Adsteam Group Swims in Red Ink

AUSTRALIA

ONLY a year ago the Adsteam Group was the darling of the stock market. Under its umbrella were companies that dominated Australian retailing and food distribution. Today, the company is close to ``going down the gurgler.'' Eighty banks are meeting this week to try to restructure Adsteam's $6.9 billion (Australian; US$8.8 billion) in debt. They are hoping to work out an arrangement that will give Adsteam a moratorium to make payments on its A$800 million annual interest bill.

At the same time, new management at the top of Adsteam is trying to repackage its assets to get more money when they are sold. Among the prize assets are the second largest retailer in the country, David Jones, the nation's largest food retailer, Woolworths, and Petersville Sleigh Ltd. which produces such food brands as Birds Eye and Peters.

Both the bankers and management are working on a company that is leaking red ink at an unprecedented rate. Last week, Adsteam reported a combined loss of A$3.7 billion for its six month operating results. The loss, mainly from writing down the value of assets, was the largest in Australian history.

After the company reported its results, it also announced that Adsteam's creator, John Spalvins, would no longer be part of management. Mr. Spalvins, an immigrant, created the giant starting with the assets of the Adelaide Steamship Company, which operated tugboats. This week, a business magazines described Spalvins as ``not quite clever enough.''

But, he was pretty clever. Spalvins put together a network of companies tied together by cross ownerships that were as difficult to see as a spider's web. Since Adsteam companies typically were minority shareholders in each other, outside investors never could get a complete picture of operations or earnings.

``One of the lessons of this is that you need to know the actual net worth of a business,'' says Bob Conlon, a professor of economics at the University of New South Wales.

For regulatory and tax reasons, Spalvins made it difficult if not impossible to figure out what Adsteam was worth. ``It was all very sophisticated, but the market was not sophisticated enough to understand,'' says Jack Frisch, who teaches microeconomics at the University of New South Wales.

From the middle of last year, Adsteam stock started sliding from A$5.49 per share. Victor Svets, one of Australia's top securities analysts, questioned the company's results at its annual meeting last year. With securities analysts unhappy, institutional shareholders bailed out. The stock finally hit A$0.10 per share last week.

In normal times, such a collapse would be lethal for a company - especially with such a huge debt. However, Australian bankers are not eager to push the company into receivership. ``If you throw it into liquidation, the banks take a big hit in one shot,'' explains Mr. Frisch. The Australian banks involved are National Australian Bank, Westpac Banking Group, Commonwealth Bank, and the ANZ. The Bank of America was one of the largest American lenders.

The strategy now, Frisch says, will be to sell off the parts. ``The quality of the assets is better than some of the other recent disasters,'' he says. With interest rates falling in Australia, the economy should begin to respond, which will help retailers such as David Jones.

However, complicating life for the bankers will be the Australian Tax Office. Adsteam recently agreed to pay A$250 million in disputed taxes. The government will likely want to get paid from the proceeds of any asset sales.

Spalvins is the last of the ``cowboy entrepreneurs'' to fall off the saddle. In the last two years high debt loads and bad management have brought down such high flyers as Alan Bond (Bond Corporation - brewing and media), John Elliott (Elders IXL - brewing, finance, agriculture) and Bruce Judge (Ariadne - property investment).

Mr. Conlon believes the lesson from the losses is a realization of the cost of deregulation - especially in the banking sector. ``Deregulation coupled with the entry of the foreign banks, with the domestic banks trying to preserve market share, was a recipe for disaster,'' he says.

Once the dust settles, Frisch thinks the government ought to look closely at Australian accounting standards. ``There were a lot of funny numbers,'' he explains.

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