Farmer

"Paul Smart, Sky’s first chief financial officer, recalls Heatley ringing one day from Gibbs’s office where Heatley was trying to encourage Gibbs and Farmer to invest. ‘Hey, Smarty,’ Heatley said, ‘tell me, when does this thing break even?’ Smart was the keeper of Sky’s business plan, which was constantly being revised as the company failed to meet its own financial targets. ‘The business plan says in two years,’ Smart told him. Sky was going to work, Heatley told Gibbs and Farmer, it was going to be great, but it was taking more ingenuity, time, effort and, most of all, money to get established than he had originally thought. But if they invested and hung on, it would get there, he promised. ‘It will only take a little money and we’ll have a lot of fun,’ Heatley told Gibbs. In fact, it would take a lot more money, another eight to ten years longer than the business plan Smart had quoted, and the company would teeter far closer to the edge of the precipice than any of them anticipated before Sky began turning a profit. ‘We made good money out of it in the end, but it was probably the hairiest ride I’ve ever had,’ Gibbs reflects."

"In 1990, the government had sold Telecom to two US telecom giants, Ameritech of Chicago and Bell Atlantic of Philadelphia, and to the New Zealand firms Freightways (owned by Gibbs and Farmer) and Fay, Richwhite (the investment bank owned by businessmen Michael Fay and David Richwhite) for $4.25 billion. Freightways and Fay, Richwhite had brokered the deal and Gibbs, who was on Telecom’s board, chaired the board committee that ran the company. Through this, Gibbs had come to know the Americans well and was used to dealing with them. He offered to talk to them about whether they might be interested in Sky. It turned out that they might."

"But for a time, all the ingenuity made no difference to the company’s struggle. A year after its launch, Sky had just 18,000 subscribers when the company had expected more like 100,000. For a period in early 1991, Sky was losing $1 million a week. Smart recalls some months where he would sit down with others to decide whether they should use the available cash to pay wages or the previous month’s PAYE, because there was insufficient money to do both. Board meetings were spent discussing loans and how much the shareholders—Heatley, Jarvis, TVNZ, Tappenden and Todd—would put in on a pro-rata basis and whether more could be raised from the banks. Gibbs and Farmer were particularly irritated. More money was required every week."

"Smart’s quick synopsis is that the company started with Jarvis and Heatley as shareholders, spent all their money, brought in TVNZ and spent its money, brought in Gibbs and Farmer and spent their money, then did the same with Todd Corp. The cash burn rate was high. Smart’s forecasts were tracking how quickly Sky would run out of money—one month, two months, three months. Heatley did not always want to know. ‘I remember once saying to him, “Jesus, Craig, you make me feel like I’m responsible for Sky running out of money,” and he looked at me and said, “Good,” and walked out of my office.’ There was occasional professional tension around how to keep Sky going with limited funds without breaking any laws or breaching any accounting standards. ‘We never went over the line but we did occasionally skate along it,’ Smart says. ‘I’d characterise it by saying that in a start-up where you are constantly running out of money, you are challenged to use every means at your disposal to fund the company.’ He sees Heatley as driven and complex, hard to like but someone who commands respect. ‘He started a business from nothing, gave us all jobs, created all that and it wasn’t easy. He might be New Zealand royalty now, but he wasn’t always.’"

"‘If there is one part of my corporate history that I could change, it would be that decision I made not to tell Trevor and Alan that I was selling my Sky shares,’ he says. ‘It was spur of the moment, based on my friendship with Rupert Murdoch and I did not think it through enough. I wasn’t trying to be clever, I wasn’t trying to do a deal behind the bike sheds and I wasn’t trying to do something that was not in their interests. My total concern was security of information, but that implies that I did not trust them and that is not true. I totally trusted them. So I don’t quite know, looking back, why I did it. It is a big personal regret and it caused some strain in our relationship for a while, but I consider both of those guys to be my close friends. Sometimes things like that happen in life—you get caught up in the moment, you don’t think something through and later you think, I should not have done that.’ Gibbs and Farmer later sold their Sky shares to Telecom."

"Gibbs’ scheme was good enough for the Hong Kong Bank (now HSBC), but since it didn’t operate in New Zealand special arrangements were required. In the end, Gibbs arranged that the Hong Kong Bank send a letter of credit to BNZ for $115 million which then endorsed Gibbs Securities’ bills of exchange. The BNZ endorsement turned the bills into first-rate paper. Gibbs then used Jarden and Co. (New Zealand’s largest broking firm) to sell the paper in the money markets. In a roundabout way, then, Gibbs and Farmer were effectively funding it themselves, putting no money in, but having gained the confidence of Wardley, the Hong Kong Bank and BNZ. The whole process had been made much easier by the financial deregulation that the government had passed over the previous months; Gibbs had been amongst the first to take advantage of the new freedoms."

