Clock ticking down for Cabcharge

After suffering the ignominy of a first strike at last year's annual meeting, investors in 85-year-old Reg Kermode's Cabcharge empire are gearing up to vote for a second strike on executive pay rules on November 28.

After suffering the ignominy of a first strike at last year's annual meeting, investors in 85-year-old Reg Kermode's Cabcharge empire are gearing up to vote for a second strike on executive pay rules on November 28.

It comes as Cabcharge is being smashed on the sharemarket after the loss of two bus contracts with the NSW government, which has been seen as a setback in what had previously been perceived as a close relationship. Indeed, until 2010, former NSW premier Neville Wran was a director of the company.

Against this backdrop is the impending response of the Victorian government to an inquiry into the taxi industry by Allan Fels, which recommended that the surcharge Cabcharge charges on every non-cash fare processed through its EFTPOS terminals or its Cabcharge charge cards or vouchers should be reduced from 10 per cent to 5 per cent. The Baillieu government has until December 12 to respond to the recommendations.

In the past two weeks shares in Cabcharge have fallen more than 18 per cent, against an overall drop in the market of 2 per cent, as broking houses downgraded recommendations for the stock. Goldman Sachs now has a sell recommendation on the stock and Deutsche Bank has reduced its recommendation to hold.

Kermode, who founded Cabcharge in 1976 and has reigned as CEO and chairman for more than 22 years and currently holds about 100,000 shares, has never been a poster boy for corporate governance. As cracks appear in the organisation investors are now airing their concerns.

It is understood that at least one proxy group, Ownership Matters, has recommended shareholders vote against Kermode's re-election given the $14 million penalties (equivalent to 33 per cent of net profit in 2011), imposed by the Federal Court in ACCC proceedings that related to anti-competitive behaviour.

Ownership Matters is also believed to have recommended shareholders vote against the re-election of director Neill Ford, on the basis he is affiliated to Kermode and therefore part of the "substantial" shortfalls in corporate governance.

Ownership Matters is also believed to have recommended that shareholders vote against the remuneration report given the "generous ex-gratia payments" made to retiring senior executive Sharon Doyle upon her retirement, particularly in light of the penalty from the ACCC under former chairman Graeme Samuel relating to the anti-competitive behaviour of its electronic payment system.

Cabcharge received a first strike on its 2011 remuneration report after 40 per cent of shareholders voted against the remuneration report. Under the rules, a company that receives a "no" vote of 25 per cent or more on its remuneration report for two successive years will be forced to put all its directors up for re-election.

It seems that after years of clipping the ticket on most aspects of the country's multibillion-dollar taxi industry, the clock could now be ticking for a company that has entrenched itself as one of Australia's most powerful vertically integrated companies.

Fels said while he couldn't comment on the final report, the draft report recommended cutting the surcharge from 10 per cent to

5 per cent.

"Cabcharge's tentacles reach everywhere in the industry and any substantial reform in Victoria and elsewhere would have an effect on Cabcharge," he said.

The taxi inquiry - the seventh since 1981 - also recommends removing the taxi industry's mandatory network affiliation, which is dominated by a duopoly that includes Cabcharge.

Under the current system, taxi drivers have to be affiliated with a network service provider, which costs $7000 a year. In return for this, the networks accept bookings from customers and transmit booking details to data terminals installed in taxis. The tone of the Fels review was that the networks exert too much control over the industry.

If speculation is right and the government accepts the recommendations, it will put pressure

on other state governments to follow suit.

This, coupled with the decision by the NSW government to put a number of bus contracts out for tender that were previously renegotiated at term end, was played down by the company on the basis that the contracts represent 16 per cent of the total fleet of Cabcharge's 49 per cent joint venture.

While this is true, the concern is that this will herald the beginning of a new era where other contracts will be put up for tender, which will crunch margins.

It prompted Deutsche Bank to issue a report saying: "This is a serious setback for Cabcharge at a time when it faces regulatory and competitive issues in its core taxi business. The risks have increased significantly with the presentation of the final report by the Victorian taxi industry inquiry. While the timing and extent of any changes are uncertain, we see a high likelihood of some of the recommendations being implemented, especially around network affiliation."

Cabcharge and Kermode have had a dream run for years, but the dream run could fast be coming to an end.

Between a declining share price, a major NSW bus contract up for tender in 2013 and the outcome of the Victorian taxi inquiry soon to be delivered, Kermode and the board will face the blowtorch at the annual meeting as well as the likelihood of a second strike.

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