Too few eggs
07 May, 2015
The recent resignation of Sir Ron Brierley from the Coats Group Plc Board (formerly known as Guinness Peat Group or GPG) brings an end to an era following his 25 years as a director of the company; 20 years as Chairman. Sir Ron previously had a 30-year stint at Brierley Investments, a company he founded in the early 1960's.
Both Brierley Investments and Guinness Peat Group were highly successful companies in the early part of their lives. Each then made one single large investment that dramatically changed the course of the respective companies, to the ongoing detriment of shareholder value. This brings into question the wisdom of having too few eggs in the basket, a classic investor mistake.
Brierley Investments (now known as Guocoleisure and no longer listed on the NZX) made a large investment in a hotel chain called Thistle Hotels that represented over half of its assets at that time. The acquisition was made with debt, just prior to the share market crash of 1987. The acquisition was the company's undoing. It had to sell off virtually all of its other liquid investments to avoid going under. Once New Zealand's largest company, it is now a shadow of its former self.
In the case of GPG, the company invested heavily into Coats Group, the world's largest thread maker. Again, Coats Group represented around half of GPG's assets at the time of the GFC. This time, the problem was different. GPG had no debt, in fact it had considerable cash reserves. Shareholder activism forced changes to the board, and a change in strategy - sell off all the investments, focus on Coats Group and pay out the excess cash. Unfortunately, the strategy hadn't factored in that the UK Pensions Regulator has a different view on the company's ability to pay out the cash, and this remains the subject of a longstanding and unresolved investigation. Although Coats Group remains a sound company, its share price is still less than half what it was prior to the GFC.
Two related companies, with a common problem - too few eggs in the basket, with the big ones stifling the smaller ones.