Growth, Debt Wear on Raiders From Australia

At first, the reaction was bemusement, with references to Crocodile Dundee. Then, there was amazement as brash Australian investors began to conquer some of America’s corporate giants, with the enthusiastic help of international bankers who financed their deals to the hilt.

But now, the glory days of the charismatic, globe-trotting Aussie entrepreneur appear to be on the wane. Some of the biggest names are reeling from pell-mell expansion, onerous debts and the Australian economy’s blend of high interest rates and a falling currency.

Of the five Australian companies that made the heaviest investments in the United States since 1980, Robert Holmes a Court’s Bell Group has already been liquidated, and two others--the enterprises of financiers Alan Bond and George Herscu--are in crisis.

That’s not to say all the aggressive Australians are down under. Notables such as John D. Elliott, the chief of Elders IXL, and Kerry Packer, who recently joined Sir James Goldsmith in a massive bid for Britain’s BAT Industries, remain in good financial health. And Australian investment in the United States is likely to continue rising. At latest count, at the end of 1987, investment stood at $22 billion, according to the Commerce Department.

But analysts say Australian raids on major U.S. firms should lessen, with Aussie investments in the United States coming in smaller steps by less flamboyant financiers.

Herscu and Bond, both scrappy fighters who built extensive empires on debt and daring, sought to follow in the footsteps of Rupert Murdoch, who put together an international media empire from an Australian base. Murdoch is now sitting pretty. His News Corp. has become largely a British and American enterprise, and Murdoch became an American citizen in September, 1985.

But Herscu, reportedly yielding to pressure from creditors, has stepped down as chief executive of his firm, Hooker Corp. About $1 billion in assets that Hooker purchased in the United States in the past several years--including the upscale retailers B. Altman, Bonwit Teller and Sakowitz, and three huge shopping mall developments--are up for sale.

Bond, for his part, is struggling to limit the damage to his Bond Corp. from several risky acquisitions--including his $1.3-billion purchase in 1987 of G. Heileman Brewing Co.--and from an adverse ruling by the Australian Broadcasting Tribunal, which could strip him of his Australian television network. He is now trying to reduce his huge debts by shedding chunks of his far-flung empire.

Pressure on Companies

While Herscu and Bond have been criticized for overly aggressive expansion and poor strategy, they and others are also suffering from the deteriorating Australian economy.

“The general macro-economic situation is approaching crisis,” said Dirk Morris, senior international economist at Shearson Lehman in London and a former Australian reserve bank official. “It’s looking more and more out of control. High interest rates and the continued risk of a weakening Australian dollar are putting a lot of pressure” on companies that have a heavy debt load.

At the heart of the economic problems is a high level of consumer and business spending combined with inefficient local industries. The result has been heavy purchases of goods and services from overseas, which in turn has produced a sudden surge in the balance of payments deficit. Many economists fear the outcome will be a large drop in the value of the Australian dollar and a higher inflation rate.

The government’s response has been to push interest rates up in an effort to cool demand. The high rates, which are now in the 18% to 20% range, have drastically increased the payments businesses must make on their outstanding loans and produced a depression in the Australian property market.

Companies that are heavily exposed in real estate--including Hooker, Bond and two New Zealand firms, Chase Corp. and Equity Corp., that were once active on the U.S. takeover scene--are thus under severe pressure. And firms that have very high debt levels are regarded with suspicion by financial analysts, who wonder whether they can continue to make interest payments. The problem is compounded by the fact that many of the same companies suffered large losses in the 1987 stock market crash.

Furthermore, any companies thinking about expansion are in a double bind: They can borrow money in Australia and pay the high interest rates, or they can borrow abroad and face the risk of having to repay with profits earned in eroding Australian dollars.

“There is a link between the companies that have problems and the companies that don’t, and the link is debt,” said Bryan Madden, director of research at Prudential-Bache in Melbourne. Bond and Hooker, he said, have debts that outweigh the capital invested in the companies by two to three times. Elders’ debts, by contrast, totalled only 30% of equity as of June 30 last year.

