Tuesday, July 31, 2007

Dubai Aerospace Enterprise Move on Auckland Airport: Will It Fly?

There has been much written about the recently announced "merger" of Dubai Aerospace Enterprise (DAE) with Auckland international Airport Ltd [AIA.NZX]

Let me give you my take.

DAE have offered the equivalent of $NZ 3.80 per share in quite a complex merger proposition that values AIA somewhere north of $NZ 5 billion in its entirety. This is substantially more than what the company was valued at before rumours of potential buyers started coming out of the woodwork a few months back. It was consistently trading at around the 2.20-2.40 range.

The hurdles that this merger proposition have to overcome are those that a midget would have trouble getting over even if he was thrown by a tall man.

Two city councils, Auckland and Manukau City, between them own almost 25% of the airport. Manukau Mayor Barry Curtis said they "wont sell" and the Auckland City Mayor, Dick Hubbard, has put proposals to be aired and voted on, one of the proposals includes ACC buying more AIA shares. It looks unlikely that these two shareholders will come to the party and sell, even at an increased offer.

The merger is also facing the wrath of other local and national politicians and the consensus of those in power and public opinion seems to be overwhelmingly in favour of don't sell. Public pressure against a sale is bound to resonate with a Labour Government wanting a 3rd term in 2008, its constituency would be overwhelmingly against such a sale.

The unpopularity of the AIA sale in the public's eyes focuses on the fact that they don't want to see a valuable "strategic" asset flogged off to any overseas company. Ironically though AIA is already owned 33% by foreign shareholders.

There are some, including yours truly, who have mentioned the obvious threat to national security that a bid from a Muslim backed company brings. We are reminded of last year when DAE was forced to relinquish ports bought in the US for similar security reasons. This itself alone is a good reason to block the sale of AIA to DAE.

I have no problem with AIA being sold to anyone else, foreign or local and in fact there is rumoured to be at least another seven possible buyers for AIA assets with a handful currently doing due diligence, among them are Melbourne airport owner, Australia Pacific Airport, Macquarie Airports and Canada Pension Plan. The last is said to be close to launching a bid.

The only problem that I see is price. While the offer by DAE is considerably more than historical AIA value placed on the company by the market AIA is a very attractive asset.

It is in a monopoly position, has one of the highest profit margins for any airport in the world and is highly undeveloped compared to foreign airports.

It is this undeveloped nature of the business that must seem the most attractive proposition to potential bidders. It is for me as a shareholder and I intend to hold long-term for that reason alone.

There are vast tracts of undeveloped land with uses for ancillary services for the airline business, retailing and hotel potential and a myriad of other possibilities. In fact AIA was discussing the possibility 2 or 3 months back of splitting the land/retail based assets of the business from airport business and trading the two entities separately on the NZX. That is where the value lies.

In my opinion the sale of AIA looks unlikely to anyone but when you have interventionist local and national politicians involved in public companies you never know what is going to happen. A couple of years ago Ports of Auckland, a publicly listed company, was bought by the Auckland Regional Council and delisted and before that Air New Zealand was grabbed by the State "in the interests of the country"

AIA CEO says the DAE offer "should be accepted by shareholders in the absence of another offer" but he himself has undervalued the very company he presides over and its shareholders.

Long-term the company is worth much more.

Disclosure: I own AIA shares

AIA @ Share Investor

Is Auckland International Airport set for M & A activity?
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Government market manipulation over AIA/DAE deal
DAE move on AIA: Will it fly?


Queenstown Airport Buyout @ Share Investor

Queenstown Airport: Queenstown Airport Update
Auckland Airport CEO on Queenstown Airport Fracas
Queenstown Airport: Court Case looks set to Drag
Queenstown Airport: Loud Voices & Loyalty
Queenstown Airport: Air New Zealand's Crocodile Tears
Queenstown Airport: AIA purchase good Long-Term but will cost shareholders Short-Term

Discuss this Stock @ Share Investor Forum - Register free
Download AIA Company Reports

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Steve Jobs Biography - By Walter Isaacson





c Share Investor 2007



Monday, July 30, 2007

Panic! Wot me?

There has been a bit of a drop in world markets over the last few days, you might have noticed financial news creeping into the main news headlines again and journos urging investors to unlock office windows.

Of course we have seen this all before, headless chickens running for the hills, as their pockets spill over with moola, not as much as they could have had if they had kept their shares and sold them in a rising market but happy in the fact that they wont lose anymore capital. Clearly these individuals shouldnt have invested in the stock market if they pull out at the slightest fall in share prices.

The New Zealand Market was the first to open on Monday the 30 July after a weekend of thought by some investors over the world markets dropping last week.

It is likely that the US market will be volatile on Monday's Wall Street opening and the cycle will begin again here in NZ Tuesday. Similarly volatile global markets will probably be the order of the day for a time.

There is a silver lining though folks!!

If you are a long-term investor, like me, then you may want to do the opposite to all the chicken littles out there and buy instead of sell.

That stock that you have had your eyes on maybe alot cheaper now and aint it better to get a good deal in a sale rather than pay more as stock prices go up?


c Share Investor 2007

Sunday, July 29, 2007

Love Xero?

Scott Manages a website development business in London and answered a few questions for me about the recently listed software company Xero [XRO.NZ]and what its prospects might be for the future. He is not affiliated in any way with the Xero company.

About the software


Powerful connections. With Xero, you can access your accounts and run your business from anywhere in the world, 24/7. And your trusted adviser's can login and view your accounts too, providing valuable real-time advice when you need it most. No more confusion, no more delays. Say goodbye to barriers. Xero's intuitive work flow makes painful data entry a thing of the past. Seamless bank integration allows your statements to be loaded daily without even clicking your mouse. And Xero's powerful Dashboard gives you a real-time snapshot of your business at a glance. Peace of mind. Xero takes care of your data security and privacy, so you don't have to. Your data is stored on our secure servers and backed up every day, so even if your computer is lost or stolen your data is safe. You control who has access. The only people who can see your personal data are those you choose.



