Freightways

"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."

"In this bleak environment, Gibbs did his duty for several years, devoting a couple of days a month to the Freightways board. Davis retired in 1981, leaving Gibbs as a full director. Pettigrew stepped down as managing director in 1983, being replaced by Trevor Farmer, although he remained very powerful as deputy chairman, with a small but not insignificant personal stake in the business. He was also on the board of New Zealand Forest Products. Freightways suffered from the fashion for excessive diversification that afflicted most large New Zealand companies of the era. Under Pettigrew it had bought a tinned fruit company in the Hawke’s Bay. Pettigrew had also wanted to buy a joinery company, but Gibbs fought against the idea, arguing that companies have a limited range of talents and that trying to do everything wouldn’t work for long."

"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."

"*These were dangerous times. David Lange and Roger Douglas, who have a huge responsibility for the colossal inflation during the mid-1980s, had given in to rapid wage inflation. At that time we were paying 25 per cent interest on bill rates, with inflation running at 18 per cent. The world was not very happy. Banks were pretty wary of lending money in those circumstances. Who the hell could pay 25 per cent interest? The way to make the Freightways privatisation risk free was to pre-sell the parts of the business that we wanted to sell but also to get ‘put options’ on bits of business we didn’t want to sell. That way the bank could put those businesses to our partners if it needed to.* *We had subsidiaries partly owned by Bandag, tyre retreading specialists, and Mayne Nickless. We went to them and said, ‘We’re going to* *buy the business; to help us fund it, we want you to agree to buy our half of the business if the banks insist, at this price.’ These were major companies and the combination of put options was sufficient for the bank to get all its dough back if the worst happened.*"

"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."

"Trevor Farmer and Gibbs each independently came to the view that the market was grossly undervaluing Freightways.[11](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-11) Few observers would have picked Farmer and Gibbs as likely partners. Legends of their early boardroom battles had spread through the industry.[12](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-12) Their backgrounds were also very different; Farmer was a self-taught businessman who’d moved from building to truck driving to freight forwarding. But Gibbs had sufficient respect for Farmer’s business abilities to approach him one day. He recalls saying to Trevor: *‘This share price is nuts. The market is still marking us down heavily due to de-licensing. You and I should buy this bloody company. I could raise the dough and we could make a packet.’ ‘Aw yeah,’ Trevor said. It was extremely casual. We never had an agreement between us in writing, and it’s not as if we were even mates at that point. But we had respect for each other and agreed to do it 50/50.*"

"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."

"The nature of Gibbs’ involvement in Forestry Corp was similar to that of his role at Atlas, Freightways and Bendon. His style was markedly different to John Fernyhough’s, for example, who as chairman of Electricorp spent most of his working week in Wellington and operated as an executive chairman. Gibbs gave Kirkland clear direction and then limited his role to challenging, provoking and guiding — and then stepping back to allow the chief executive to do his job. After an initial burst in February and March 1986, he spent no more than two or three days a month on the task. Gibbs says he’s always been ‘very cunning at avoiding the time-consuming business of managing people or of getting sucked into detail’. As a result he was able to cover an extraordinary amount of ground in business and public service, while still retaining enough freedom to travel for as much as three months a year and to think of new schemes. When most of Gibbs’ counterparts could tell him what meeting they’d be attending in a year’s time, Gibbs worked hard to avoid commitments that denied him spontaneity. Wherever he was, in New York or Harare, Gibbs kept on top of his half-dozen work streams with a steady flow of handwritten fax messages, channelled through Jacquie Turner at the West Plaza office."

"The Freightways deal exemplified the Gibbs approach. It was based on understanding the psychological drivers of the people whose help he needed; understanding not just what they wanted, but who they were. James Yonge was an investment banker with a great reputation for putting deals together, who Gibbs made sure had a lot riding on making this deal work. Yonge moved heaven and earth to sell the loan to his parent trading bank. The Freightways board comprised several proud businessmen who wanted, above all, to maintain their strong reputations in the community; after Gibbs’ initial foray into the market, they were looking for a solution that took the heat off them. His ability to read a situation so clearly had made him a brilliant negotiator. This is why those observing Gibbs most closely found him an interesting character. For all his apparent belligerence, the key to his success was his insightfulness and his empathy with those on the other side of the table."

