Foreign takeovers, AMP, state budgets, capital raisings, trading halts, Quintis and the claimed valuation of collapsed companies

A deluge of foreign takeover offers

A lot has been written about foreign takeovers this week after the $23 billion offer for APA Group by a consortium led by Asia’s richest man, the Hong Kong billionaire Li Ka-shing.

I can well remember meeting with former APA chairman Len Bleasel in Sydney back in 2016 when he was gloating about the company being almost 6 times bigger than its nearest rival, DUET Group.

Indeed, as this 2016 APA voting intentions report for the Australian Shareholders’ Association noted: “APA has Australia’s largest portfolio of gas pipelines totalling 15,134 km, which dwarfs nearest rival DUET with 2468 kms of pipelines.”

Lo and behold, entities controlled by Li Ka-shing snapped up DUET for $7.4 billion last year and is now offering $11 a security for APA, the undisputed giant of Australia’s gas pipeline industry.

Stand by for a protracted debate about essential services, foreign ownership and monopoly infrastructure assets. It is worth revisiting our recent special edition on foreign ownership in Australia because this deal is super large, which makes it super-sensitive.

What other western country happily allows its ports, airports and natural monopoly energy assets to be owned by foreign investors? Then again, the lead bidding vehicle Cheung Kong Infrastructure is listed in Hong Kong so at one level all that is really changing is one of set of private owners sell to another.

With gas pipelines all over Australia, there are a lot of different governments which have an interest in this deal, so it is little surprising there hasn’t been more political opposition thus far.

APA is an unusual beast because it is a trust structure, which doesn’t have to have regular director elections, AGMs or even a vote on the remuneration report, something it only voluntarily introduced last year.

There is no bigger company on the ASX operating with such a structure, which really should have been normalized years ago, but the conservative board didn’t want to incur any one-off tax costs.

At least this situation will be fixed by foreign takeover.

With the stock closing at $9.82 on Friday, investors clearly believe there is significant deal risk on the proposed $11 offer. I’m punting that it won’t happen on competition grounds, because a single foreign company will simply have too much control over Australia’s energy sector, even with the asset disposals they are proposing.

Finally, here is a rundown of how Li Ka-shing’s empire got to such a dominant positon over the past 25 years after Victoria’s Kennett Government kicked off the great energy sector  privatization program in 1994.

December 1999: CKI pays $3.5 billion to the SA government for the ETSA transmission and distribution assets, which were sold in one block, unlike Victoria where the businesses were broken up.  

July 2002: US utility AEP sells CitiPower to CKI for $1.53 billion, booking a $US125 million loss after buying the business from the Kennett government.

November 2005: CKI floats 50% of its Victorian and South Australian electricity distribution businesses in a $1.5 billion-plus raising through a float of Spark Infrastructure, which remains listed to this today.

August 2016: Federal government bans Chinese government-owned State Grid and Hong Kong listed CKI from bidding for NSW business Ausgrid, on unspecified security grounds.

May 2017: CKI completes $7.4 billion acquisition of DUET – see farewell speech by the chairman.

June 2018: CKI-led consortium proposes $23 billion takeover of APA Group.

David Murray brings in a familiar face to help save AMP

A lot of board upheaval has happened at AMP over the past 25 years, but from a board compositon point of view, 2018 will be remembered as the year it managed to lose all 4 of its female directors, whilst retaining the existing 5 male non-executive directors.

This was largely coincidental based on board election cycles, but it was also expected that the first new appointment would probably be another female director.

Alas, chairman-elect David Murray, who is still not yet even on the AMP board, opted instead for his former CBA general counsel, John O’Sullivan.

When a messiah is hired, it is very common for them to bring in a number of people from their previous work-places. Chairs and CEOs like to gather around them supportive people they know, trust and rate. Peter Smedley famously had whole teams that he took from Shell, to Colonial and then Mayne Group in the 1990s, although that all ended in tears.

John O’Sullivan was Malcolm Turnbull’s choice to lead ASIC but was vetoed by Labor so withdrew from the race, leaving the door open for the little known James Shipton, who really was the Stephen Bradbury candidate.

It will be most interesting to see what ASIC does with AMP after the Royal Commission. The Murray-O’Sullivan combination at CBA were known to be very aggressive and you can imagine O’Sullivan wanting to demonstrate his credentials by not being pushed around by Shipton’s ASIC.

After this week’s chat with a crew from 4 Corners, I’ve been reflecting further on what went wrong at AMP.

Paying almost $5 billion for the old National Mutual business in 2010 was clearly a disaster, particularly given that it doubled down on life insurance at a time when the industry was being squeezed by super funds moving into the life insurance space.