The Questions:

To answer your questions, most of which require some degree of speculation...

Share Investor: How much market share, given time, do you think Xero can take away from traditional off-line providers?

Scott: Plenty, with time. Initially people like myself will become the early adopters, and if it really is as good as it potentially can be, word of mouth will spread it far. The advantage for Xero, what harm can there be paying a couple of hundred dollars to test it out for a few months, indeed they could easily offer a free month or two, once you are hooked (or you get to the point that it's easier to persevere than change accountancy systems) then you have a customer for a very long time.

I can see growth potential with payroll integration also, email payslips, the whole thing. Too many companies use a different piece of software for every different tasks. Then licensing fees, upgrade costs, etc.

One of the biggest costs with traditional accountancy systems is multiple users on multiple PC's. This cost is gone with Xero.

S.I. Is the Xero product so superior that it will take users away from other online providers such as Quicken and MYOB?

Scott: I think yes, eventually. So it is a long-haul investment. MYOB and Quicken will respond, Quicken already has an online model in the US. But they rely heavily on what I outlined above, once a user has coughed up the $ and implemented their business on a system, they aren't going to change in a hurry. Give them a compelling and easy change though, and who knows?

Xero's advantage here is they can make changes, fixes and upgrades quickly and efficiently, Change a few lines of code and instantly fix a bug or small problem. Spend a day programming a new feature, test it, and it's online two days later.

S.I. The costs to the end-user, are they lower than online software?

Scott: I think if you looked at the OVERALL cost it would be competitive, compared to the features and abilities available. Sure, you can spend $400-600 on MYOB or Quicken and use it for 5 years - or spend $600 a year on Xero. But what are you missing out on that your competitors will have over you during that time? Quicken and MYOB still have issues emailing a frieken invoice! Xero will probably be able to integrate into your company website... it wouldn't surprise me if they implement a Credit Card payment module for you to use...

S.I. Margins for the company, how good could they be once initial establishment costs are factored in and then overcome over time?

Scott: Fantastic. SaaS is a wonderful business model. If things are done properly you could have a handful of people run the entire company (as it is). They will have to hit the right mix of features, price etc and I think that they will. It will be very interesting to see what offers they come up with, really I should email Rod Drury to see if some of the things I have mentioned here are on the cards.

S.I. Is the only point of difference between competitors off and online products the fact that Xero is online?

Yes, and No. Being online does lean toward a whole other set of advantages, a few of which I outlined above. There are certainly advantages to having offline software, if you are stuck somewhere with a laptop and no internet connection, but is that the way of the future? No, I didn't think so either.

S.I. Will it be horrendously expensive and or technically challenging for prospective clients to switch from their current provider to Xero?

Scott: I hope not. There are several options, either you keep your existing accountancy software around, but stop using it on a certain day and transfer balances, stock levels etc to the new system. Or Xero can come up with a migration tool. Or simply target NEW businesses first or those without an existing system.

They would be smart to sell this to the accountants, who will then recommend it to their clients as a system they can easily access as well. The possibilities are limitless, but no changeover will ever be VERY easy... or, it could be, who knows?

S.I. What is the main reason why you want to use this software and why not shift your current business accounts to Xero as well?

Scott: I sold both of my businesses before leaving for London, and my Trust accounts are so pathetically easy I do them in Excel. However, When I return to NZ my next business will be Xero based. I will use it to eliminate the frustrations I experienced with other accountancy software I used, mainly user limitations, bank reconciliations, expense management, jeepers almost everything!

The value I see in Xero is that if a feature ALMOST works the way you'd like, theoretically they can have change online within hours after a response to user feedback. This will happen thick and fast on startup, as they vie to impress...

S.I. Are any competitive differences easily overcome by Xeros rivals?

Scott: If Xero's rivals are well aware of their weaknesses, why haven't they done anything about them by now? I think they have underestimated the online market, to be honest, as have many people in the past - I can see Xero's advantages, and have watched them closely since listing. Maybe there will be rumblings, who knows? I am willing to bet the people behind Xero intend to stay ahead of the pack no matter what, and they are off to a good start.

S.I. How will the likes of giants such as Google online apps affect Xeros entry into the marketplace?

Scott: Hard to say, multinationals often forget New Zealands special needs in these areas, so Xero may rocket here but find it hard to break the US and UK. A tough call.

S.I. What are the costs of continuous development of this software to stay ahead of the pack?

Good question, although I don't have the answer I would say they are attractive compared to version updating, releases and distribution from the big two...

To put it in perspective, I work for a company in London that uses a SaaS model, they don't really even realise it. The IT Dept consists of 5 staff, which is more than sufficient to manage the website and support new development. The online model is worth hundreds of thousands of pounds to their business.

They developed it themselves to replace the offline model, shooting themselves in the foot? No. Because they have happier and more dedicated customers, spending more money with them!

S.I. Given mostly positive answers above how long do you think Xero could take to become a market player of some substantial nature or even a dominant player in this sector?

Scott: I will get onto the Xero bandwagon soon, I think their listing price could still drop a little more while they are quiet and people get itchy feet, or don't really understand what they have bought into... Xero will show it's results when it is ready, I get the feeling it will have VERY rapid growth, next year(2008) should be an interesting year.

End.