"[2](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-ref-note-477308-556173400-2). Francis Allison Symes review of Freightways, October 1974, *NBR* Freightways file, Auckland Libraries."

"Lead & Feathers: The history of Freightways,"

"His experience at Ceramco, and at St Martins Properties, a much smaller company which had floated just before the crash and had suffered accordingly, taught Gibbs that he didn’t enjoy being a chairman of public companies. Regulations were onerous and he was forever obliged to explain himself in the press. As well, he felt particularly responsible when friends and family had put their money in, relying on his abilities; people like Jill Holt, the widow of his old friend Jim. She’d invested in St Martins and after the crash stood to lose most of her investment. She recalls that much to her relief Gibbs bought the shares back off her at the listing price, as he did with others she knew. ‘Some people,’ she says, ‘said that it was nothing to him, he was rich, but the fact is that most men in his situation don’t do what he did. It was very nice of him.’[37](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477346-006497775-37) Having done the rounds, Gibbs concluded that chairing a private company where only the principals had shares, such as Freightways, was much simpler."

"The place was demoralised. You had outstanding doctors and dedicated nurses, but they were frustrated by the process. If you do not know that your way of doing a leg operation, for example, is more or less costly than another equally successful way, then you have no basis on which to take rational decisions. You are just doing whatever happens next and that is a very depressing world to live in, and it is an incredibly wasteful one too. The hospital system had collected information about costs for 20 years, then stopped because nobody was doing anything with it. Information on costs alone was of no use for management unless they also had market prices, which show the value of what they were doing. At Freightways we knew exactly what each service cost and the value to the customer, represented by what they would pay, but these poor people simply got an amount of money and when they’d spent it, they stopped or requested more. Meantime, because money was limited, there were huge waiting lists in every area of medicine. Without prices, there can be no real management. We know how badly the Russian economy worked without prices. Here the government in New Zealand insisted that we run a huge and important system exactly the way the communists ran Russia. It was insane and still is."

"Towards the end of Gaynor’s period, aside from his major investments in Freightways and Ceramco, Gibbs’ portfolio consisted of a pile of cash, in excess of $100 million, and other public shares worth a mere $1.2 million. Gaynor remembers his boss worrying incessantly about the relatively insignificant parcel of shares. Gibbs, he says, was not a natural passive investor.[36](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477346-006497775-36) Meantime, Gibbs had made it his goal never to be in the position where he couldn’t write out a $20 million cheque that could be cashed the next day."

"Richwhite negotiated the fee, which, if they were successful, would be very lucrative. Gibbs’ efforts to gain a slice of the business took longer to bring to fruition. Initially they thought in terms of joining the bid as fully paid-up partners with the Americans. In that scenario, their aim was to persuade the Americans to apply plenty of leverage to the deal. If, say, they bought Telecom for $4 billion with 75 per cent debt, only $1 billion worth of equity would be required. Freightways and Fay and Richwhite’s Midavia Holdings would need to find $100 million to take a 10 per cent stake. If the Americans went in with only 40 per cent debt, however, the New Zealanders would be scrambling to find $240 million for a 10 per cent stake. That would be distinctly less attractive."

"Then a few days before the bid was due, Gibbs ‘had a brainwave’. He now offered to commit to buying 10 per cent of the shares at the purchase price. They’d put down $20 million on settlement day and the rest, $380 million assuming a bid of $4 billion, would be due three years later. The Americans would fund them for those three years, while the New Zealanders would pay them interest on the outstanding money until they paid for the shares. Gibbs recalls: *That got the Americans’ attention. ‘Oh that’s a different deal,’ they said, ‘you’re committed to buy.’ And there it was: the greatest coup of my business career, the chance to make serious money. We’d own the shares but didn’t have to pay for three years; we’d put down $20 million, but that would represent only part of our merchant banking fee; we’d have to pay interest, but dividends would probably cover that, and unless something went badly wrong, in three years’ time the shares would be worth a hell of a lot more than the original purchase price.* But what if something did go badly wrong and Telecom shares went down over the following three years; what if Gibbs and his friends had to stump up another $380 million in 1993 for shares that were worth only $200 million? Gibbs hadn’t been prepared to take that risk. Under the deal that he prepared, Freightways and Midavia would buy the shares through a company, Carla Nominees, which only had $100,000 capital and they would give no personal guarantees. Furthermore, Gibbs took the precaution of securing their $20 million down payment against the shares. Bell Atlantic and Ameritech, for all their lawyers and checkers, overlooked doing the same for their $380 million, so if for any reason the New Zealanders didn’t pay they’d get their $20 million back before the Americans received any of their $380 million. And they were risking only $100,000. Carla Nominees had entered a binding contract to purchase the shares, but the New Zealanders had no risk. It was effectively still an option."

