The big (stinking rich) sell-off

Last Updated: Wednesday, 19 September 2007

By James Bennett

In the past 12 to 18 months, a string of Australia’s best and wealthiest entrepreneurs have sold off all or part of their business.

Solomon Lew has unloaded his Witchery clothing chain, his stake in Coles Group and his shares in retail company Colorado. Lang Walker sold $1.1 billion worth of property assets. John Ilhan has sold two separate stakes in his Crazy John’s mobile phone business, and Queensland billionaire John Van Lieshout sold his furniture chain Super A-Mart for about $500 million. James Packer and Kerry Stokes flogged half of their media companies for a total of $9.5 billion.

When the rich rush to sell assets, it is often a warning that the market is about to take a turn for the worse. Entrepreneurs have an innate ability to spot future trends and pick the top of the market.

And, given the recent falls in equity markets and the global credit squeeze that has occurred as a result of the sub-prime mortgage crisis in the United States, who would argue with the judgement of these sellers? But there are a number of other reasons for these deals.

A price too good to refuse

The amount of cash pouring into private equity funds in the past few years has changed many things about the Australian business landscape. Flushed with cash and backed with debt funding, private equity firms have gone out and aggressively bid for assets, pushing prices of companies up in the process.

For some entrepreneurs, the amounts offered have simply been too good to refuse. Van Leishout has admitted that he never expected to get so much for his Super A-Mart chain and Lew got about $15 million more than analysts expected in the Witchery deal.

In hindsight, it appears some these entrepreneurs may have picked the top of the market. John Kinghorn sold a 73% stake in his RAMS home loan business in July for more than $600 million via a public float, just weeks before the sub-prime disaster struck (although the value of Kinghorn’s remaining stake has since plunged). Van Leishout said earlier this year that he was concerned that Australia’s economic conditions had to come to an end at some stage – suddenly it looks like he could be right.

Expansion

Packer and Stokes have sold half of their media businesses in order to build giant war chests to expand into other areas. Packer has poured his money into Publishing & Broadcasting’s gaming business, while Stokes has made a range of investments, including a stake in infrastructure business GRD. Like Van Leishout, Stokes and Packer realised that the mammoth appetite of private equity firms presented a once-in-a-lifetime opportunity to accelerate the growth of their business.

John Ilhan has sold about 25% of Crazy John’s to National Australia Bank and interests associated with the Smorgon family in two separate transactions.

Ilhan’s business is at a crucial point. Its supply contract for Telstra phones and services recently ended, and Ilhan now wants to double the size of Crazy John’s distribution network and introduce new products, such as broadband services.

As Ilhan told the media in July, that sort of expansion needs cash. "I've been able to grow the company to this point without any equity partners, but for us to double or even triple our distribution in Australia, and to expand into other parts of the world, it would have taken me much longer. I don't want to be 90 when I've done all that. I want to speed the growth."

Bowing to the inevitable

Many sectors of the Australian economy are extremely mature and dominated by a handful of very big players. For the little guys, it is case or get big or get out.

The Laidlaw family has owned the Yakka clothing business for more than 80 years. But the textile and clothing sector has become tougher and tougher in recent years as competition from low-cost manufacturing centres such as China. Relatively small companies could simply not survive. In February, the Laidlaws sold Yakka to $1.5 billion clothing giant Pacific Brands for a reported $230 million.

It is a similar story in the transport industry. The dominance of industry giants Toll Holdings and Linfox has forced industry consolidation. In July, Sam Tarascio sold his Westgate transport business to Linfox for a reported $90 million.

Retirement and generational change

Many of Australia’s wealthiest entrepreneurs are getting older, hitting their 60s and 70s, and it is time for their business to be passed to the next generation. But in many cases, the children of Australia’s best entrepreneurs are unwilling, or uninterested, in taking over the family business.

Sometimes it is easier to sell up and then split up the resultant pile of cash. That way there is money for the entrepreneur to enjoy retirement and for their children to pursue their own ambitions.

It is worth noting that for many private entrepreneurs, the emergence of private equity has provided an alternative to the very public traditional methods of exiting a business: a trade sale or float.

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