Xero @ Share Investor

Share Investor Interview: Xero's Rod Drury
Xero Ltd: Download full Company Analysis
Share Investor Q & A: Reader Questions to Xero's Rod Drury
Rod Drury on Xero and Growing Business
Xero set for surprise to the Market?
Love Xero?
Share Investor's 2010 Stock Picks
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Discuss XRO @ Share Investor Forum

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Listen to Rod Drury Interview

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Buy new: $14.95 / Used from: $7.50
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c Share Investor 2007

Saturday, July 28, 2007

Competing With Style

Ain't Competition Nasty!!

I just want to relay my thank you to those of you who have bothered to contact me over the demise of the old Share Investor Forum. It has taken a lot of work to get it going and it was getting a couple of thousand of visitors a day. Not big, but it was growing.

It seems I have now been relegated to the realms of blogging. Here I shall stay and I hope some of you will join me.

The main thrust of this post has been spurred on by the nastiness that has come from individuals and those connected with http://www.sharetrader.co.nz/ . They are responsible for informing my host, http://www.jconserv.net/, that I was "violating copyright" on my site and thus here I am now.

I'm not sure what the "violation" was for but suffice it to say Share Trader has a wealth of material on it that infringes copyright. I am not about to inform the owners of copyrighted material of such.

The nastiness started soon after I opened the site last September, with subterfuge related to the owners of Share Trader, re-directing my URL to a porn site and an attack on its content in early 2007.

For the life of me I don't understand why Share Trader may be afraid of a little competition. They are in a monopoly position, so perhaps they want to maintain it anyway they see fit?

Competition is really what today's piece is about and I can relate my recent experience to the business world in general and specifically to New Zealand business and its listed companies.

Perhaps the most glaring example of recent occurrence when it comes to tough competition is the stoush between New Zealands two major supermarket players, Foodstuffs and Progressive, over the battle for control of The Warehouse [WHS.NZ] Foodstuffs and Progressive currently dominate the supermarket sector with duopoly pricing but want to take out a fledgling player in the supermarket industry simply because they fear what a bigger third player might do to corporate profits.

These two players are not interested in competing at the shop floor with a new entrant, they simply want to eliminate this competition before it starts.I am not against competition but surely if Progressive and Foodstuffs want to expand their empires why don't they duke it out with the minnow fair and square, compete on price and service and open some additional outlets of their own?

It is interesting to note that Progressive have stopped one of Foodstuffs outlets from opening on Auckland's North Shore for more than 10 years and the market has lain idle for more than two years as empty as it was when first built. Legal action has also been taken(and failed) by Progressive to shut down an outlet mall in the same area for dubious reasons.

The fate of this stoush is now in the hands of New Zealand's Commerce Commission.

Monopolies in New Zealand are very common. This is mainly because we are a small market. The consumer clearly must be protected to some extent from these giants.

Telecom [TEL.NZ]and its dominance in the tel co sector for the last 20-30 years has had a negative effect on New Zealand, its economy and the consumers back pocket. The technology that Telecom customers must use is never up to date with overseas tel cos and most communication is still being done with the use of copper wire. True enough Telecom has been a good business for its early investors and many have made plenty of moola but as time has gone on the refusal by management to invest back in the business has cost Telecom ,its current shareholders and customers dearly. New Zealand is currently at the back end of the line when it comes to broadband and its products are expensive. Its current shareholders have lost big time.

Vodafone, similarly, seems to have adopted many of the traits that Telecom has had as a Telco monopoly and its mobile service and prices reflect the duopoly structure that co-exists with Telecoms mobile network.

It is a human trait to be confidant when one is in a good position in life and one could be forgiven if one was even a little cocky and boastful at times but some of the leaders of our monopolies take this position to levels of arrogance that seem to mock and deride their customers.

The recent case of Teresa Gattung is a well known one. She professed in 2006 in a Telecom shareholders meeting that "...the tel co business model, using "confusion" as a "marketing tool to maintain prices and margins" and that Telcom had been using this model for years wasn't really a shock to consumers but what was a slap in the face was the fact that she actually said it with impunity!!

Perhaps the funniest use of arrogance and disdain for consumers of recent times by the CEO of Auckland Airport [AIA.NZ] was his contention that narrowing the duty free retailers from two down to one at Auckland International Airport would "...give consumers more choice and the same low prices that they have always had..." now I didn't graduate from university with honours but even I can fathom that Don Huse might be pulling on something more malleable than a duty free wine cork. This individual is currently telling AIA shareholders to sell their shares to Dubai Aeronautical Enterprise for a measly $NZ3.80. Would you trust him? I don't.

Even my favourite topic of discussion of listed companies on the NZX, Restaurant Brands[RBD.NZ] have displayed some of the qualities of a monopoly over its last 10 years as a listed company without actually being one as such-to be fair though its Pizza Hut and KFC divisions were very dominant. Vicki Salmon, its most recent CEO, was blind in the face of reality when every time there was a poor profit announcement(which was most often the case) she continued to trot out the mantra "...we expect to see an improvement in the coming months..." The real arrogance of Vicki and her predecessors though was the fact that they had two dominant brands, KFC and Pizza Hut and much like Teresa Gattung RBD management neglected those brands simply because of their dominant positions and the thought by management that these brands were bullet-proof. Those two brands currently wallow in mediocrity in the face of real competition from the likes of Dominoes and Nando's Chicken.

Sky Televisions [SKT.NZ] position as the only player in the pay TV market in New Zealand makes its clients shake in their boots every month when their account arrives. Monopoly pricing rules and the arrogance of management when consumers complain is almost on a par with Telecoms head honchos. Perhaps they all went to the same charm school but I detect a pattern with management reaction to customer complaint when you are the only big kid on the block.

A dominant player that must be admired is Coca Cola. The focus on their product is fanatical and every aspect of marketing and selling is expertly crafted and nurtured from upper management all the way down to the fridge in the corner store. Coke ignored their consumers in the mid-1980s when they changed the formula of Coke without consulting consumers and had to back peddle when a backlash by consumers saw sales volumes fall in the USA. Their dominance of the caffeinated fizzy beverage market gave management the belief that they could mess with their leading product without a consequence. How wrong they were. They did learn from their mistake though and that is to be admired.

