High noon in the wild West

The ultimatum issued by the directors of West Australian Newspapers may be shareholders' best bet in extracting a control premium from Kerry Stokes.

The weekend decision by the non-executive directors of West Australian Newspapers to resign en masse should Kerry Stokes be successfully in winning even one board seat is a calculated gamble, as well as an indication that the incumbents believe there is a strong probability that Stokes could be successful.

Stokes, whose Seven Network owns 19.4 per cent of WAN, has requisitioned an extraordinary meeting of WAN shareholders next month to attempt to evict all four non-executive directors from the board, including chairman Peter Mansell.

Stokes has nominated himself and his lieutenant, Peter Gammell, as candidates for the board and encouraged others to nominate. Attracting nine other nominations for what would be two board seats if the incumbents were all ejected.

Mansell and his fellow directors yesterday launched their formal defence of their positions with the release of the notice of general meeting. Ahead of that release, however, they declared that each of them had decided that if Stokes, Gammell or both were elected they would not serve with them even if shareholders voted against removing them individually.

While they presented arguments as to why they had taken that decision, essentially the same arguments they are mounting against the election of Stokes and Gammell, the decision to survive or resign as a group appears tactical.

It is conceivable that sufficient shareholders could vote for Stokes and Gammell to get them onto the board and that two of the incumbents would see off the challenge from the nine candidates who have put themselves forward. That would leave Stokes with two of the four non-executive positions, with the fifth director WAN’s chief executive, Ken Steinke not being challenged.

Once inside the boardroom, Stokes – who could add to his holding using the ‘’creep’’ provisions of the Takeovers Code to add three per cent of WAN every six months – would end up with effective control. The WAN board has pointed out on a number of occasions that those are similar tactics to those Stokes used to get control of Seven, using the creep provisions and then a series of share buy-backs in which he didn’t participate that lifted his proportionate shareholding to the point where his control couldn’t be challenged.

The incumbents have denied WAN shareholders the compromise option, making it an ‘’all or nothing’’ outcome. Either the shareholders vote to keep Stokes and Gammell out of the boardroom or they hand control of the boardroom to him.

The platform the WAN directors have adopted is straightforward. They are painting Stokes as an opportunist who has seized a moment provided by the impact of the introduction of new presses, which has disrupted circulation and which caused a write-down of the value of the old presses, and of the sale of WAN’s half-share of Hoyts at a loss. They say WAN’s underlying profitability and prospects are strong.

They argue that Seven is a WAN competitor and, more powerfully, point to the risk of Stokes obtaining effective control without paying a control premium.

The control premium argument is the one that should grab the attention of WAN shareholders. If Stokes can get into the WAN boardroom it is improbable WAN shareholders will ever see a premium. If they keep him out, with nearly $500 million tied up in an investment in the company, the pressure would be on Stokes to either relinquish his ambitions or offer a premium to realise them.

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