Harvey Norman and Transurban capital raisings, Liberal governance problems, fast ASX and AGL AGMs and a submission on the Nine-Fairfax merger

At last, Harvey Norman goes for a renounceable raising

After belting Gerry Harvey for ripping off his own small shareholders in 2014-15 when he personally under-wrote a heavily in the money Harvey Norman non-renounceable capital raising, it was a relief to see the latest $168 million raising announced on Friday was “renounceable”. Unfortunately, it’s Claytons renounceability!

Gerry’s previous effort was one of the worst we’ve seen because about two-thirds of his shareholders declined to participate so he personally scooped up the shortfall, at a heavy discount, as the sole under-writer.

This time around, those retail investors who don’t wish to take up the 1-for-17 offer at $2.50 (the previous close was $3.67!) will be able to sell the rights on market between September 11 and October 8.

As has been said before, the biggest victim in Australia’s anything goes capital raising system is the retail shareholder who does nothing and once again Gerry is not protecting them because there is no bookbuild to sell off the shortfall at the end of the offer.

And rather than only Gerry getting the shortfall this time, Harvey Norman has moved to a model of all applicants being entitled to apply for “overs” at the fixed price of $2.50.

Remarkably, all of the directors have declared in this ASX announcement that they intend to apply for these shortfall shares, where no premium will be paid. This will give the directors quite a conflict of interest when they devise their scale back policy.

I own 21 Harvey Norman shares and will be applying for $15,000 worth of “overs”, treating the opportunity as the equivalent of a share purchase plan.

Will the directors scale me and other small shareholders back and maximise their own allocations or will they settle on a minimum allocation for all applicants, such as the $15,000 threshold for an SPP?

All of this comes after various other governance controversies at Harvey Norman, so do click on these two previous Mayne Report editions to better understand the context:

Why Gerry Harvey is the dunce of the class on governance
September 14, 2017

A blast on the phone from Gerry Harvey
September 28, 2017

Gerry’s chutzpah really is quite extraordinary. Rather that sort out the controversies in his accounting practices and apologising for producing an unexpected capital raising, his commentary to The Weekend Australia was all about the supposedly dodgy capital raisings of others. Here is the exact quote:

“In the GFC most of them (companies) including all the banks were all in strife overnight and they didn’t even let all their shareholders participate in most cases in the raising, because they didn’t have time, needed the money tomorrow, and I’m still shitty about the fact that I didn’t get any shares in a lot of those banks and companies.’’

As the holder of the world’s biggest small share portfolio, I know for a fact that this is rubbish. The GFC turned into an enormous opportunity for retail investors to make windfall gains by participating to the maximum extent possible in all the raisings that came down the line, particularly from applying for “overs” in non-renounceable offers.

As one of Australia’s most prominent retail shareholders, Gerry would have received many dozens of opportunities to invest, unless his investments were somehow structured corporately so he didn’t receive any of the share purchase plan offers.

There were very few placement-only raisings as corporate Australia raised more than $100 billion after the GFC. Indeed, looking back, I can only identify the following 6 ASX200 deals where retail investors were completely locked out:

Commonwealth Bank: $2 billion raised through institutional placement at $38 a share in October 2008 to fund BankWest acquisition with no SPP.

Fortescue Metals: placed 17.4% of the company with the Chinese Government at $2.48 a share raising $645 million in March 2009 but never offered the same deal to its loyal but unloved retail shareholders.

Lend Lease: completed a $300 million institutional placement on February 4, 2009 at $6.05 a share to strengthen the balance sheet but the shares then tanked to a 20-year low of $5.50 so they abandoned the SPP for retail investors. 

Primary Healthcare: raised $184.5 million through an institutional placement at $11.90 a pop on November 9, 2007 with no SPP for retail. 

Santos: $500 million placement at $12.55 in December 2010 and no follow-up SPP for retail investors.

Ten Network Holdings: completed a $138 million placement at $1.15 a share in August 2009 but failed to follow through with an SPP.

Why do a capital raising at all, Gerry?