What can happen when a company or individual has a dominance in its field-and clearly they have got that way because they have been enterprising, hard working and clever-is that its position as the only or biggest player can be undermined by the tunnel vision that often comes about when one doesn't have to look over ones shoulder at the ankle biter running behind you. When suddenly that ankle biter starts nipping at your heels your reaction to the competition is a very important pivotal position for your company or product. What you do next, whether it be competing on a level playing field in your market or trying to undermine the newbie in any way you can , can have a negative perceptional outlook on your company from its consumers and ultimately a material effect as you lose the vision you once had when you initially set out to conquer your entrepreneurial goals.

There are countless monopolies that have fallen because of lack of care, they shouldn't have simply because they were in the dominant position, but the lack of care for the consumer and or the product or service they sell can even bring a dominant player to its knees. Management simply can't overlook basic business acumen simply because they "own the market."

Competition is essential to life, in business, on the sports field and life in general but ultimately if you play with a loaded deck and cards up your sleeve you , your company and your product or service just may be the loser in the end.

Related Amazon Reading

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Copyright Share Investor 2007, 2009

Friday, July 27, 2007

Burger Fuel Listing 27th July (NZ time)

The story below from the NBR confirms that Burger Fuel is listing on Friday July 27.

After the big top up from its present owners and founders one can only guess that its appearance on the NZX today is going to be somewhat of an anti-climax.

It is a great little company but has been repeated often by myself and others, it overvalues itself and this overvaluing has led to the low interest in the IPO.

Had it been a lower valuation the market could have taken this IPO seriously and backed it fully.

As it is BFW is going to struggle today SP wise and will continue to struggle in the weeks and months to come.

Management have overestimated their abilities in a financial sense when it comes to the IPO, lets hope they havent done the same when it comes to future financial management projections.

Readers will have to ask themselves if founders have only managed to raise at best $5m NZ dollars of a sought after 15m, then the original plan is going to be somewhat constrained.

The reported $1.5m cost of the IPO is a laugh and there is no report yet as to whether that cost comes off the $5m raised. In the absense of further info we will be generous here and give them the benefit of the doubt until told otherwise.

With such a shakey start to its public life, Burger Fuel is going to struggle right from the get go. Not a good omen for its future.






BurgerFuel to list after $2.7m top-up
NBR Staff


BurgerFuel will list on the NZAX on 27 July following a $2.75 million top-up from founders Chris Mason and Josef Roberts.

$5.25 million was raised from 2380 shareholders - although that also included shares bought by the founders from the public pool - making up the minimum $8 million equity sought.

The company originally hoped to raise $15 million for 26.7 percent of the company but the response to its "would you like shares with that?" campaign was unenthusiastic and the offer had to be extended.

The capital will be used to pay the upfront costs of more stores before these were on-sold to franchisees.

In Australia, BurgerFuel has one franchised store and hopes to franchise more as well as operating its own store due for construction soon in Sydney's Kings Cross.

Chairman Peter Brook said the company would look to roll out stores in other countries with local partners to reduce capital investment costs.

BurgerFuel is due to open in Tauranga and Napier soon to take the total store numbers to 24.



c Share Investor 2007

Friday, July 13, 2007

But wait there’s more: How I’m learning to love Kiwisaver

For selfish reasons, I have been thinking lately. What I have been mulling over is Kiwisaver and its relation to the NZX and what it might mean for its future. The stocks in my portfolio and yours are going to benefit.

Let’s get this straight, I am dead against Kiwisaver. It is compulsory, inefficient, costly, enormously complex, will have low returns for its participants and is damaging for business.

The big winners will be the Kiwisaver providers, the IRD, who have hired 400 more drones and other government lackeys and the recipients of our largess.

The NZX could be the big winner if overseas experience has anything to go by.

The US and most recently the Australian stock market have benefited greatly from the retirement schemes that run in both those countries. The companies on those countries listed indexes have performed consistently better than our listed companies simply because of the large amount of retirement money sloshing around with no place to go but investment.

True, a lot of retirement funds will be inefficiently filtered through fund managers before reaching the NZX and much of the Kiwisaver proceeds will go offshore to other exchanges but there will clearly be billions going into our stock market.

In the USA their 401ks have helped push stock fundamentals to levels above the Kiwi NZX and in Australia multiples are similarly higher.

The extent of many countries super funds and its contributions to their local economies cannot be understated but as these funds have gotten bigger they have even stretched their economic tentacles abroad, US funds through private equity have bought companies in Australia and New Zealand and other countries while Australian funds have bought up large in New Zealand. The biggest retirement money buyout in New Zealand being the Canadian teachers fund buyout of Telecom New Zealand Ltd [TEL.NZ] Yellow Pages for over $2 million NZ dollars.

How long it will take for the New Zealand super funds proceeds to have an effect on our market depends on the uptake of Kiwisaver by its citizens of course and the impact will also depend on whether Kiwis who start a new job opt out of the conservative 6 providers that are the default ones and whether current employees decide to open themselves up for more risk and more return by going with a provider such as Fisher Funds which is likely to focus on the NZX and ASX and its smaller growth companies.

Certainly there is already evidence that these types of funds have had an impact on our market. Government and quasi Government institutions through agencies such as the ACC and the Government super fund for state employees have helped bolster our market and its listed companies. Mostly the blue chips but also a few middle to smaller cap stocks have been targeted by these funds.

Our market has mostly been a disappointment over the years compared to foreign bourses and the absence, up till now, of retirement funds bolstering the NZX will put our market on more of an even footing, help stimulate IPO’s and channel funds away from the over inflated and the tax friendly property market.

