Gerry Harvey's investment in a Victorian dairy farm could end up costing Harvey Norman shareholders more than $60 million.
The future of the dairy farm and cattle breeding business, Coomboona Holdings, is uncertain after National Australia Bank took control of the company late Friday, appointing receivers and managers to protect its position after Coomboona directors including Mr Harvey appointed administrators.
Mr Harvey outlaid $34 million for a 49.9 per cent stake in Coomboona in September 2015, angering investors by buying the stake through a Harvey Norman subsidiary, HNM Galaxy, rather than one of his private companies.
Harvey Norman also lent Coomboona almost $29 million, according to Harvey Norman's latest accounts, $18.5 million of which was repayable on demand and $10.2 million repayable in 2020.
Harvey Norman is now at risk of losing its entire equity investment and some or all of its debt exposure if the receivers – Peter Anderson, William Harris and Matthew Caddy of McGrath Nicol – fail to find a buyer willing to pay a high enough price to repay National Australia Bank, which as secured creditor ranks ahead of Harvey Norman.
ASX Announcements Expand The receivers and managers say Coomboona, about 15 kilometres north-west of Shepparton, will continue to trade while they attempt to sell the business as a going concern.
"We are in the process of conducting a review of the financial position and operations of Coomboona with a view to stabilising the business while we run an orderly sale campaign," Mr Anderson said on Monday.
"We will be in communication with all relevant stakeholders and will be providing updates as appropriate."
The administrators, Ryan Eagle and Stewart McCallum of Ferrier Hodgson, are assessing Coomboona's financial position and expect to hold the first creditors meeting in Melbourne on April 6.
Coomboona's 50.1 per cent shareholder, Hong Kong-based businessman Alex Arena, could not be contacted for comment.
Further losses Last month Harvey Norman wrote down its stake in Coomboona by $20.7 million after booking equity-accounted losses of $4.6 million in the December-half and losses of $5.95 million in 2017.
The writedowns and operating losses contributed to a 19.3 per cent slump in Harvey Norman's interim net profit to $207.7 million.
The Coomboona investment was valued at $49.42 million, including commercial loans worth $28.76 million and an equity stake worth $20.67 million, comprised of capital contributions of $33.88 million less Harvey Norman's share of Coomboona's cumulative losses of $13.2 million since 2015.
Harvey Norman flagged further losses, revealing that it was in dispute with its joint venture partner after demanding the repayment of $18.5 million in loans payable on demand.
"Subsequent to the balance date, a dispute has arisen between the HN (Harvey Norman) JV entity and the Eternal Sound JV Entity in relation to a number of matters, including the future direction of the Coomboona JV," Harvey Norman said in its first-half accounts.
Australian Shareholders Association monitor Allan Goldin said the failed foray into dairy farming and cattle breeding once again demonstrated that an investment in Harvey Norman was an investment in Gerry Harvey.
"I said three years ago when it was first announced they should never have invested in dairy," Mr Goldin said.
'"This is a company which is a retailer and it's not their core business ... if the chairman wants to make a personal investment that's fine, that's his choice.
"Still, you'd expect to find some corporate governance and you don't find it with this company."
Deutsche Bank analyst Michael Simotas said the capital sunk into the dairy JV was not large in the context of the Harvey Norman group.
"But this event is a reminder of why investors dislike the company investing outside of its core competency," Mr Simotas said.
Harvey Norman shares fell 1¢ to $3.63, taking losses since February to 20.7 per cent.