Building A Little Empire On Wheels

Sydney Morning Herald

Monday November 5, 2001

Rod Myer

You've seen Toll on the roads. Now its boss wants to move into rail, writes Rod Myer.

Paul Little, chief executive of Toll Holdings, is used to getting what he wants. In the 15 years since he and two former work mates from Mayne Nickless paid $1.5 million for the transport outfit that ran Peko Wallsend's mining gear around Newcastle, he has made 27 acquisitions and built a company with a stockmarket value of $1.6 billion.

To do that, he picked up problematic pieces of what had become the difficult and unglamorous transport industry and turned them into what he calls ``total logistics providers" companies that contract to manage a product all the way from the factory dispatch dock or the wharf to the supermarket shelf or showroom.

Little has two business maxims that can be summed up thus: ``To manage something, you have to own it" and ``Never pay retail". He says: ``Toll has a history of not paying top price for anything."

The group's stratospheric growth has pushed it into the top echelons of the road transport business, and now Little wants to do the same in rail.

Toll is bidding in the National Rail/Freight Corp privatisation that will deliver its new owner control of the standard-gauge rail freight network stretching from Brisbane to Perth via Melbourne and Broken Hill.

Little has his heart set on being part of what he sees as the great rail revival about to sweep Australia. ``We think that inside Toll the volumes we move on rail could double over three or four years, probably moving off-road to a great extent," he says.

The pundits are tipping NRFC, with assets of about $1 billion, might be sold for $1.1 billion to $1.7 billion. Little says (publicly, at least) that the consortium of Toll and Chris Corrigan's Lang group aren't going to pay that.

``National Rail is not without fairly major problems and we think there's a real chance both those businesses may sell for less than their asset value," he says. ``National Rail has never made money. There was a report that suggested it was going to make money this year, but that is a very convenient return to profitability, one would assume."

Those problems include commitments made to unions on staffing and redundancies, and surplus rolling stock that must be rationalised. And governments, which will still own the tracks, must spend $350 million upgrading the Melbourne-Sydney line and others in NSW before NRFC will be able to compete with road. The timing and finance to account for those issues will dramatically affect the end price.

Little already knows about trains. Toll loads 30 a week, which are run by subcontractors. But although Little piles two containers on each wagon crossing the Nullarbor, where there are no bridges, there has been precious little profit for Toll in rail.

NRFC would change that by giving Toll state-of-the-art rolling stock and locomotives, and track access arrangements that would mean its trains could race on while those of competitors wait in sidings to let them pass.

But five parties are said to have their hands up for NRFC, so what happens if Toll loses? Little says that if he doesn't get his hands on NRFC through the privatisation process, he will build up his own operation.

That would be a long-term proposition, buying rolling stock and building terminals while having to compete with whoever wins NRFC. But whichever way the sale goes, Little is not planning to be left out in the cold.

``If we can't buy it, we think we can cut a deal with whoever does because we're a very large user of rail services," he says. ``We're National Rail's second largest customer behind BHP."

Transport is a tough game, and Little has thrived in it. Head office, a modern but unadorned open-plan space in Melbourne's St Kilda Road, seems to reflect his philosophy of up-to-the-minute frugality.

Fifteen years ago, transport was simple. If there were three trucks vying for a job, ``Linfox would have been there with one, Toll with one, and the Maynes [Mayne Nickless] group," he says.

``The only way you could compete then was on price. Service levels were all pretty high, and the costs of a truck, fuel and the driver were the same for everyone. It was a question of who had the most courage in cutting prices.

``That was part of the dissatisfaction with the transport industry. Everyone knew it was highly competitive, that margins were slim and there were few chances to add value."

After Little and the father-and-son team of Peter and Mark Rowsthorn bought Toll back in the 1980s, they decided to capitalise on the hard grind transport had become by gathering unwanted assets and moving the industry into a new era.

That means looking at the total logistical exercise of moving products to where they're needed when they're needed, investing heavily in information technology and committing to manage clients' inventory or product needs.

In this new world, Little says, you can't just ``do the sexy bits like owning the warehousing and distribution if you're not doing long distance, wharf, contract distribution and the other bits and pieces needed for the total solution.

``So Toll was able to not only build very swiftly the hard assets necessary to compete but was able to go a step further and introduce smart technology that enabled customers to build up the faith they needed [to allow] a transport company to go beyond supplying the truck to managing the supply chain."

No-one else in Australia or elsewhere, he says, has been able to replicate the Toll model. But its success has not been all about gee-whiz technological solutions. Hard dealing has earned returns, and analysts say Little likes to pay ``50c in the dollar" for assets. His crowning glory to date has been buying the old IPEC business from Mayne Nickless.

The parcel operator, once owned by the idiosyncratic 1970s political figure Gordon Barton, was losing money. Little convinced Mayne not only to give him the $50 million balance sheet but to hand over $4 million in cash as well. Within a year Toll had turned it into a profit maker.

This year's $120 million purchase of the Wagga-based Finemores group has been harder, with Little admitting that its refrigerated goods and liquids divisions are difficult.

``The problems have remained problems and we need to work our way through those," he says. But the $10 million in synergies he promised from the purchase will now be even higher, he claims.

Little says he ``likes most things on wheels" and once drove trucks and raced Porsches. That competitive spirit is still evident. At the mention of the Lindsay Fox-Solomon Lew Ansett bid, he smiles and says: ``I hope he [Fox] gets it. It won't be without its challenges."

Fox, a long-time competitor who tried to muscle in on the Finemores deal, is one of the few in trucking who draws Little's grudging respect.

``There are quite a few [in transport] that I've learnt from indirectly and didn't want to model myself on. Lindsay as much as we compete head to head I admire what he's done."

Technology and logistics solutions notwithstanding, turning a profit in transport is hard yakka, and Little smiles as he says his margins are now up around 5 per cent. Telstra, supposedly going through hard times, earns close to 50 per cent.

But that hard grind has built Little a $225 million fortune, $12 million of which he recently converted into cash with the sale of 500,000 of his 8.7 million Toll shares into an equity raising. Wealth, he says, is a byproduct, not the main aim, of his business life and he doesn't plan a further selldown of his stake.

Analysts admire Little's achievements but point to Toll's 32 times price/earnings multiple, wondering if growth can be maintained enough to justify it. One says the company makes so many acquisitions it is impossible to see how previous purchases are performing.

Another asks whether Toll's market price rating of 2.5 times the average for the transport sector can be justified. Little thinks it can.