Gamed by the market casino

Global stock markets are going through a stage where the underlying value of a company is taking second place to casino-style frenzies.

On Saturday morning I described the way markets now operate as I tried to determine whether the rises of last week were part of a sustained rally or were really only a 'dead cat bounce' (Rallying for a dead cat bounce, October 8).

The huge fluctuations in markets have become a nightmare for long term investors but, worse still, as value become less and less important in assessing market values, takeover raiders are using our casino-established market prices to take away from long term Australian investors the key assets that they need to diversify away from banks and resource companies.

Our boards and independent takeover investigators are either too frightened of the power of the short-term blinkered institutions to fight casino-set values, or simply don't understand what has happened.

This leads me to a dinner briefing myself and other journalists received from Foster's management, prior to the takeover bid, explaining how you calculate the real value of the company. But first some history.

We first saw this problem with Axa when, with all the right intentions, the independent expert Grant Samuel did not explain the effect on Axa's value of the deal Australia had done in China. The French did understand the implications and once they had taken Australia's Asian jewel for a low price they wasted no time to boast about it (The great Axa rip-off, June 28).

Then came ConnectEast, where the independent expert Deloitte revealed the facts but did not understand their implication for long-term holders. Major shareholders lead by David Murray's Future Fund did understood the potential value but could not block the bid (Murray's key to a super future, September 26).

In both these cases the boards and independent experts were sucked in by the markets. In days gone by, using markets would have been fine but in today's world markets have moved away from value to trading. So the rubber stamping of the bids on the basis of markets is fine for the short-term punters (as most super managers have become) but a disaster for long-term investors like our retirees.

Now to Foster's, which is part of casino-set values. I would never have understood how to interpret its figures but for that fascinating briefing. The next day when I went back to the Foster's split-up documents I found it very difficult to get the facts to implement the briefing guidelines. Nevertheless, for Eureka Report readers on May 13, I was able to calculate that, on the basis of the facts in the split up documents, Foster's was generating about $650 million to distribute either by way of dividends or share buy backs which gave a yield of 7.5 per cent on the then price of $4.39.

Then I waited for the preliminary profit statement which would display the sums for all to see. But while the June 30 accounts showed components in a much clearer way than in the split-up documents, shareholders could only understand the value of their company if they knew how to interpret the data.

Although some of my original May 13 Eureka components were wrong, the June 30 accounts confirmed that Foster's had indeed generated trading $650 million for distribution. I set this out in Business Spectator (Breaking the Foster's cash machine, August 24).

I was critical of the board for not spelling out to all shareholders how the sums worked.

SABMiller understood the sums perfectly and lobbed a $5.10 bid on the desk which directors compared to the casino markets and recommended it without actually explaining to shareholders that they were forgoing a 33 cents a share distributable cash surplus.

At the May briefing Foster's management set out very similar strategies to those that SABMiller have been exposing, although I am not sure if they would have sold the spirits business to an elated Coke chief Terry Davis as SAB plans to do.

But the other strategies of investing more in marketing and looking at whether they should replace Abbotsford are the same. I should emphasise although the 33 cents a share cash surplus allows for capital expenditure and higher marketing than previous years, it would be reduced if the board decided to invest larger sums in these areas. But they would only do that if they believed it would yield even greater returns. And of course there are always the trading hazards.

That 33 cents a share distributable surplus does not include tax, but when Foster's returns to taxpaying after its win in the courts Australian shareholders will receive the tax paid back in franking credits. For Australians it's a nil sum game.

I sympathise with Foster's directors. A few years ago when share markets set values I would have made a similar conclusion. But times have moved on. Unfortunately the die is cast but it is important shareholders see in the takeover documents what they are giving up.