Even though our market has done well over the last few years don’t imagine that it is overvalued as a whole. When you include the extra funds from retirement money that are to come on-stream over the coming years you could be forgiven for doing cartwheels if you are already in the market at the prospects of fund managers pouring mum and dads money into the NZX.

Kiwisaver isn’t a perfect tool or even close to a perfect tool for helping kiwis save retirement money, tax cuts would be a far better and cheaper solution and then we could put those funds directly where we like.

Having said that there are always winners and losers when it comes to Governments meddling in its citizens business and for those that are already invested in the NZX and its fund managers of course, they are the big gainers.

Kiwisaver @ Share Investor

Kiwisaver mediocre substitute for real saving


Recommended Amazon Reading

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The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham
Buy new: $14.95 / Used from: $7.50
Usually ships in 24 hours

Buy The Intelligent Investor & more @ Fishpond.co.nz

Fishpond



c Share Investor 2007

Friday, July 6, 2007

Share Investor Interview: Josef Roberts, Senior Burger Fuel Director

Exclusive Interview with Josef Roberts, a director of Burger Fuel Worldwide [BFW.NZ] pre IPO and listing on the NZAX board of the New Zealand Stockmarket.

Burger Fuel IPO

New Zealand's fastest-growing gourmet burger chain BurgerFuel is putting its customers first as it plans to list on the NZAX after raising $15 million with an issue of 15 million shares at $1 each, with a one-for-five option to buy additional shares at the same price in 18-months' time. Minimum subscription is for $1000 worth of shares and options.

Funds raised from the issue will be used to fund the company's national and international growth aspirations, primarily in New Zealand, Australia, Europe and the United States. BurgerFuel currently has 19 outlets in New Zealand and one in Sydney.


This interview was conducted via email.



The Q & A


Share Investor:

What exactly is the money raised to be used for?

Josef Roberts:

Primarily securing and constructing new stores and expanding infrastructure to support growth. Although the construction costs of a franchisee owned store are paid for by the franchisee; capital is required to secure leases, make construction commitments and secure prime sites as they become available.

The stores built are then on-sold to franchisees. In this way capital can be recycled. In addition, however, it is possible that BFW could operate some stores until the appropriate franchisees are selected. In this case BFW would collect the revenue from those stores and could also elect to sell those stores on an earnings multiple, as opposed to a set franchise fee – so there are benefits – if a store is held and operated for a period of time by BFW.

Sometimes we have franchisees already signed and no site available and sometimes the other way around. Additional capital allows us to speed up store development by being able to proceed with immediately securing top locations as they become available and even operating them in the short term if necessary. However, we are primarily about franchising; this allows us to achieve much faster growth.

S.I. How was the value of the company at $60m arrived at?

J.R. Firstly, we have to remember that the $60 million valuation assumes a further $15 million in cash is raised in the IPO.

A company like ours is not so easy to value, as you know. A number of factors have to be taken into account such as the company investment to date, future earnings, growth capabilities, scalability, personnel and intellectual property - amongst other factors. The company has been extensively modeled under different scenarios to determine a valuation. Grant Samuel, the independent corporate advisory firm, analyzed the various scenarios and settled on a value that they considered to be achievable, based on our future growth potential and associated earnings.

Valuation ties into forecasts and as you know we are not providing those. Why? Well for a growth company like ours it is very difficult to confirm exactly where we will be in 12-months from now. As outlined on page 15 of the prospectus – there are 3 possible scenarios for expansion. Each would provide different financial outputs. If we were to make early predictions now and not achieve those predictions this could seriously impact on the company’s future share price. Accordingly, it is the most responsible approach to gain investment on the clear understanding that no projections are being provided.

Whilst we knew that this could make it harder for us to raise capital, we also believe in the fairness it gives investors up-front in accepting the terms we offer. We want them to assess the value and potential for themselves; which is what you guys are doing – even if this means they say “no thanks”.

The company intends to rely on continuous disclosure reporting to keep the market informed of key developments – such as yesterday’s announcement about our growth - already up 41%. Imagine what that would have done for our share price had we been listed?

We will have plenty of announcements to make in the future – because we are a high growth company and we operate very visibly. People can see progress and performance and this is what drives a share price – right?

To those who say the company is over-valued – they are entitled to their opinion. We know the value of what we have and we are confident in our ability to not only grow the company but also its share price. We have come to the market with an offer. If our offer is not acceptable – so be it – we stay private.

S.I. If you are opening company stores initially, how long do you intend to keep those stores?

J.R. As explained in question 1. However, in general only until the appropriate franchisee is appointed

S.I. The market is confused about what sort of company they might be investing in. Is it principally a franchisor or an owner of actual stores?

J.R. Principally a franchisor as explained in question 1, however, it is our view at this stage, that we should always own and operate at least one store long-term, in each country like we do in New Zealand and will do in Australia. This keeps us in touch with the reality of operations as well as providing a valuable training ground to personnel and franchisees in each local market.

S.I. Will stores be leased or owned outright?

J.R. Leased

S.I. Long-term, is the bulk of company revenue going to be based on royalty fees or revenue from store sales?

J.R. Answered in Q1. Also, please refer to page 54 of the prospectus – this sets out our revenue income. Clearly, you can see that royalty fees are the major on-going component, but up-fronts, transfer fees and income from our satellite kitchens also make substantial contributions.

S.I. There is similar competition from such outlets world-wide, most notably GPK in the UK, how well do you think you and/or your franchisees will do against this competition?

J.R. GPK is essentially a Wisconsin model. We think our track record in NZ in competing against Wisconsin speaks for itself. But we do not underestimate competition here or in other countries. In the end we are confident in our ability to compete with any gourmet burger offering.