Cash flow businesses--as opposed to those, such as real estate, which depend upon an increase in the value of assets over the long term--are considered by analysts to be a vital ingredient in surviving the current credit squeeze. Elders, with strong brewery businesses centered on Foster’s Lager in Australia, Courage in the United Kingdom and Carling O’Keefe in Canada, has strong cash flow.

Credit Squeeze

Hooker, on the other hand, purchased retail chains and shopping malls based on a strategy of using the stores as anchor tenants for the shopping malls. This scheme was designed to expand the chains rapidly and make the malls more successful, but it produced little cash flow in the short term and was widely viewed as risky.

In recent months, Hooker, a venerable property concern whose debts began to climb when it was seized by Herscu in a hostile takeover in 1985, has experienced a severe credit squeeze and was forced to negotiate a moratorium on repayment of $700 million to its bankers while it proceeds with its massive asset sale program.

Alan Bond counted on cash flow from breweries in Australia and the United States to pull through tough times, but the flamboyant one-time sign painter, who achieved international fame with his successful bid for the America’s Cup, also bought properties including the Chilean telephone company, gold and coal mines, Hong Kong real estate, equity stakes in several British conglomerates, a television network and the Kona Kai Club in San Diego.

“Bond has a reputation for paying top dollar for everything,” Madden noted. “You can argue that he bought the wrong assets, or he paid too much.” His purchase of Heileman, which is struggling to compete with powerhouses Anheuser-Busch and Miller and has yet to make a turnaround, was widely criticized, as was his acquisition of an Australian television network from Kerry Packer for about $740 million in 1987.

Bond is reeling from a spate of bad publicity and speculation about his ability to pay his debts: Bond Corp. shares fell by nearly half earlier this month before recovering somewhat. And the Australian Broadcasting Tribunal, after investigating a questionable payment to a politician and an alleged threat to harass a business rival, ruled that Bond was unfit to own a television network.

Many of the assets Bond is now selling were purchased last year from Robert Holmes a Court, who sold most of his empire, including a large stake in Texaco, after his Bell Group lost $750 million in the stock market crash.

Values Down

But Bond is unwilling to shed some key holdings for the simple reason that they are worth far less than what he paid for them. The television network has a stock market valuation of about one-third the purchase price. Bond International Gold, purchased as St. Joe Gold from Fluor Corp. in 1986, has suffered from weak gold prices. And Bond has been unable to find a buyer for his unfriendly 20% interest in the British conglomerate Lonrho PLC.

The Lonrho stake may have been his downfall, because Lonrho Chairman Tiny Rowland has waged a relentless campaign against Bond that has reportedly included a study pegging the Bond group’s debt service payments at $840 million against earnings of just $285 million. Bond fiercely denies the charges, but they clearly have had their effect.

And concerns about Bond Corp.’s viability have been intensified by the fact that the true financial situation of the empire, with its privately held master company and impenetrable web of cross holdings, is impossible to ascertain. But even sober observers believe Bond is hurting.

“Bond has played very close to the wind, and the only reason he’s been able to get away with it is because he’s so far overextended,” said one Sydney banker, noting that the banks are loath to put such a large debtor into default. “It’s like in gambling: If you keep playing double or nothing, eventually you’re going to end up with nothing.”

As Bond and Hooker struggle, several other acquisitive Australian companies are being watched closely for signs of weakness in the face of interest rate pressures. One is Christopher Skase’s Qintex Group, a media and resort company that agreed last spring to purchase the United Artists film operations from MGM in a transaction that, if completed, will cost Qintex about $600 million.

Qintex’s stock price has fallen by about half since its peak last November, according to Madden.

