Gerry Harvey and the billionaires’ club

Today in my first Rich Secrets column for 2012 I name the 12 wealthy entrepreneurs I will be following closely over the next 12 months.

One of the most interesting is Gerry Harvey, who for the first time in two decades finds his business at the centre of the sort of structural change that has already claimed several competitors.

Given how closely Harvey has associated himself with his retail change, it’s no surprise that the fall in its fortunes is also impacting Gerry’s personal fortune.

This year could well decide if Gerry stays in the billionaire’s club.

Using the 2011 Rich 200 as a starting point, we can say that Gerry’s fortune was $1.41 billion at the end of May 2011.

Based on Harvey Norman’s share price, that total is split into $785 million worth of Harvey Norman shares and $625 million worth of private assets, including extensive thoroughbred racing, breeding and auction interests.

But since then, Harvey Norman’s share price has fallen by 21% to $1.98. The value of Gerry’s shares is now $617 million. Assuming the value of his private assets hasn’t fallen (difficult to say, although prices were down at the Magic Millions horse auctions last week) then Harvey is currently worth $1.24 billion.

At that level, he’s still safely in the rarefied territory of Australia’s billionaires. But he has been aided by a 9% increase in the Harvey Norman share price since the start of the year, when the shares were at $1.81.

If Harvey Norman shares were to drop to $1.70 – not that far under the $1.78 low they touched in late 2011 – and the value of his private assets fell, then his billionaire’s club membership would be under review.

For his part, Harvey recognises that market perception is running against him.

“Harvey Norman used to be a glamour stock; analysts loved it,” he told the Australian Financial Review last week.

“Not any more. Unless we make changes to our business, the future does not look so rosy.”

But Harvey says he’s getting no credit for doubling the value of the company’s assets.

“Our share price is lower because we’re not showing the same potential as 10 years ago and that’s fine. But I just wish they would look at the wider picture sometimes. We have $2.1 billion in net assets. Someone like JB Hi-Fi is worth less than $100 million, but their market cap is three-quarters of what Harvey Norman’s got. That doesn’t make sense.”

Of course, it’s the nature of those assets that is important. The rise has been driven by a big increase in the value of property owned by the company – according to the latest Harvey Norman annual report, the company owns 93 stores worth more than $2 billion. The value has risen by $700 million in the last four financial years.

But these aren’t assets that are going to get analysts or investors excited. It’s probably a bit unfair given that Harvey Norman’s portfolio is undoubtedly blue chip, but the company’s balance sheet does not scream “way of the future”.

At least Harvey has put his money where his mouth is. In late December, with Harvey Norman shares languishing at a record low of $1.78, Gerry spent around $1 million to buy half a million shares.

That suggests Harvey still has plenty of cash at his disposal – if Harvey was to fall out of the billionaire’s club, it’s not going to change the fact he remains one of our richest retailers.

Indeed, perhaps it won’t change anything. Back in 2009, Harvey told ABC’s Four Corners program that he had lost a staggering $1.5 billion since the start of the GFC. His reaction to loss was priceless.

“In a way I’m sort of proud. I think to myself ‘Oh, I lost $1.5 billion, what a beauty!’ I never thought I’d have it to lose.”

Whatever you think of the outlook for Harvey’s business, you’ve got to love his attitude.