What you have to understand with BurgerFuel is that we have strong operating systems that are scalable. We also have a strong brand that represents more than the sum of its parts. That is to say we have a defined culture – we don’t just make burgers – people eat BurgerFuel for the experience as well as the product and our culture. Once again, that’s either understood by investors or it isn’t.

S.I. It is nice to see owners retaining a stake in the business, so firstly why not float a larger stake if your intention is to expand quickly, wouldn’t it have been better borrow from banks, keep the company for yourselves if it is only a small 25% of the company going public?

J.R. We think that being listed will greatly assist us in expanding overseas as well as attracting franchisees – it’s as simple as that. Credibility toward securing leases, supply lines, staff, franchisees and other associated stake holders becomes easier if we are publically listed.

If people don’t want us listed here in NZ – I think you can work out for yourself what will happen. We will most likely continue as a private company and list further down the track in a different country or we may never list.

In respect of the 25% for $15 million, we have the ability to re-cycle capital (as explained in Q1). The options also provide for some future capital, as well as giving investors an incentive to invest now. If we asked for more now we would just be sitting on your cash – and you wouldn’t like that either Darren!

S.I. A related question to the above, why is the sunset clause on directors and founder owners for selling their shares such a brief one?

J.R. Yes, it could have been longer. Having said that, our aspirations are all about building a global brand. We are committed to doing that – I am personally doing this because I enjoy it and am passionate about growing BurgerFuel, just as I did with Red Bull in NZ and Australia. However, unlike Red Bull, this is a NZ brand. We feel it too can go global. It is my intention to be there when we open stores in the US, whether its next to the Viper room in LA, on the strip in Las Vegas or in Times Square I can’t say, but I want to be there for it. Chris is also a very passionate guy – he created this company and he loves it – it’s his life. We have everything to gain by building this up to be a huge company and increasing our own value as well as those of our partners (shareholders).

S.I. The decision to list on the NZAX instead of the NZX, why was that made when the disclosure rules of the NZX would give possible investors more confidence in their investments because as we know knowledge in investing is what it is all about?

J.R. The NZAX is designed for companies with high growth potential like us. They are not required to publish forecasts due to the fact that they are in a high growth phase and actual results could vary considerably.
We have come to the market with an offer on terms that we knew would not appeal to all investors – but they are our terms. We could have made grand projections now to attract investors (like other companies you know have) – but that is not how we do things.

As already outlined there are a range of scenarios for the way we can roll out and this goes to the heart of any projections we would have committed to. We want to be upfront about that. “Invest if you believe in us” – that is what our message is. People don’t have to invest. We would rather know that we have a certain style of investor. Like the franchisees that we select to become our partners – we want to attract investors who are there for the same reasons we are – because they are passionate about the company and believe that we can do it – (I can hear some of you laughing!!).

We’ve been criticised for targeting so called “na├»ve” investors. This is not the case at all. We want a big spread of investors including those who eat at our stores and take part in the ownership. Although these people may not be seasoned investors like yourselves, they should not be underestimated. They are the opinion leaders, they understand what makes a brand.

Our IPO advertisements are all about light hearted communication, boosting awareness and a bit of fun. This is who we are and this is how we do things. We polarize and we think that is important to build any strong brand or culture. It’s a mistake to try and be all things to all people.

We want a base of NZ investors who will review our business on a daily basis and tell us where we can improve. We think this is very important to our future. In this way, we have a constant R & D base assisting our international development. However, this offer is also for other serious investors who may not yet eat in our stores. We can see that by some of the larger amounts that are being applied for that also carry CSN numbers, that clearly, our growth potential and ability to drive the share price by announcements of progress and performance, is understood by some seasoned investors.

S.I. Finally, what or who was your inspiration to start the Burger Fuel company and did you intend to "go global" initially and where do you see your company in 10 years?

J.R. Chris knew he could make the world’s best burger and he knew he could come up with a scalable business model that could grow fast. He always wanted to take BurgerFuel global. For me; I invested for this reason. If you read the prospectus thoroughly you should get a strong sense of this. Just look at our trademark protection programme. This alone, demonstrates our vision in thinking global and acting to secure our intellectual property over the years.

Page 67 of the prospectus – clearly sums up where we see our company in the future.

S.I. Thanks for your time Josef and good luck for the future of Burger Fuel .


Burger Fuel Background


BurgerFuel started in 1995 when Chris Mason opened the company's first store in Auckland's Ponsonby Rd. It is the brainchild of founder and director Chris Mason, who met Josef Roberts when Roberts owned the Red Bull brand in New Zealand, and wanted to sell his drinks through Burger Fuel shops.

Roberts took Red Bull to Australia, and after selling the Australasian Red Bull franchise back to its original European owners, decided to join Mason and work to expand the business. He said both businesses were brand-driven. "But with Burger Fuel there is the prospect of exporting a Kiwi product globally."

Roberts said Burger Fuel eschewed private equity raising in favour of public listing because that would add to its credibility as it sought to roll out overseas.

Currently BurgerFuel serves over 35,000 burgers a week and has 20 outlets, with three more scheduled to open soon in New Zealand, including one in Queen St Auckland, and one planned for Kings Cross in Sydney.


Additional info from Josef Roberts unrelated to questions posed by Share Investor but furnished to us by him

This whole process reminds me of when I started Red Bull in NZ in 1996 and then Australia in 1999. When many laughed and mocked us for trying to sell a small, unusual tasting can of drink for an “outrageous” wholesale price of over $2.00! I was told “only Coca Cola can do something like this. Red Bull will never make it, it’s a fad drink that anyone can produce. This is destined to fail.”

Hmmmm!

