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Who will follow Sir Ron Brierley down the Yellow Brick Road?

Who will follow Sir Ron Brierley down the Yellow Brick Road?

James Mitchell

OPINION For those of you raising an eyebrow at the recent bid for Yellow Brick Road, remember this: seasoned value investors like Sir Ron Brierley know how to pick a stock.

The same can be said of Macquarie, a long-time significant shareholder in YBR. Macquarie began reducing its stake in the business last year and now holds less then 3 per cent.

Brierley’s ASX and NZE-listed investment vehicle, Mercantile, scooped up Macquarie’s shares and crept up the YBR register before making a takeover bid this week.

Macquarie rarely loses money. The group is notorious for picking the right assets to invest in, knowing when to get in and when to get out. But Macquarie’s exit has little to do with the fundamentals of YBR as a business and much more to do with the mortgage broking industry at a point in time.

There is money in mortgages, as Macquarie well knows. It held significant positions in ASX-listed broker group AFG and non-bank lender Homeloans Limited. These have also been reduced or sold off in what can be viewed as a strategic move from Macquarie to distance itself from businesses that have been pinned down by the Hayne inquiry and the unforgiving Productivity Commission.

Macquarie clearly wishes to reduce its exposure to these things, which are beyond its control. The group also pulled out of reverse mortgages after learning that ASIC was looking at them and the ACCC was undergoing an extensive investigation into mortgage pricing by the banks.

Macquarie is still a shareholder in the privately-owned Connective aggregation group, one of the largest in the country, but that position is also believed to be up for sale.

There isn’t too much liquidity in businesses like Yellow Brick Road; Macquarie would have most likely been looking for the right person to buy their stake. They may have even called a few old friends.

Enter Sir Ron Brierley. The 81-year old New Zealand born Sydney-based investor is no rookie when it comes to a deal. He’s been trading since his school days. Stamps were his first bet. He reportedly sold his first set to a teacher who ran the school stamp club, prompting an angry reaction from the headmaster.

After setting up Brierley Investment Limited (BIL) in 1961, he began collecting companies and by the late 1980s held a stake in more than 300 businesses, including Air New Zealand.

More recently he has focused on Australian assets. In 2016, Mercantile made a $21 million hostile takeover of Perth and Singapore-based Richfield Shipping.

Late last year he attempted a hostile takeover of WA-based Bauxite Resources. The off-market bid by Mercantile closed on 30 June 2018 with fewer than 2 million shares accepting the deal.

Meanwhile, he’s been creeping up YBR’s register and this week made his offer: 9 cents a share. The low-ball bid values YBR at around $25 million.

Mark Bouris has labelled the offer “opportunistic” – which is exactly what it is. Brierley knows a deal when he sees one.

It’s safe to say he would double his money buying the business at this price, given the value of YBR’s mortgage book and 50 per cent take in Smarter Money Investments (Chris Joye owns the other half).

A few fund managers collectively held 30 per cent of YBR three years ago before selling down and switching to cash. The business was trading at 60 cents at the beginning of 2015. By the end of the year the share price of at 27 cents.

YBR is currently trading at around 10 cents a share with a market cap of $28 million.

 

Who will follow Sir Ron Brierley down the Yellow Brick Road?
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