Good Financial Shape

But David Evans, head of Qintex’s U.S. subsidiary and president-designate of United Artists, said the fall in the stock price was due to a “rub-off effect” on all media companies in the wake of Bond’s problems--as well as “general doom and gloom” about the economy--rather than any problems within Qintex. He also noted that the share price of Qintex America, traded over the counter in the United States, had risen recently.

The financing for the UA purchase has been altered, Evans said, with the equity portion of the $600 million Qintex needs increased from $300 million to more than $500 million. Thus the company will need to assume a maximum of $100 million in new debt for the deal and borrow another $200 million for working capital. The equity funding will come from unidentified Japanese, European, and American companies, and Qintex still aims to complete the deal by the end of the summer.

Another Australian media and property magnate with U.S. ambitions, Westfield Holdings founder and Chairman Frank Lowy, appears to be in good shape despite the problems in the Australian real estate business. Westfield recently paid $34.5 million for a controlling industry in Barris Industries, parent of Guber-Peters Co., a television and film production firm.

“The credit risk for Westfield is very good,” said Roger Colman, an analyst with County Natwest Wood Mackenzie in Sydney, Australia. “He has a very good package of shopping centers with good cash flow. He’s the safest” of the big entrepreneurs.

Elders also appears to be in sound condition, although a recent offer by Harlin Holdings, a vehicle controlled by Elders chairman Elliott and other senior executives, to buy all outstanding shares of Elders could result in a higher debt risk for Elders. An Elders spokesman maintained that the Harlin maneuver was designed to placate shareholders and would have no impact on the company’s ability to make further acquisitions.

Elders’ primary North American property is Canada’s Carling O’Keefe Breweries, which will soon merge with Molson’s; it also owns a Kansas City, Mo., grain trading firm and a New York-based investment bank. Elders’ active investment arm has a 14.9% stake in the group, led by Los Angeles financier Alfred A. Checchi, that has agreed to acquire Northwest Airlines parent NWA Corp. But a spokesman emphasized that Elders was not an airline company and called the NWA interest a short-term investment opportunity.

Still on the Lookout

Brad Orgill, a director of Potter Partners in Melbourne, predicted that Elders would remain on the lookout for a major U.S. acquisition in brewing or agribusiness.

And other profitable Australian companies will also continue to look outside. That’s because the Australian economy is small, and industries tend to be highly concentrated, with just a handful of firms dominating particular markets. Companies that want to expand, therefore, have few opportunities to increase domestic market share and are forced to venture abroad.

James Reno, a Los Angeles-based vice president of the Australian investment bank Capel Court Pacific, noted that there were many, many Australian investments in the $10-million to $200-million range.

“Strategic investors will continue to look outside Australia,” said Reno, adding that these investors will be looking for businesses related to their home-country specialties. Orgill suggested that the retailer Coles-Myer Ltd., the waste management firm Brambles Industries, and the paper and packaging group Amcor Ltd. (unrelated to the Orange County firm of that name) were all looking for investments in the United States.

But major new purchases by big international players emerging from Down Under are unlikely, at least for the moment. And if Herscu and Bond do not resolve their difficulties, then the army of Aussie entrepreneurs will suddenly look a lot less fearsome.

THE AUSSIE ENTREPRENEURS JOHN D. ELLIOTT Elders IXL Ltd. Down-to-earth businessman and politician engineered a careful expansion of the brewing, agribusiness and natural resources group that kept debt levels low. Investment arm will take a 14% stake in Northwest Airlines parent NWA Corp.

GEORGE HERSCU Hooker Corp. Aggressive, irascible self-made man led the property company into an ill-fated expansion into U.S. retailing and real estate. Over $1 billion in U.S. assets now on the block.

ALAN BOND Bond Corp. and affiliates Flamboyant America’s Cup conquerer bought property, media, brewing and mineral companies around the globe, but is now struggling to counter accusations that he cannot service the debts. Stock price tumbling, asset sales under way.

CHRISTOPHER SKASE Qintex Group Debonair young executive launched his entertainment and resort company’s first big international foray last spring with an agreement to purchase United Artists.