Investors should look at the strong corporate governance and the people behind BurgerFuel. The advisors, the independent directors on the board – these are highly respected and experienced individuals who have chosen to join BurgerFuel. They did not need to. They have assessed the company’s prospects for themselves. Investors should take this into account.

We respect your community. We know that you guys carry huge influence. I bring you back to the fact that we have come to the market with an offer. Saying “here’s our price and terms”. If they are accepted – great we know we have the kind of partners (in the shareholders that buy in) that we want. If not – we will continue as a private company and still be successful.

Take a look at the total system sales growth figures from yesterday’s press release. Last year’s first quarter was a weekly average of $276,403, same period this year $390,379. Last week - $445,011.
We are growing anyway, but the IPO process alone has totally enhanced the value of the company even more. No one in New Zealand has not heard of BurgerFuel as a result of it. Remember, we’re a marketing company. Our campaign is all about growing the brand and selling burgers, as well as shares - and that’s what we’re doing.

Darren, best regards and thanks again for the time you have given us. We know this may not be everyone’s kind of investment and we respect that. We also respect you and your community’s views.

I would like to say one last thing though – if NZ continues to criticise companies and publish material so quickly before thoroughly assessing the offer – aren’t we somehow killing our own country? It’s amazing what gets published in the media without the prospectus even being read. There is in fact a lot of information in our prospectus for potential investors - it’s not just a pretty document.

New Zealand needs higher risk growth stocks (which is what we are) just as it needs the kinds of stocks that are like “watching paint dry”.

Would the last entrepreneur in NZ please turn the lights off when you leave? Australia, UK, USA – here we come!

Josef Roberts

Director

BurgerFuel Worldwide Limited

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c Share Investor 2007

Sunday, July 1, 2007

Official Response from Burger Fuel

There has been a response to more information asked from the Burger Fuel Employee and BF itself has responded:

Share Investor:

Can you enlighten us further?

The reply was:

Darren,

Ok, first things first. This is an ‘Official’ BurgerFuel response. But don’t worry this isn’t a generic response as we’re taking on board what people are saying about our IPO. Neither are we responding to take pot shots at you, we are fully aware that this investment is not for everyone and that all are entitled to their opinion on the BurgerFuel IPO.

Now, down to the numbers (which is what I’m sure you’re most interested in). The press release has some but not all the info contained in the prospectus (which we suggest anyone interested in the BurgerFuel IPO or expanding their portfolio in general should read – hard copies available in-store).

There are a few figures in your post which need to be corrected first to make sure we are all working off the same figures. Our Total System Sales (that is, the total sales of all the BurgerFuel stores) last financial year was $16.4M (plus GST). At the end of 31 March 2007 we had 19 stores. We can’t just divide $16.4M (plus GST) by 19 to get an average as stores open up at different times during the year. Our average sales (not including any stores not open for more than 6 mths in the year) were $20,727 per week (plus GST). So we are way above the $150k a unit turnover (closer to $1M-$1.1M per year as an average). You can see pg 53 of the Prospectus for more info on our averages and sales totals.
The $3.1M you refer to is the revenue coming into Burger Fuel Ltd (for the 9 mth period to 31 Dec 2006), it is not the sales figure for all our stores. BurgerFuel Ltd had an operating surplus. You may argue that the surplus is not a large one, but as we’ve outlined in the prospectus, significant investments have been made into marketing our brand, securing intellectual property, developing our systems and preparing the company to go global. The $250k loss relates to Burger Fuel International Ltd which carries a head office and satellite kitchen infrastructure for our one Aust. store. Essentially, we have already geared Aust. operations so that they are ready for us to start expanding as soon as we’ve raised funds. The site plans for our 2nd Aust. store in King’s Cross have already been submitted to council.

We’re certainly not trying to hide anything from the public, there is a lot of info in the prospectus (including the above figures) clearly set out. Again, we suggest that anyone looking at the BF IPO should get a prospectus and read it – hard copies are now available in-store.

Potential investors should look at the fact that the decision to list has been made in conjunction with Grant Samuel who have modeled the company and its prospects. Potential investors should also look at the Board of Directors (pg 45-46 of the prospectus)– these are not the kind of people that would get involved with a company without a thorough analysis of its potential.

Lastly, we know that the BF IPO is not for everyone. We want people who believe in the brand (and there are a lot out there) to invest if they think we’ve got what it takes to go global.

If you’d like any more info please read the prospectus or, if you’d like, we’d be happy to answer any other questions (within reason) or organise a phone interview for you.

For the many that view this blog, here is some press that will hopefully balance your opinions on things.

TVONE - Brian Gaynor on ASB Business (comments on BF IPO around the 2:20 mark): http://tvnz.co.nz/cda/tvnz/video_popup_window...

In the end, however, just remember that the NZAX is “specifically designed for fast-growing, developing companies” and that’s what BurgerFuel is.

Either way, thanks for talking about us, we appreciate your opinion.
The team at BurgerFuel

www.burgerfuel.com

PS: Regarding the ‘Fuel Employee’, we’re not sure that it was one of ours. However, all our employees are extremely passionate about the brand and the company so we know that many of them would want to make sure that key facts were correctly represented.


Should I make a call and let you know more or has the Burger Fuel Correspondant given you enough info?

Any questions you would like to pose should I make a call?

Share Investor: Takes a Bite-KFC

A very interesting article below about Warren Buffetts approach to brand names got me thinking about its local significance and Restaurant Brands Management of its KFC brand:


Brand names

Commodity companies
Warren Buffet distinguishes between commodity companies and non-commodity companies.

Commodity companies sell products or services that are undistinguishable from the products and services of other companies. Here the customer generally buys on price.

Take soap, for example. Different companies sell soap but their ordinary product is generally the same. The customer will buy from habit or personal choice but can swiftly change brands where there is a price advantage.