"Gibbs handed over his A4 sheet of analysis, saying, ‘Look, James this is a good deal, we need funding, here are the facts.’ He then had to wait three months while Wardley’s analysts went to work on the figures to confirm Gibbs’ calculations. With that hurdle crossed, Gibbs hired Yonge as his investment banker for the takeover bid with a large success fee. The generous fee encouraged Yonge to pull all the strings necessary with his parent, the Hong Kong Bank, to lend the New Zealanders 100 per cent of the money required for the bid. Since Gibbs and Farmer were using a fresh company to make the bid, Tappenden Nominees, which had only $100 capital of its own, this wasn’t straightforward. Gibbs says:"

"The privatised Freightways was the perfect set-up for Gibbs. He quickly stepped back, installed one of the former directors, Bill Wilson, as an independent chairman and left Farmer to operate the company from a small head office, trusting him absolutely and having great confidence in his ability as an entrepreneurial and effective businessman who understood the sovereign importance of cash flow. The two biggest profit earners of the restructured Freightways were the couriers and its stake in Chep pallet hire, which had developed a very effective computerised system to handle the awkward logistics involved in circulating pallets through the supply chain. With the couriers, Farmer developed a philosophy of having more than one entrant in each area of business. Freightways had several courier companies — Post Haste, Sub 60, New Zealand Couriers and Castle Parcels — all aimed at specific areas of the market, but overlapping. They were welcome to compete with each other. Each had different systems of distribution. Together they eventually accounted for more than 60 per cent of the New Zealand courier market. Couriers were the ultimate cash flow business since customers bought envelopes before they used them, and best of all, a lot of the envelopes were lost and never used. The drivers owned the vehicles and there was no stock, so the business generated huge cash flow returns with very little capital investment."

"Somehow Gibbs and Farmer had to orchestrate events so that maximum pressure could be applied to the board to agree to the sale of Mayne Nickless’ shares. Gibbs’ strategy was to launch into the market with a first come, first served offer of $1.70 a share for 27 per cent of Freightways, which, together with Mayne Nickless’ 24 per cent, would take them to 51 per cent ownership.[15](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-15) The price valued Freightways at $114 million.[16](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-16) The stockbrokers would line up the customers to purchase the 27 per cent the night before and so they’d have all they needed within a few minutes of the market opening in the morning. This would leave the market gasping for more. All those who had missed out would watch as the share price subsided back towards $1.38 and would begin clamouring for the opportunity to enjoy the same deal. And so it proved. Gibbs and Farmer launched on Wednesday, 27 March 1985, using Tappendens as their vehicle. They’d gained their 27 per cent by 10.15am.[17](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-17) Gibbs kept his public comments to a minimum, telling the *Dominion* only, ‘We thought it was a good idea.’ The share price settled back at $1.55 and the Freightways board had a problem on its hands. Shareholders who missed out demanded to know why the board hadn’t insisted their two fellow directors took 27 per cent of everyone’s shares rather than first come, first served. Valentine could only reply that he hadn’t known anything about it; but now his and his colleagues’ prestige as top company directors was on the line."

"Once Gibbs and Farmer gained control of Freightways they had no time to lose; Gibbs remembers telling someone at a cocktail party he was paying $500,000 a week in interest, and he wasn’t exaggerating. But neither man saw the exercise as a big gamble. Farmer says: ‘We knew we could sell two businesses pretty easily; meanwhile the cash flow was good and wasn’t going to stop overnight.’ Gibbs carried out the pre-arranged deal with Mayne Nickless and then sold surplus assets, such as Grower Holdings, the canning business in Hawke’s Bay, Bandag, and some pieces of real estate, for good prices.After an intensive six-month effort they’d paid off the loan and everything left — including half of the best trading businesses, couriers, Armourguard, freight forwarding — was pure profit.[22](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-22) Roger France worked closely with Gibbs those six months. He was hugely impressed that ‘at no point did this huge deal they’d taken on feel out of control; everything landed pretty much where Alan had conceived it would land’.[23](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-23) Meantime, France observed, Farmer kept the businesses running like clockwork through an incredibly unsettling time with no damage to the cash flow or the management team."