Then you have the whole issue of why Harvey Norman is even bothering to do a $168 million capital raising when on November 2 it will pay out a record fully franked 18c dividend which will drain $200 million in cash out of the company.

Given that Harvey Norman’s $810 million syndicated debt facility was drawn to $740 million as at June 30, it would have made more sense simply to abandon the final dividend.

And why on earth is Gerry continuing his practice of declaring far higher profits than necessary, which then leads to a much bigger corporate tax bill?

The 2017-18 pre-tax profit came in at $532.5 million, but the income tax bill of $150 million brought the net profit down to $375 million.

All the while, sitting unnecessarily on the balance sheet is $544 million in debts that are supposedly payable from franchisees. For reasons that are explained here, it is unlikely these “franchisees”, if you can really call them that, will ever pay back the money so it would have made more sense to simply write-off the lot, declare a loss for the year, get the corporate tax bill down and declare no dividend.

Unfortunately, doing that would require Harvey Norman admitting to aggressive accounting practices over a long period of time.

Frankly, in my opinion it is surprising that the auditors from Ernst & Young are allowing Harvey Norman, which has no independent directors, to keep that $544 million on the balance sheet and once again expect this will be a major issue at the November 27 AGM in Sydney.

Then there is the whole mysterious issue of Harvey Norman’s property portfolio, which has been valued at a record $2.86 billion as at June 30, up from $2.66 billion a year earlier. Such round numbers to get a precise $200 million uplift over 12 months, courtesy of purchases, improvements and revaluations!

But what is in this property portfolio? Sadly, Gerry doesn’t even publish a list of the addresses on his website, let alone provide individual valuations. This remains one of the biggest jokes in corporate Australia and explains why many institutional investors have long given up on holding Harvey Norman shares.

Transurban goes with a 3^rd PAITREO but why the discounted $600m placement?

The NSW Coalition Government is awash with cash for its re-election next year after a Transurban-led syndicate agreed to pay $9.3 billion for 51% of the giant WestConnex project.

And as part of the process, Transurban will become the first Australian company to complete 3 different PAITREOs, in this case a $4.2 billion monster which is only surpassed by NAB’s $5.5 billion and CBA’s $5.1 billion back in 2015. However, we’re not going to put this one on our best practice list because Transurban have also thrown in a $600 million discounted placement at $10.85 to its joint venture partners as part of the deal, which is disappointing.

Macquarie and UBS are being paid a tidy $68 million to under-write Transurban’s 10-for-57 PAITREO at $10.80, which is easy money given the stock last traded at $12.06.

Truth be known, Transurban has such a good record at negotiating tollroad deals with governments that it could probably have done a conventional rights issue with no under-writing arrangement at all.

Instead, we get the usual rushed institutional offer with a longer than normal suspension of trading all the way through until Wednesday morning, even though the deal was announced at 9.21am on Friday morning.

Without seeing the market reaction, it is a bit hard to determine whether Transurban and its partners have overpaid for control of WestConnex, but when governments run on short term political cycles, it usually pays to offer them cash up front in exchange for a long term concession.

Sydney motorists are being locked into tens of billions of dollars worth of long term tolls and Melbourne, Sydney and Brisbane will be left as 3 of the world’s most heavily tolled major cities, all beholden to the whims of Transurban, a company created by Macquarie Bank and Transfield in 1995 to bid for the original Citylink project in Melbourne.

Transurban shares were floated in 1996 at the equivalent of $1 and with a promised 59c distribution in 2018-19, the original investors have made a fortune courtesy of the inability of governments, particularly in Victoria and NSW, to negotiate sensible tollroad concessions with the company.

And speaking of Melbourne-based companies floated in the 1990s, what about CSL. The stock soared to a record high of $227.31 on Friday, giving it a market capitalisation of $102.8 billion, which now exceeds Westpac on $98 billion and leaves CSL sitting 3^rd on the league ladder behind CBA and BHP.

Putting a governance lens over Liberal Party dysfunction

Most people I’ve spoken to over the past fortnight have been appalled by the unwarranted decapitation of Malcolm Turnbull and it very much looks like the Liberals will pay for it at the next election when Labor is likely to win in a landslide.

