Telecom

"Late in 1987, racing aficionado and former New Zealand cricketer Terry Jarvis asked for a meeting with Heatley. The pair had met socially through golf and tennis but this time Jarvis had a business proposition. In Australia, he had seen that pubs and clubs were showing horse racing live, with the video feed delivered by satellite. He thought the same thing could work in New Zealand and was keen to explore it. He had got together with Brian Green, an engineer who worked in telecommunications and who was known to the Jarvis family. The pair had begun investigating how racing, which in New Zealand at that time could be followed live only by listening to the radio or attending the races in person, might be brought to screens. But the regulatory environment was hostile to broadcasting and as bad, if not worse, for anyone trying to enter the telecommunications market. Telecom had a monopoly by law on all aspects of telecommunications. Even the phones in New Zealanders’ own homes were owned by Telecom and customers rented their home phone as part of their monthly bill."

"The regulation that first confronted Heatley, Jarvis and Green was daunting. Just to try to replicate the Australian situation of showing live racing in pubs meant first penetrating a dense thicket of bureaucracy and government-mandated monopoly. Technically, putting a satellite dish in a pub car park was not difficult. Nor was leasing transponder space—there was a satellite with a transponder capable of rebroadcasting from Australia to New Zealand, which potentially allowed Australian horse racing to be shown live across the Tasman. Jarvis had already talked with Kerry Packer’s Channel Nine about getting access to its racing channel’s content. But even if you owned your own pub—owned the land, owned the buildings—and bought your own satellite dish, paid yourself to have it installed and paid for the satellite space to receive the signal and the coverage, you would still need a licence from Telecom to set up the dishes and allow the telecommunications to go ahead."

"Initially, the trio began investigating replicating the live horse racing that Jarvis had seen in Australia but the more they examined what was happening overseas the more they began to focus on pay TV and, at the same time, the new industry of mobile telephony. Heatley and Jarvis went to Hong Kong to talk to Hutchison Telecommunications, owned by Hong Kong’s wealthiest man, Li Ka-shing. Jarvis and Heatley were interested in how they might get into the mobile-phone industry in New Zealand but it was heavily regulated and, once again, controlled by Telecom. Hutchison was interested in pay TV, so the discussions were useful."

"In 1988, Heatley says he suggested to Jarvis that rather than trying to get into the mobile-phone market by competing with Telecom, perhaps they should try to buy Telecom’s own mobile phone business. The industry was in its infancy and while Heatley was captivated by its possibilities, he did not get the sense that Telecom had the same enthusiasm for it. It was also going to require massive capital expenditure and to do that, an investor needed a lot of faith in the future of the industry. Heatley, a voracious follower of the media, had that faith and his instinct was that Telecom did not, or at least not to the same extent. He and Jarvis went to see Telecom to ask if the company would be interested in selling. Heatley anticipated a rebuff but, to his surprise, the company seemed to view mobile telephony as an irritant that distracted from its lines business. Slowly, he and Jarvis negotiated the outline of a deal to buy Telecom’s frequencies and mobile-phone business. Heatley could scarcely believe it. They had started out thinking about televised racing, then pay TV and here they were planning to get into the mobile-phone business as well."

"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."

"‘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."

"The new Forestry Corporation was originally going to start functioning in September 1986, but it was held up by parallel work being done in other parts of the public service. The ideas in Gibbs’ model of a state-owned enterprise, operating under the Companies Act with staff who weren’t civil servants, fed into work also under way at the Treasury, led by Rob Cameron, Graham Scott and other officers, and at the State Services Commission, particularly after Roderick Deane took over as chairman on 1 April 1986.[42](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-42) It made sense to handle the state’s other commercial activities — such as electricity, Telecom and State Coal — in the same way.[43](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477308-556173400-43) Complicated legislative changes were required, which set back the new dawn until 1 April 1987."

"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."

"It provoked a celebrated court case driven by some disgruntled Lion shareholders, which, once solved, allowed the merger to proceed.[8](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-8) As a Lion director Gibbs watched the saga unfold and he was later drawn to observe: ‘David Richwhite is one of the most aggressive businessmen this country has ever produced, and I mean that as a heartfelt compliment.’[9](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-9) Having been hired by several of the new SOEs, including Telecom, to raise capital on international finance markets, Fay, Richwhite had deep relationships throughout the Wellington commercial and government worlds."

"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."

"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."

"In February 1988 Trotter appointed an Englishman, Peter Troughton, to run Telecom. A tough Cockney who had previously run London’s telephone network, Troughton quickly concluded that staffing levels, which ran to more than 23,000, would need to halve during the next 20 years.[3](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-3) Methodically he set about installing proper business practices that, as had been the case with the Forest Service, had been entirely lacking. There had, for example, been no real asset records.[4](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-4) Meantime, after the usual wrangle, Telecom’s board and Treasury officials had settled on $3.2 billion as a suitable book value for the assets being vested in the new corporation.[5](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-5) Whether it was still worth that in early 1989, after the government had removed Telecom’s monopoly over all aspects of telephone services, was far from clear."

"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."