"With a likely price tag of at least $2.5 billion, Telecom itself was beyond the capacity of any New Zealand company to buy on its own. Gibbs thought Fletcher Challenge, the biggest local conglomerate, might be interested — ‘Hugh Fletcher,’ he says, ‘wanted to buy everything, at a bargain price’ — but even they would need to partner with someone. The task therefore was to find a suitable international partner. So while Farmer was concentrating on negotiations with Telecom over Netways, Gibbs began to search on his own in the early months of 1989. He soon got wind that merchant bankers Fay, Richwhite were also tapping the walls."

"Gibbs and Farmer called Fay and Richwhite in early 1989: ‘We think we should buy Telecom. There’s a huge play here, we can probably get it for a good price, but we can’t do it ourselves; we’d love to work with you.’ Gibbs said that he’d handle the deal from their end; after a short discussion at the other end, Richwhite was nominated as their leader."

"Gibbs was happy now. As September 1993 drew near, when Freightways and Midavia Holdings had to buy their 224 million Telecom shares from the Americans at the privatisation price of $1.81, the share price was floating upwards towards the $4.00 range. Gibbs’ and Farmer’s pay day arrived when they outlaid around $200 million for their 112 million shares and immediately sold 67.5 million on the open market for $256 million (at an average price of $3.80 a share). They’d made more than $50 million instantly and still retained 50 million shares, with a market value of $210 million. Gibbs was convinced these shares would continue to rise in value; Fay and Richwhite, who had other pressing calls on their money, sold down their shareholding more rapidly.[41](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-41) Brilliant negotiations in 1990 and the insistence of a second round of restructuring in 1992 to set the company back on track had produced the highlight in a successful career of deal making. Real money is often made at the point of discontinuities: when seismic shifts occur in the economy, such as from a regulated environment to a deregulated one, or from state enterprise to privatisation. Such conditions provide the opportunity for a few smart entrepreneurs who are in the right place at the right time to prosper extraordinarily. But, as the purchasers of the Bank of New Zealand, New Zealand Steel and the Central North Island Forest discovered, there was nothing automatic about profiting from privatisations."

"Freightways also continued to prosper. The character of Gibbs’ involvement in Freightways remained his ideal for any business enterprise. He’d sit down with Farmer regularly and together they’d work through a list of issues: ‘We’d agree on everything and Trevor would go away and do it,’ Gibbs remembers. He never spent hours studying routes for couriers or worrying about what trucks to buy; nor did he worry about managing the 3200 people working for Freightways’ many businesses. Roger France, who had been their CFO from 1985, watched the Gibbs–Farmer partnership from close quarters."

"As a holding company, Freightways held many businesses, each of which Gibbs and Farmer sold in three large transactions in mid-1997: Armourguard, New Zealand’s largest security firm, was sold to US public company Tyco International for $33 million ($44 million in current terms); CHEP, the pallet hire business, went to Brambles for $55 million ($73 million in current terms); and Freightways Express, which contained the nine courier businesses, they sold to Ausdoc, an Australian publicly listed company, for $125 million ($167 million in current terms).[4](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477355-616451090-4) With hindsight, Gibbs thinks they may have made a mistake selling the courier businesses:"

"Eventually, in September 1996, Gibbs, Farmer, Wyborn and Burr formed a new company, Viaduct Harbour Holdings Ltd (VHHL), to buy the block for $74 million.[2](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477355-616451090-2) Gibbs and Farmer each had a quarter share. Immediately they set about the creative task of transforming a large area of rundown vegetable markets, fishing sheds and warehouses into something special. Team New Zealand’s 1995 victory in the America’s Cup yachting competition and subsequent plans to defend the cup in Auckland created a powerful stimulus for the development. Rob Campbell, their CEO, remembers that Gibbs poured ‘huge enthusiasm’ into the project through 1996 and 1997, weaving a study of waterfront development and a search for the world’s best waterfront designer into his extensive travelling at that time. ‘Never mind Auckland,’ Campbell says of Gibbs’ approach, ‘this should be world-class.’"

"However, in 1995 when he’d seen that the Ports of Auckland were selling 18 hectares of waterfront land immediately west of the CBD, Gibbs thought back to the value that had been lying dormant in the surplus railway land in 1991: ‘I knew it would be a mess, that no one would see the value in this tangle of leases and that there’d be an opportunity.’ Farmer, meantime, had earlier been shooting in Britain with a party that included the Duke of Westminster. He’d been enthused about the power of long-term leasehold estates with returns that adjusted for inflation. Gibbs and Farmer prepared to compete for the land, but once again discovered that the other most serious bidders, Gibbs’ and Farmer’s old Unity colleagues, Mark Wyborn and Adrian Burr, were people they knew and it made more sense to work with them."