When your franked dividends are suddenly a whole lot less valuable you’ll know to blame Tony Abbott, Peter Dutton, Mathias Cormann, Kevin Andrews, Mitch Fifield, Michael Sukkar, Mitch Fifield and the other embarrassed wreckers who pulled the rug on one of the better Prime Ministers to have led Australia.

So, what are some of the governance lessons from the whole debacle, including for the structure of the Liberal Party and our Parliament?

Firstly, the gerrymandered senate is clearly not helpful as Malcolm Turnbull has traditionally drawn little support in leadership contests from Senators in small states, such as Tasmania and Western Australia.

When a social conservative like Eric Abetz is able to lock up the Liberal Party in Tasmania, it can prove decisive, as it did when you consider that all 4 of the Tasmanian Liberal senators – Abetz, Richard Colbeck, David Bushby and Jonathon Duniam - voted to sack the Prime Minister in preference for the unsaleable Queenslander Peter Dutton.

If you just reverse those 4 votes alone, the decisive Friday spill vote would have been defeated with 44 votes supporting the PM and 41 votes calling for the leadership of the party to be declared open.

The next problem goes to membership recruiting, something which has seen the Victorian division of the Liberal Party taken over by these social conservatives, largely because the incumbent moderate MPs failed to use their office resources to build membership and lost control of the Administrative Committee (aka, the board).

Kevin Andrews, Michael Sukkar and prolific recruiter Marcus Bastiaan are now effectively in charge with some of the other key members of their ruling faction on the Administrative Committee being little known social conservatives such as Paul Mitchell, Karina Okotel and Ivan Stratov, a former Family First candidate.

These people seem far more interested in culture wars and conservative social ideology than growing the economy and supporting investors or the business community.

Victorian Liberal Party President Michael Kroger nominally runs the show but his failure to put a stop to the coup showed either poor judgment or a personal lack of authority over the generally younger social conservative turks.

As chairman of what is effectively a 19-person board, Kroger has a vital job but his judgment seems less than ideal. Suing the directors of the Cormack Foundation, the Liberal Party’s biggest Victorian donor and a key conduit to the business community, was a brazen move which was partly triggered because Kroger refused to follow good governance guidelines and separate the role of Finance Committee chair from his own, as the Cormack directors requested.

Keeping rank and file members engaged is another cornerstone of good political governance but in Victoria the ruling Liberal faction have abandoned all preselections for incumbent MPs, which was apparently all about saving Kevin Andrews from preselection defeat in Menzies. (Disclosure: I polled 6.7% running against Kevin in 2016).

If you watch this Marcus Bastiaan speech to a Sydney audience friendly with Tony Abbott, it was all about giving members a vote in preselections. Then when the Bastiaan forces took control of the Victorian Liberal Party, they abolished all preselections for incumbent house of representative members.

Having demonstrated that power, the proverbial gun to the head was deployed in order to decapitate Turnbull, the message being: “If you don’t back Dutton, your preselection may be under threat.”

That, along with the self-interested promotional aspirations of people like Greg Hunt and Michael Sukkar, explains why so many Victorian MPs and Senators voted to install a former Queensland policeman who failed accounting at university to be Prime Minister.

So when the outgoing member for marginal Melbourne seat Chisholm, Julia Banks, talks about bullying and intimidation, that preselection threat is at the heart of the matter.

The final governance reform goes to leadership selection. Labor has settled on a good model giving members a 50% weighting after each Federal election, and it would make sense for the Liberals to adopt a similar measure.

AGL and ASX out of the blocks super early with their AGMs

As a serial candidate for the boards of public companies over the years, I’m used to a company revealing their full year results and then deciding whether to have a crack based on the information revealed.

If the result is a shocker and the share price crashes, alternative candidates for the board should be able to nominate at the subsequent AGM.

Alas, that sequencing is no longer how the system works as some big companies, most notably ASX and AGL, will demonstrate over the coming weeks.

You see, both of these companies are having their AGMs so early, that nominations for the board had actually closed before the full year results were even released.

In the case of ASX, the full year results and notice of meeting for the October 4 AGM were both released on August 16.