"Gibbs’ primary contribution came in mid-1991, a year after Sky was launched. As Coopers & Lybrand had predicted, the fledgling business was taking longer to get established than initially estimated; the New Zealand economy was in deep recession and subscribers were signing on in a trickle rather than the steady flow that Heatley had confidently anticipated. The business was losing $1 million a week, which gained everyone’s attention. Heatley hadn’t lost confidence but admitted that he’d underestimated the startup costs. He remembers Gibbs calling him up at home one evening and saying, ‘Craig, you promised me that if I put a little bit of money in Sky I’d have lots of fun; I’ve now got more than a little bit of money in it, and it’s no fun at all.’ Their solution was to bring in more investors to contribute around $100 million in fresh capital. They started talking to Gibbs’ partners at Telecom, Bell Atlantic and Ameritech, sowing the idea that this could be a useful experiment for them. In the United States telecommunications companies were barred from investing in cable television, so New Zealand would provide an opportunity for them to explore potentially interesting synergies between the two industries. Soon a consortium was drawn together comprising Bell Atlantic, Ameritech and two cable companies, Time Warner and TCI, and they began negotiating an appropriate price for 50 per cent of Sky."

"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."

"From Gibbs’ perspective, the primary task for the new chief executive was to implement the plan that had been drawn together by the taskforce he was leading. Deane had to satisfy himself that it was deliverable, commit to it and then make it happen. This he did with style, taking on McMillen as his chief operating officer and White as his chief financial officer, and bringing in some of his own people to strengthen the marketing and human resources side, where the taskforce’s work was relatively underdeveloped. In February 1993 he announced the second round of restructuring, with a goal of reducing staff numbers to 7500 over four years. It wasn’t Gibbs’ original target, but it was sufficient to ‘make the company sing’.[37](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-37) The market responded with gusto, sending the share price surging past $3.00 almost immediately.[38](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-38) When critics said Gibbs was tough and mean for slashing staffing levels, his reply was always the same: ‘It’s not me that’s tough on Telecom, it’s the consumers; they want and demand cheap calls. If we hope to remain a profitable business we have to give them what they want.’ Telecom’s progress was also helped by the slow progress Clear was making in its court battles."

"I said to the Americans, ‘All I want is a bright, tough, telephone man, who really understands how many people you need to do a job and who is a very experienced manager. And on the other side, I want a financial guy who really understands telecom economics. The guy you had working on the bid, Jeff White, would be perfect.’ They agreed, so along with White they sent Ben McMillen, this brilliant old telephone guy who would get in there at 6am each morning and tear into it. They each brought down some helpers and combined with Telecom’s best we ended up with 50 people in a hotel on The Terrace. I gave them my speech: ‘We’re going to plan a reconstruction of the company within a month. The primary thing is to take labour out of it. I’ve done my analysis and I reckon we can run it with 6500 people.’ They said, ‘Alan, impossible.’ I said, ‘Bullshit. I’m sure we can do it. You’ve got to reconstruct the business as if it was yours. Not as if it’s some lazy American company, but how you would run it with your own money.’ McMillen loved the chance to organise things as he thought they should be. ‘Go to it,’ I said. I’ll be back once a week. They came back with a plan for 6300 staff."

"Running parallel with that, Gibbs worked with White on some financial engineering to gear the business up a little. Their package, which returned $400 million of capital to shareholders, also gave the share price a jolt. Investment in plant and technology, meantime, remained significant. In the financial year after the reconstruction, Telecom’s investment at $407 million was higher than the $400 million taken by shareholders in dividends.[35](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477273-050103421-35)"

"Gibbs was also fascinated by the question of happiness. As he had grown wealthy through the 1980s and particularly after the Telecom deal, he’d noticed many people assuming that the money must have made him happier. It hadn’t particularly. He’d derived great satisfaction from his achievements in his chosen field — successfully completing big deals — but beyond a certain point more money didn’t equate to greater happiness. For many years he’d been quietly testing some of the fundamental assumptions that underpinned modern social activism: that normal folk wanted the lives of their idols, that the old and infirm wanted to be young again and that the lives of the poor would be transformed if they had more money. When meeting new people, whether at his home in Auckland, in a Moscow taxi, or by the side of the road in Cambodia, Gibbs would ask them three questions."

"in Telecom’s case from the significant productivity gains generated by changes inside the company and from investment in technology following its transition from government to private ownership, Gibbs saw that Telecom’s golden run would end sooner or later."

"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."

"Parallel to Cameron’s valuation effort, Gibbs did his usual single piece of A4 paper analysis of how much Telecom might be worth: ‘It wasn’t hard for Telecom,’ he says. ‘It was a lovely, fat company, with huge margins and a lazy balance sheet. It was obvious that if you could keep the margins it would be a fantastic business.’ He told the Americans that they wouldn’t get it for less than a price-to-earnings ratio of 12, which with earnings a little over $300 million, put the price around $4 billion. It was a long, steady process to reveal to them the value in the business."

"Gibbs presents an interesting paradox in the sense that his personality is intensely restless and rarely satisfied, driving a ceaseless search for new forms of stimulation, but so far as his money is concerned he has long since been satisfied and his search for stimulus has never extended to a desire to put it at risk. Telecom acquisition team member Steve Walker remembers Gibbs ruminating late one evening after a meal in Philadelphia in 1989 while they were chasing the Telecom deal: *Alan told me, ‘Look, I’ve got 100 million dollars,’ or some such figure. ‘It wouldn’t make a scrap of difference to my lifestyle if I had another 100 million dollars; but it would make a big difference and would seriously piss me off if I lost $50 million.’*[18](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477355-616451090-18)"