AMP has always been overly influenced by its agents and buying the old National Mutual business left with it with a massive 2900 advisers, far more than any other Australian player. The advisers still have too much influence, which is partly why the Royal Commission snafu happened.

There has  also been the problem that AMP Capital really has under-performed as a fund manager for most of the last 15 years. It stayed active for way too long, only recently shifting to a more passive approach, something that should have happened years earlier to catch the global wave of index investing.

Throw in the crazy George Trumbull acquisition binges in the UK and then with GIO in Australia, and you have a series of long-term blunders that has literally blown up more than $10 billion.

Indeed, it is hard to think of anything much that AMP has got strategically right over the years. Remember when they helped bail out Westpac with that strategic alliance in the early 1990s, becoming the largest Westpac shareholder for a time.

Given the way Westpac has subsequently performed, just hanging onto those shares long term would have made AMP a fortune.

State budgets and the lack of transparency

June is one of the quietest months of the year for ASX announcements because very few companies release results and there are hardly any notices of meeting.

However, one thing you do get in June is lots of state and territory budgets. NSW will be out tomorrow and after that we’ve only got South Australia to go where the new Liberal Government is giving itself until September to get its house in order.

As a campaigner for gambling reform in Australia, state budgets are interesting because they reveal the break-down of the circa $6 billion a year which states and territories pocket from the world record $24 billion a year Australians lose gambling.

Gambling is a sensitive issue so some Governments and the companies they licence tend to be quite minimalist in the information they release.

For instance, Crown Resorts doesn’t break out how much they make from their poker machines in Perth and Melbourne, whereas Star Entertainment happily discloses that its 1500 Sydney slots have generated the following losses in recent years:

2011-12: $239.4m
2012-13: $242.1m
2013-14: $255.6m
2014-15: $288m
2015-16: $313m

In Victoria, you get monthly overall pokies loss figures broken down by local government area and twice a year you get the specific venue losses, which is how we know that Woolworths has 82 pokies venues which stripped Victorians of $669 million in 2016-17.

By way of comparison, NSW is a black hole when it comes to disclosure, perhaps reflecting embarrassment over the $7 billion a year in annual poker machine losses. The NSW Budget papers totally downplay sky-rocketing gambling revenues and even the person responsible in Cabinet is known as the Racing Minister.

The Tasmanian budget is particularly unhelped as they combine the casino tax revenue with the monopoly pokies licence held by the Farrell family’s Federal Group.

Most states and territories, with the exception of Tasmania, are rolling out a new point of consumption tax on foreign bookmarkers which currently pay sod-all licence fees to the Northern Territory government.

However, in terms of transparently reporting this, the ACT budget last week decided to include the extra $2 million from this new tax with the existing reporting on pokies tax figures, when they are totally un-related.  

At the end of the day, transparency is pivotal for both accountability and public trust. There is a lot of stigma and shame from the people who contribute the $24 billion in annual losses and it would be easier to assist them if the whole system was more open and transparent.

$53 million placement with no SPP – send an email direct to the chairman

After the ANZ placement cartel charges, I was hoping selective placements as a whole would become less common.

There will always be small placements below $5 million, but this week a company called Global Geoscience announced a $53 million institutional placement at 41c, an 8% discount to the previous close, to help fund development of a lithium project. Sadly, there was no Share Purchase Plan for retail investors on the same terms. The Constant Investor army is encouraged to email chairman James Calaway and complain about this lack of respect for small shareholders. His email address listed on the announcement is jcalaway@calawayinterests.com. Fire away.

Who gets to call a trading halt – and why?

Whenever a company goes into a trading halt, you can normally expect some big or bad news, such as a takeover bid or the revelation of financial problems.

Capital raisings are another standard reason for a trading halt, although the ASX intervened a couple of years back and banned trading halts for block trades when key shareholders are selling down. This rule prevented Ruslan Kogan from suspending shares in Kogan.com when he and another founder, CFO David Shafer, were trying to raise $100 million in a share sale last week. In the end they lowered their price expectation and settled on a $41 million sale.

On Wednesday this week, an outfit called Hill End Gold announced a trading halt on the grounds that it would be releasing a pre-feasibility study into a potential alumina project near Ballarat the following day.

Why does the ASX allow this? If you’ve got market sensitive information to release, do it straight away?

You can possibly argue there is the risk of a leak as the company prepares to release the report, but as things turned out, this 30 page report did nothing for the Hill End share price, which continues to trend down.

Despite the hoopla, it’s hard to imagine a $270 million alumina project near Ballarat getting off the ground, but best of luck to Hill End Gold as it attempts to drum up interest, trading halts and all.

How can a capital raising be first in first served?