AGL is probably feeling a bit vulnerable given all the politics around energy and the departure of CEO Andrew Vesey, so it changed the timetable this year to release both its full year results and the notice of meeting for its September 26 AGM on August 9.

Last year the cycle was full year results on August 10, notice of meeting on August 25 and AGM on September 27.

After a relatively calm AGM last year at the Melbourne Recital Centre, AGL has returned to the same venue this year which is also a first. Can anyone else name a company that has held its AGM away from its home city in the same venue two years in a row?

At least that will make it more difficult for aggressive Sydney players like Tony Abbott and Alan Jones if they want to rock up and complain about renewables or the planned closure of that old coal clunker Liddell.

ACCC submission on Nine-Fairfax takeover

The ACCC is taking public submissions on the proposed merger of Nine and Fairfax and you can do the same before the September 7 deadline, including by using this useful portal created by the journalists union, the MEAA. Below is a partial extract of what I’ll be submitting:

As part of its market inquiries, the ACCC should listen to this 30 minute podcast of a recent Melbourne University discussion about the Nine-Fairfax takeover involving Alan Kohler, Eric Beecher, Andrew Dodd, Andrew Carson and Stephen Mayne.

A wide range of important issues were canvassed and here are some additional points in terms of how the ACCC should treat the proposed Nine-Fairfax merger.

Firstly, please lock in a commitment to print publication of The Age, The SMH and The AFR for at least 5 days a week until the end of 2021. This would provide certainty to readers, advertisers, distributors and employees alike, whilst also leaving the door open for an earlier end to printing 7 days a week.

Please also consider requiring Nine to divest its controlling stake in Macquarie Media, as the power potentially available to the Nine board through their control of Nine News, The Age, The SMH, The AFR, 3AW and 2GB is too great in a democracy, particularly after what we’ve just seen with Malcolm Turnbull.

Australian media has a long and sometimes controversial history of billionaire influence-pedalling. Think Rupert Murdoch, James Packer, Kerry Stokes, Frank Lowy and Gina Rinehart in more recent times and Alan Bond, Christopher Skase, Paul Ramsay, Jack Bendat and many others in earlier times.

We saw a dysfunctional gaggle of five billionaires competing for control of Ten Network Holdings in recent years and it ultimately led to financial collapse, which was a disaster for all investors, including the minorities who did nothing wrong.

Knowing this history, and also what happened to Malcolm Turnbull in recent years, the risk here is that someone like Gina Rinehart, Andrew Forrest or James Packer might decide to spend at least $1 billion and buy 20% of Nine as part of a political power play. This could see a partisan mining mogul or casino entrepreneur suddenly in a hugely powerful position to overly influence public debate.

Therefore, from a diversity point of view, you might want to consider some form of constitutional shareholder limit, such as is in place at Tabcorp, Star Entertainment and CSL. Settling on 15% would be a good start, although ultimately any predator should still be able to make a full bid for the company. It would just need shareholder approval like any other takeover scheme of arrangement.

Around the grounds of gambling

Rather than taking liberties and hitting you with too much self-interested gambling news from my main job, if you’re interested, click on this link to read the full “Gambling News” that was sent out last Thursday. Some of it is quite interesting from an investor perspective. The 3800 words covered the following 10 stories:  

Essential Media poll shows strong support for gambling reform

Woolworths confesses as pokies profits jump again

Crown and Star Entertainment reveal $1.376b in pokies losses

Victorian pokies losses jump for 8th straight month

Alliance supports cracking Michael West probe of NSW pokies clubs

Ross Ferrar jumps the shark - time to go?

Clubs and pubs pushing back in NSW

Busy times for applications at the VCGLR

ACMA moves to ban advertising during live streaming of sport

Best of the gambling media

In addition to that, The Weekend Australian published this online story suggesting that Woolworths is investigating a $3.5 billion float of its ALH pokies pubs business.

Coles is already trying to exit in a sale to private equity firm KKR, so if Woolworths divests as well, it will confirm just how toxic the predatory pokies business has become.

That’s all for now.

Thanks for reading and keep doin’ ya best, Stephen Mayne