of the company's liquidity and balance sheet strength. Challenger has $750 million in excess capital and low gearing at a corporate level.

Polson said Packer continued to play an active role at board level. He said the delisting of Ellerston GEMs had no implications for Challenger, which has been touted as a possible CPH privatisation prospect.

Challenger is maintaining an optimistic view of the securitisation market. Stevens says mortgage origination deals will return in the next year but in smaller tranches than previously.

Stevens says one of the biggest opportunities for Challenger is in annuities, a business that has been boosted by $1.5 billion with the purchase of the AXA annuities book. He says fixed rate, fixed term annuity products will come back in to fashion.

Challenger's funds management operations suffered a 19 per cent decline in assets under management in the period, but Stevens said the equities division was "doing OK”.