Saturday, April 29, 2006

Brian Gaynor: Time has clipped wings of brash Hawk

The Hawk is back, but he is a far more cautious individual than the high-flyer of 20 years ago.

In the 1980s, Allan Hawkins was a confident and aggressive businessman who took Equiticorp and its 40,000 shareholders on a hectic roller-coaster ride.

The Equiticorp chairman and chief executive was the quintessential risk-taker as he acquired major interests in Feltex, Fisher & Paykel, Aurora Group, New Zealand Steel, Yates Corp, Carter Holt Harvey and Guinness Peat. He also made audacious takeover offers for ACI and Monier in Australia and acquired a controversial 4.4 per cent stake in BHP.

Hawkins showed no signs of self-doubt even after Equiticorp collapsed in January 1989. His post-collapse book, The Hawk, was brash and confident and finished with the words: "I'm going to keep on scrapping."

But with the passage of time, including a jail term, Hawkins has lost most of his appetite for risk. He is now chairman, chief executive and a major shareholder of Cynotech Holdings and this week's annual meeting was a far cry from the crowded and upbeat gatherings he presided over during the mid-1980s.

The former high-flyer has become cautious and conservative and he told a small gathering of Cynotech shareholders that the group's finance company operations had adopted a low-geared strategy because of press reports of a softer economy.

Hawkins also got into a scrap with former Cynotech director Richard Guy over the confiscation of 5.5 million shares and the ability of Guy to vote these at the meeting.

Many of the shareholders at this week's gathering were old associates and friends, and they must be asking whether their loyalty will be rewarded and if Hawkins' low-risk strategy will succeed in the present competitive business environment.

Cynotech, formerly known as Rocom Wireless, was listed on the New Capital Market in August 2000. Rocom began experiencing problems at the end of 2001 and the next few years saw large losses, board and executive changes and numerous attempts to raise new equity to keep the company alive.

At one stage, its shares were suspended for not producing the annual report on time and a rights issue was affected by severe snowfalls in Ashburton, the home of its share registry.

Hawkins first appeared on the scene in June 2004 when his companies, Cynotech Securities and Newmarket Securities, were assigned a Rocom borrowing facility. He was appointed chairman and chief executive of the listed company and his interests were contracted to underwrite a rights issue.

Rocom was in dire straits with $7.7 million of accumulated losses and $1 million of negative shareholder funds. It also operated in the technology area, where Hawkins had limited expertise, and he accepted the position of chairman and chief executive, which is contrary to modern corporate governance best practice.

The former high-flying businessman still had a loyal band of supporters as the company's share price shot up from 8c, just before Hawkins' involvement was announced, to 28c a month later.

One of his first initiatives was to establish Rocom Finance, now called Budget Loans. The original intention was to provide finance for the company's corporate and private clients but it now supplies loans for holidays, home improvements, cars, weddings, debt consolidation, mortgages and other personal items.

The finance company is low-geared with a shareholders' equity ratio of 44 per cent and its growth has been extremely slow compared with that of its competitors.

At the end of 2004, Rocom sold most of its traditional technology business and changed its name to Cynotech Holdings.

In 2005, Cynotech purchased Betta Foods, now called Merlin Foods, the ice-cream cone manufacturer. The purchase and sale agreement involved Cynotech Securities, a company associated with Hawkins, purchasing Betta Foods in March 2005 for $3.68 million (including legal fees, funding fees and a bank loan guarantee fee of 2 per cent a year) and selling it to the listed company for $3.89 million two months later.

Merlin made a major contribution to Cynotech's earnings in the December 2005 year, although Hawkins warned that trading conditions were now more difficult because of cost pressures, particularly electricity, gas and labour, and a more competitive environment.

At December 31, 2005, Hawkins owned 23.5 per cent of Cynotech's paid-up capital and 26.3 per cent of the warrants. A number of his old mates had also come on board, with Mike Daniels, one of Equiticorp's main stockbrokers, holding 2.8 per cent, Daniels and Mike Benjamin 2.6 per cent and Peter Francis, an old Chase Corp sparring partner, 2.7 per cent.

The main issue at this week's meeting was the proposal to change the exercise price of the warrants from 25c an ordinary share (exercisable on May 27, 2006, or May 27, 2008) to either 10c on June 27, 2006, 20c a year later or 30c on June 27, 2008 (shareholders could choose any one of the three exercise dates if the motion was passed).

Guy, a Cynotech director until November last and the largest shareholder before Hawkins took control, opposed the motion because he had sold his warrants and the proposal would dilute his shareholding. The dilution issue is important because Cynotech has 34.1 million warrants and 68.3 million ordinary shares (including convertible notes).

Guy was also annoyed because on April 20, just six days before the meeting, Hawkins transferred 5.5 million shares owned by Guy to Cynotech Securities, one of his own companies.

This dispute relates to security over loans from Hawkins to Guy to fund the latter's purchase of Rocom's original assets and his participation in a rights issue. Hawkins claims that Guy had been selling shares and he needed to protect his interests by transferring the shares, while Guy said he had met all his loan obligations and was in Fiji when the unauthorised transfers occurred.

Hawkins told shareholders the lower exercise price for the options was required because Cynotech needed the funds as he was lending money to Budget Loans. The finance company needed more equity in order to issue a prospectus and grow more quickly.

The warrants motion, which required a 75 per cent majority, was carried by 31.4 million (76 per cent) to 9.9 million. All of Guy's shares, including those transferred on April 20, were voted against the motion.

There weren't many positives to take away from the Cynotech meeting. Net earnings for the six months to June 30 will be well down on the $442,000 achieved in the same period last year because the latter included an extraordinary gain from the sale of assets of $500,000 and there are no exceptional gains in the pipeline this year.

As far as the December 2006 year is concerned, Hawkins said: "Provided we can control the impact of cost increases in our manufacturing operations [Merlin] we expect to produce an acceptable result for the full 2006 year."

But the most disappointing aspect of the meeting was Hawkins' lack of vision. He talked vaguely about acquisitions but, this time around, he doesn't have the financial resources to undertake an aggressive acquisition strategy or a team of bright young executives to support and assist him.

The big picture view of Hawkins is that he was far too aggressive and gung ho when he got his first chance in the 1980s and he is now too cautious and conservative.

A more middle ground approach is best suited for listed companies.

Cynotech Holdings

Share price 14c
Warrants price 5c
Market capitalisation $8.9m

Directors
Allan Hawkins (chairman & CEO)
Paul Hutchinson
Kevin McDonald

Net earnings
(December 31, 2005 year)
Operating earnings $308,000
Gain on asset sales $416,000
Tax - nil
Net earnings $724,000

Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.

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