"In a decade of deal making, this one had brought Gibbs close to heaven. The $4.25 billion privatisation of Telecom proved to be the sixth largest deal done anywhere in the world in 1990.[24](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-24) The merchant banking fee that the Americans would pay Freightways and Fay, Richwhite, which they calculated at $52 million, was unmatched internationally that year. Gibbs was cock-ahoop. It had been a great team effort that combined the determination and deal-making brilliance of Gibbs with the breadth of talent and relationships that Richwhite had fostered at his merchant bank. The Telecom deal was also Richwhite’s proudest moment in business. He summed up their collaboration: ‘Gibbs wouldn’t have won it without us; we wouldn’t have made so much money without Gibbs.’[25](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-25)"

"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."

"Gibbs’ style was an object lesson. ‘Alan would hit on only a couple of things during Freightways board meetings and they would always be of substance,’ he says. ‘While I’d think a little bit about everything, Alan would have thought deeply about a few things, the things that mattered, which on reflection is a better approach.’"

"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."

"Jenkins suggested that Gibbs turn his attention to the two places in the world with excellent low-volume, specialist cultures for car making: northern Italy and the British Midlands. Since Gibbs spoke no Italian, it made sense to look first at the Midlands. In the UK half a dozen companies, including Morgan, Aston Martin, TVR and Lotus, manufactured cars in low volumes. They were supported by engineers with the sorts of skills and mind-set that Gibbs needed. The decision was made; Jenkins merged his business with Gibbs’, and Gibbs and Jenkins became partners. The project moved across the Atlantic. In Neil Jenkins, Gibbs had found a Trevor Farmer-like figure to help him with the car project. Since the engineering challenges fascinated him, Gibbs would have a more hands-on role than he had had with his former businesses, such as Freightways and Ceramco, but he’d long since learnt that he needed a trusted and capable partner on the spot."

"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:"

"He was leaving New Zealand while at the very height of his powers. Gibbs was one of the nation’s half-dozen wealthiest individuals, a leading director of its biggest public company (Telecom), co-owner of one of its most successful private companies (Freightways), a major shareholder in one of the nation’s most promising start-up companies (Sky Television), which was soon to go public, a director of its largest brewer (Lion Nathan), as well as a leading member of the Business Roundtable and of the ACT party. He might have looked forward to a gentle transition into Grand Old Man of New Zealand company directorships and a stalwart of the cocktail set. But such a lifestyle never held much appeal to him. In his late fifties he wanted fresh challenges, not to ride on past accomplishments."

"*I’d rate Freightways as the central and major business experience of my life. It lasted for 20 years and was based on a great partnership with Trevor. We never had an argument and we’re still great mates, which is hugely satisfying. It was a hell of a lot of fun; we made heaps of dough and learnt a lot about life. We both gained great value out of each other. I wouldn’t have changed a thing. My only mild regret is selling. The courier companies were brilliant businesses and still are. We both underestimated how well Trevor had trained the guys who stayed in charge. Dean Bracewell, who was a relatively young chief executive, has done an excellent job continuing Trevor’s very disciplined approach. It’s hard to have the discipline not to charge around buying into Australia and doing stupid things; Bracewell has that discipline.* *So we sold the courier businesses privately to some guys in Australia, who leveraged the hell out of it (we had no debt on it) and refloated it at a huge profit, like we should have done. They did a Gibbs on Gibbs. We sold them for much less than they were really worth. It was an end of an era and I didn’t give it the attention it deserved, although the truth is that Freightways has probably performed better since 1997 as a public company than it might have if we’d kept it private. A public company has the advantage of keeping people on their toes, since one’s pride is involved. If we’d kept it private and not given it sufficient attention — Trevor being retired and me being overseas — it may have run down and Bracewell might have wandered off. That’s the thing about capitalism; nothing keeps working forever. To stay on top a company needs constant reinvigoration and attention to detail.*"