Buy Undervalued Assets Then Rewrite the Contract Terms

"Until that point, people would go to a third-party financier, like Fisher & Paykel Finance or someone similar, to rent this equipment. I understood, though, from my previous experience at General Finance, and at Xerox where everything was done on finance, just how much profit there was in the finance game. We were keen to retain that profit ourselves, instead of passing it on to third parties. In starting our own finance book, we were able to increase the value of our receivables considerably. So, instead of putting a customer on a casual contract that paid $80 a month for a piece of equipment, as an example, we could put them on a three-year contract paying just $50 a month. It was a win for them, and the guaranteed term made that item worth $1,800 to us. Our asset had just become much, much more valuable. Such was the power of what someone had agreed to pay for it over time. It gave us leverage that we could borrow against. Not only that, but we also had thousands of newly acquired pieces of equipment we could do this with, and because we owned all of the equipment now, too, we could do this almost indefinitely. We grew that finance book to $100 million in receivables. This was the making of the Blue Star business, in many ways. It was the genius in the deal that no one else had thought of. The others who were bidding for the Telecom business against us had been thinking in basic and more linear terms. We were thinking in leveraged terms – about the ability we would have to turn the assets we were buying into something worth much more. Fundamentally, we were thinking bigger and doing things better."

"Together, alongside Eric, we built that company. Blue Star went from virtually nothing to a billion dollars in turnover in a few short years. As was his spirit when he broached the idea of me buying in during that first meeting, Eric continued to be a big thinker, a brazenly ‘big goal’ guy. He would arrive unannounced at meetings where we were setting budgets. There we were, discussing how we could get up to $5 million turnover out of a particular branch, and he’d goad us for thinking too small. ‘Think about how we get $20 million out of that branch instead,’ he’d add. And they would, because they were now thinking bigger, more ambitiously, more commercially. Luckily, Paul and I were an excellent team when it came to getting things done. The deal that turned things around for Blue Star came via Telecom. Following Telecom’s desire to get out of hardware and instead focus just on network connectivity, Telecom was selling its customer premises equipment business. Virtually no one else at the time was selling that sort of equipment, but these guys had all the stuff that was installed and required in businesses. From physical phones and PABX (private automatic branch exchange) systems to alarms, wiring and plugs – you name it, this portion of the Telecom business had it and was renting it to its business customers, with very little competition. When Telecom made it known it wanted out of that business, we saw an opportunity. Having worked there previously, Paul and I knew the hardware business at Telecom well and could see its potential. Telecom hadn’t really ever fully understood it well as a business and, as a consequence, had mismanaged it. Now, the company was motivated to sell, so I believed we could get a good deal. The reason we’d wanted the business was that Telecom had all the customers as casual rentals. It had never had to put them on a contract because it’d had such a monopoly. The customers couldn’t rent this stuff from anywhere else. But we had the idea to put the customers on a contract that committed them to renting the equipment – that their business needed by this stage – for three years. It was a win for them because we could bring the monthly rental amount down, and there was vast potential in it for us to increase the value of the business. We convinced Eric to enter the tender process. The first challenge was that this portion of the Telecom business didn’t have a proper profit and loss, or a set of books with it, so everyone was unsure as to how to value it. All we knew was that there was a bunch of physical assets that got rented to customers, and this is how much the equipment was currently rented for. People were all making wild stabs at a figure on that basis. Eric, Paul, and I got together in a room to discuss what we thought we should bid for it. Paul and I were still busy trying to convince Eric it was a good idea, but none of us could come up with any really solid rationale for the price we should offer. So, we came up…"

"Back in that room, where we’re putting numbers in a jar for the Telecom offer, my slip was the one that got pulled out: $15 million. We can never know if that was the right number – and I know Eric had wanted to pay less than that – but it got us the business. From there, we had to work out how to actually pay for it. Here’s where the deal got even crazier. We hadn’t actually secured the finance to back our offer; we couldn’t yet put money where our mouths were. Normally you wouldn’t be handed an asset without having first paid for it, but somehow, in this case, we got the keys and began the handover before we had properly paid. None of us can remember now if a small deposit changed hands, but if it had, it can’t have amounted to much, because we still hadn’t figured out how to finance the deal yet. The business we had bought was a bit of a mess, to say the least. In the transition from government department to private company, there had been people retained that shouldn’t have been (obviously not the ones we’d filtered), and there was relatively shoddy record keeping. The stock control seemed to have been fairly non-existent up until this point. We had bought all of the hardware, but the business couldn’t give us a proper asset list."

"It was early days, and they had just 23 customers, but they’d done a lot of the hard stuff already. To be an electricity retailer, you had to have an agreement to buy electricity from somewhere, at wholesale, and you had to have a way to then distribute that electricity to your customers. These guys had already secured a deal to bulk buy electricity from Contact Energy, running power from Contact’s generators, and they had agreements with the line companies to run the power too. With their technical background, they’d done a good job of getting these things in place. But they were quickly running out of money. They approached us to see if we wanted to invest. They were looking for a partner to put money in so that they could continue to grow and make a real go at it."