THE DISTILLERY: PacBrands pass

Jotters look at the reasons behind the private equity snub of Pacific Brands, while one discovers value still exists in the cheque.

It’s easy to say that Pacific Brands has been marooned by Kohlberg Kravis Roberts, after the private equiteers walked away from the clothing company, apparently unable to find safe water. However, The Sydney Morning Herald’s Elizabeth Knight and Business Spectator’s Stephen Bartholomeusz argue that PacBrands has already done a lot of the things private equity might do to extract value. Elsewhere, one writer takes a fresh look at the consumer watchdog’s penchant for petrol price scrutiny, while another finds the humble chequebook hanging on.

The Sydney Morning Herald’s Elizabeth Knight explains that there are two reasons why private equity firm Kohlberg Kravis Roberts mightn’t have been able to find a compelling offer for Pacific Brands.

"The first is that the company's future profit performance was sufficiently uncertain that the exit strategy would have been hazardous. The second is that the company had already undertaken much of the restructuring and the upside was therefore limited for a new owner. Pacific Dunlop has already exited some business units, the outcome of which has been lower revenues. The bottom line is there is not much left on the bone for buyers wanting to make some money. The only measure on which the company fitted the private equity criteria is that it was cheap and unloved. But this is not enough. Unloved companies can ultimately become more unloved, which makes them a value trap.”

Business Spectator’s Stephen Bartholomeusz deals with the same themes in his piece, but is ultimately swayed by the reiteration of the PacBrands guidance.

"Perhaps they were deterred by the uncertain and unstable broader environment as much as anything they saw within Pacific Brands itself – it’s been no secret that despite the whirlwind of activity within the group in recent years it has been struggling to translate that into earnings stability, let alone growth, in the hostile environment for value-based brands. The private equity groups didn’t need access to the group’s management to know that. The failure of a transaction to materialise from the prolonged discussions with private equity would normally generate concern within the market that Pacific Brands’ financial position had deteriorated to the point where it had scared the potential suitors away. Pacific Brands was, however, able to reiterate its existing guidance for this financial year in today’s announcement. If it hadn’t, today’s sharemarket sell-off on the back of the announcement would have been far more savage.”

Meanwhile, The Age’s Malcolm Maiden considers the legality of Informed Sources, the almost-real-time service the petrol companies use to monitor their competitors.

"The retailers obviously use the information to frame their pricing tactics. Informed Sources is therefore a major contributor to the weekly petrol price cycle, which usually sees prices come down early in the week and then expand again as the weekend looms. The crucial question though is whether the big petrol retailers are using the information to become more competitive, or less competitive: all companies check competitor prices, and react. And while the petrol price cycle sees profit margins tighten around midweek and then expand, the pattern is changing: the cheapest day was Tuesday, but it has been moving towards the end of the week as the big retailers hold their prices down longer. Three legal opinions about the legality of the Informed Sources network were sought by the ACCC before the arrival of Rod Sims as chairman of the regulator in August last year. None of them concluded that the information-sharing network was illegal.”

And The Age’s Eric Johnston says a major industry review recommends that Australia keep the cheque as part of the financial circulatory system.

"Over the past decade, cheque use in Australia has dropped by more than 60 per cent in favour of electronic alternatives such as internet or phone-based payments. High costs linked with processing cheques has also meant banks were keen to see the end of the cheques. The average cost of processing a cheques is estimated at $7.69 each, compared to less than $1.21 for each electronic payment, according to figures by the Reserve Bank of Australia. However, cheques are still widely used among the elderly and those living in rural Australia, while charities still receive payments through cheques.”

Sticking with domestic affairs for the rest of this morning’s commentaries, The Sydney Morning Herald’s economics editor Ross Gittins concedes the budget is the most redistributive in years, and that’s a good thing. Fairfax’s Insider columnist Ian McIlwraith is still pushing for the ASX to modify its proposed reforms to capital raising requirements for smaller companies. And The Australian’s economics editor David Uren says the government will have to add a dose of austerity to future budgets given the rising costs in the health, education and welfare departments.

In company news, The Australian’s Bryan Frith asks if Crown isn’t the party behind the borrowing of Echo Entertainment stock, then who is, while The Australian’s Barry Fitzgerald reports from the annual oilers conference in Adelaide.

And finally, The Australian’s John Durie claims that JP Morgan’s trading cock-up supports the argument banks of that size are less too big to fail and more too big and bonkers to manage.

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