RICH PICKINGS: Swamped by structural change

While the rich may have a knack of spotting trends ahead of the pack, even they are struggling against the tide of structural change currently taking place in Australia.

Lang Walker flogged $1.1 billion worth of property assets. James Packer and Kerry Stokes raised $500 million each by selling pats of their media empires. John Van Lieshout was one of many selling out to private equity; he got $500 million for his Super A-Mart furniture chain.

The GFC and the seemingly never-ending GFC hangover saw the sales slow down – until this week.

First came the news that Australia’s Chicken King, Bob Ingham, was selling his giant poultry empire Ingham’s Enterprises, with speculation that his family could get up to $1.6 billion.

Then came the announcement that South Australia’s Gerard family was selling its ASX-listed group Gerard Lighting to a private equity firm for around $186 million – just two years after floating the business for around $177 million.

Unlike in the heady days of the 2005 and 2006, these deals are not being driven by the promise of fabulous prices, but are instead taking place against a backdrop of structural change.

The rich might be great at picking trends ahead of the rest of the market, but even they cannot outrun the structural change hitting the Australian economy.

Take the Lea family, owners of the Darrell Lea chain that collapsed into administration two weeks ago.

The Lea family was a member of the BRW rich list for three years, peaking in 1988 with a fortune of $40 million.

While they have not graced the list’s ranks for 24 years, the demise of their business has been accelerated by incredible changes in the retail sector.

The rise of the private label, the pressure from higher labour costs, shifts in consumer trends towards healthier foods and the general mood of austerity across the retail sector have all buffeted the business in the last two years, adding to a general decline in market position that started years ago.

Let’s take a look at three of the prominent recent examples of structural change hitting the rich:

James Packer and new face of television

James Packer’s decision to sell his stake in Consolidated Media, which owns a 25 per cent stake in pay television group Foxtel, appears to be driven by two factors.

Firstly, he needs cash to help fund his bid for a greater stake in Sydney casino operator Echo Entertainment and potentially other casino investments in Asia.

But there is a sense from many analysts that Packer is selling out at what could be the top of the pay TV market in Australia. As in other areas of the media, it is the structural change driven by the internet that Packer could be seen to be reacting to. As usage of internet television services become more prevalent in Australia, growth in pay TV penetration could be under pressure.

Packer has expertly timed his exit from free-to-air television and magazines to get maximum value before they were hit by structural change. He looks to be doing the same here.

The Gerard family and the perfect storm

The Gerard family’s exit from Gerard Lighting could be seen as a unique two-stage process.

Firstly, the company floated on the ASX early 2010, raising about $85 million, most of which was used to pay off debts accumulated when the company bought out rival Lightening Corporation a year earlier.

Second came the sale to private equity firm Champ, just two years later.

Now, it might look as though it would have been simpler to sell to private equity in the first place. But the world is a very different place than it was two years ago, when the Gerard family may well have seen a brighter future for their company.

The sharp rise in the Australian dollar has made the imported competitors that much cheaper. Costs in manufacturing, including labour and energy, have risen. The construction sector, where Gerard Lighting sell its products, is going through its own period of structural change, driven by poor credit conditions, falling sales and waves of consolidation and collapses.

Champ’s offer of $1.05 a share is just 5 per cent higher than the $1 a share that Gerard Lighting floated at, but against that backdrop of structural change, the Gerard family may have done as well as it could have hoped.

Bob Ingham and the chicken run

Bob Ingham’s decision to sell his business is clearly driven by succession issues – none of his children are involved in the business, so a handover to the next generation was impossible. Sensibly, Ingham is getting out at a time when he can carefully control the process and, with any luck, the price.

That price however will be impacted structural change hitting the food and agribusiness sectors. Price deflation (driven hard in Australia by the supermarket giants Coles and Woolworths) and rising costs have seen margins slashed and producers and manufacturers forced to consolidate to build economies of scale.

Inghams Enterprises has been a participant in this consolidation itself, adding several smaller businesses to its empire in recent years. Now it will be a prime target of a global food business looking to bulk up.

The structural change impacting the global agribusiness sector is likely to see more Australian-owned agribusiness and food groups shift to foreign ownership as margins shrink further.

This trend might not have exactly forced Bob Ingham’s hand, but it certainly would have shaped his thinking.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.