If you listen to Treasury Wine Estates CEO Michael Clarke, the key to his sales strategy is creating a perception of scarcity about his key brands.

Selling scarcity also seems to be a tactic deployed by smaller companies in capital raisings, specifically this idea that a share purchase plan could close early due to a shortage of stock.

An outfit called Nzuri Copper played the game this week, calling an calling an EGM in Subiaco to approve a $6 million placement at 25.5c. Thankfully, there will be a $15,000 Share Purchase Plan for retail investors at the same price, but the SPP is capped at $1.2 million and is unusually being done on a “first in first served” basis. However, with the stock closing at 25c on Friday, investors should wait until closer to the June 22 closing date. No point being first served out of the money stock, folks!

If Nzuri also offered a guaranteed VWAP-x price, investors could happily apply early and know they won’t get shafted. However, that can mean differential pricing with the placement price, which usually generates grumbles from the institutions.

Frankly, “first in first served” seems to be a tactic deployed by companies which are worried they won’t raise enough money, rather than those genuinely trying to limit over-subscriptions.

17 companies which collapsed still claiming to be worth more than $100 million

Frank Wilson, the former managing director of Perth-based Sandalwood company Quintis, was hit with civil charges by ASIC last week his for allegedly delaying the release of information about Nestle terminating a key contract in early 2017. See all the details in this ASIC press release.

Quintis is an interesting company because it collapsed after announcing one of the biggest ever losses by a Perth-based company ($416 million), but still managed to grossly over-state its claimed assets at the time of the collapse, which weighed in at $375 million.

Indeed, Quintis made it into 12^th position on one of my favourite lists which tracks the claimed audited net assets of companies at the time of collapse. There may be others, but over the years I’ve come up with 17 companies claiming to be worth more than $100 million when the undertakers came in. The various audit partners who signed these accounts shouldn’t be too proud of their efforts:

Babcock & Brown, $2.63 billion: collapsed in March 2009 but its last audited accounts were released in August 2008 and showed a $150 million half year profit.

ABC Learning, $2.23 billion: claimed this figure in February 2008, but clearly this was more than $3 billion off the mark given the subsequent collapse. The CFO was charged by ASIC and received a 2 year suspended sentence and the auditor was banned for 5 years.

Pasminco, $1.5 billion: declared a $23 million net profit for 1999-00 and then collapsed shortly after courtesy of crashing commodity prices.

MFS/Octaviar, $1.223 billion: plunged to a belated $242 million loss for the half to December 31, 2007 after writing down the MFS Pacific Finance division by $246 million. Never reported after that due to a corporate collapse.

HIH Insurance, $953 million: placed into liquidation on March 15, 2001 and the 1999-00 annual report claimed net assets of $953 million. Famously, Arthur Andersen were the auditors.

One-tel, $945 million: collapsed in 2001 and after never declaring a profit or taking a serious write-down.

Brisconnections, $945 million: declared a $142.6 million loss in 2011-12 and then collapsed in early 2013 after traffic forecasts fell massively short.

Sons of Gwalia, $728 million: somehow reported a $12.23 million profit for the 6 months to December 2003 when this balance sheet claimed net assets of $728 million. Was in administration just a few months later.  

Great Southern Plantations, $706.4 million: final result was a $63.8 million loss for the year to September 30, 2008 but it collapsed in 2009 with a grossly optimistic balance sheet.

Timbercorp, $595.6 million: final full year result was a $44.6 million profit in the year to September 30, 2008.  

Allco Finance Group, $545 million: reported a $1.73 billion full-year loss for 2007-08 but this still left it with net assets of $545 million when the administrators were called in.

Quintis, $375 million: the Perth-based sandalwood company reported a $416 million full year loss in 2016-17, but this still left it claiming to have net assets worth $317 million at the time when administrators were called in on January 22, 2018.

Rubicon Europe, $298 million: whilst a big loss slashed its claimed net assets from $537 million to $298.2 million in the 2007-08 balance sheet, the property investor was suspended in November 2008 and then collapsed.

ION, $297 million: the car part company collapsed in late 2004, but the 2003-04 results claimed a net profit of $29.7 million and $297.1 million in net assets.

Windimurra Vanadium, $196 million: receivers were appointed in February 2009 with claimed net assets of $196 million in the 2007-08 annual report.

Ten Network Holdings, $152.5 million: declared a $231 million loss for the half year to March 30, 2017, but never reported again before administrators were called in.

Centaur Mining & Exploration, $110 million: collapsed in May 2001 with $650 million in debts and the last annual report claimed it had net assets of $110 million.

That’s all for now.

Keep doing ya best, Stephen Mayne