This makes the seller vulnerable to the trading practices of competitors and it has a limited ability to increase profits by raising prices. To stay alive, it must respond to its competitors.

Warren Buffett on commodity companies

In 1982, Warren Buffett said this about commodity companies, particularly those in industries that have surplus capacity:

‘Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc) are prime candidates for profit troubles.’

Non-commodity companies - continuing competitive advantage

Other companies produce a product or service that is so different from its competitors, or so special, that the customer, and the distributor, cannot do without it. This allows the company what Mary Buffett and David Clark call a "continuing competitive advantage". They liken a competitive advantage to a moat surrounding a castle. The moat stops enemies attacking the castle; the brand name stops competitors taking away customers.

Having a brand name is not enough. The brand name, according to Mary Buffett and David Clark, must be lasting – it will go on into the foreseeable future without costly maintenance. There is no real competition for the product. This is a sustainable brand name.

The Coke brand name

A good example of a continuing competitive advantage of this kind is Coca Cola. The customer generally asks for a Coke by name; they do not buy a ‘cola’. Coca Cola is a long time investment of Berkshire Hathaway and one that Warren Buffet has constantly said is never for sale.

Some companies can obtain a continuing competitive advantage by having a monopoly, or being part of a marketing structure that operates as a monopoly. A good example of this is Freddie Mac, The Federal Home Loan Mortgage Corporation, established by Congress to buy and securitize mortgages, reselling them to investors as guaranteed mortgage pass-through certificates. This was an earlier investment of Warren Buffett.

Brand name companies

There are also some companies that market commodity products so well that they distinguish their commodity product from that of their competitors and so put their own special ‘brand’ upon their product. They can achieve this by marketing, continuous improvement, by quality production and service, or in many other ways.

McDonalds sells hamburgers and, if truth be known, their hamburgers are no better than those of their competitors. McDonalds has made itself a brand name primarily through marketing, uniformity of product, and accessibility.

Gillette sells razor blades, not a unique product. It has become dominant in the market, and a brand name, because it markets itself well, continually improves its product – track the progress of the shaving tool) – and its products are reliable.

Warren Buffett on competitive advantage

In 1993, Warren Buffett had this to say about companies with a continuing competitive advantage:

‘Is it really so difficult to conclude that Coca Cola and Gillette possess far less business risk over the long term than, say, any computer company or retailer? Worldwide, Coke sells about 44 % of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market.’ Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power.’

Brand name advantages

Time, of course, has moved on since 1993 – market shares change and, arguably, computer companies may have entered the brand name field (for example, Microsoft). However, Warren Buffet’s point is that there are big advantages in having a brand name like Coke, or Gillette:

The customer knows the name and the product that the name represents
Distributors have to stock the product (can you imagine a supermarket without Coke)
The company can keep pace with inflation (or even jump ahead of it) with price rises;
The competitive advantage of a brand name company is also enhanced if the product needs continual replacement; food and beverages, razor blades, newspapers.

A brand name in itself is no guarantee of investment success. Conversely, a company can be successful without having a brand name.



May I pull out a paragraph for closer scruitiny that is relevant and an indication of how RBD "manage." the brands that they do:


‘Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc) are prime candidates for profit troubles.’

I would argue that RBDs brands are not the "non-commodity" businesses that Buffett continues on with in the following paragraph, simply because RBD management are not doing any of the above:


Non-commodity companies - continuing competitive advantage
Other companies produce a product or service that is so different from its competitors, or so special, that the customer, and the distributor, cannot do without it. This allows the company what Mary Buffett and David Clark call a "continuing competitive advantage". They liken a competitive advantage to a moat surrounding a castle. The moat stops enemies attacking the castle; the brand name stops competitors taking away customers.


KFC would sneak in on its uniqueness for sure but its "moatability" (I just love new words) if you like, is countered by RBD managements treating their brands in a commodity type way, that is to say, neglecting them.

It is clear to most what happens when you treat any company in a cavalier fashion and in the case of a "moat" company like RBD and its brands they have managed to break the dam down and the water is rotting those brands from the inside out.

The dominance factor that Buffett talks about really only applies to KFC. Pizza Hut and Starbucks are not dominant in their niche as they have many local and international competitors that consumers will go to. Product isnt that unique to these two food brands.

KFCs dominance though has and is being taken for granted by management. How can RBD let such a global brand with such an ingrained status in New Zealand culture to the current point of diminishing returns. For goodness sake they have a potential cash cow here.

Pizza Hut is sadly going into terminal decline in this country and its competitors look set to cut it into Ponsonby like peices of the pizza it throws at its customer.

Starbucks is muddling along at a snails pace compared to its interantional brothers but seems to be stuck in a rut.

I wont go into those two here.

How does one resurrect a brand?

KFC is currently in the process of being given yet another re-vamp. We all remember the most famous revamp over ten years ago, Kentucky Fried Chicken became KFC and we all forgot about the F word.

We didnt of course but that revamp worked for a time, then logos were changed, stores remodled several times for new "looks" and menus were changed.

My point is these things all worked, for a time, and it is clear they only work for a finite time because the keepers of the brand have had to continue to revamp and window dress.

What I think is lacking though is these things that Buffett talks about:

‘Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc) are prime candidates for profit troubles.’

Even with a business moat, a dominance in the industry and an identifiable brand in KFC . It just isnt going to work if you run your brand like a commodity product and therefore tarnish its image and therefore its cache.

At present they are focused on everything but the basics of maintaining a brand and in the process slowly killing it. Only KFCs uniqueness as a food product is keeping the punters coming through the door.

Great brands are made but they can also die if they are neglected.

Too much has been taken for granted by those at Restaurant Brands head office and all they need to do to resurrect the KFC brand is to treat it like the brand it is.

Stand behind it and back it 200%


C Share Investor 2007