Landing the big fish with a very small lure
IN THE sport of fly fishing, the angler wades into the shallows to cast an almost weightless lure.
The markets are more interested in Carnegie's and Singo's corporate fishing expeditions: their plays for Fairfax Media and Qantas, where the pair and the airline's former boss, Geoff Dixon, have gone to war with the chief executive, Alan Joyce; and Carnegie's attempt to break up the 40-year-old cross-ownership between the investment house Washington H. Soul Pattinson and the building materials company Brickworks.
Carnegie and Singleton grabbed headlines just over a week ago with their declaration they had bought a stake in Fairfax and would work in concert with the company's biggest shareholder, Gina Rinehart, who has so far failed to get seats on the board. Many were bemused on Monday, however, when it turned out Singleton and Carnegie had spent a trifling $1.7 million to buy 0.15 per cent of Fairfax.
Behind the scenes, their detractors were quick to scoff. Come on, fellas, show us the money! It's a silly-season furphy. It all comes to diddly squat.
Were they just fly fishing?
With Qantas, Fairfax and Soul Patts, there is a pattern: attempt to wield maximum influence while holding small stakes in the companies. The idea is to agitate and build enough shareholder support to force the companies to change direction, even overthrow their leadership. In all these cases, though, they are yet to corral the shareholder support they need to bring down the barricades. But try to get anyone, on the record, to write them off. Carnegie and Singleton are a little coy, too, having agreed with Rinehart that none of them will talk to media about their Fairfax deal without first getting each other's approval. It makes it hard to read their collective motives, or just how collective their ambitions really are. They want some carve-up of the remaining assets, a strategy rejected by Fairfax. They also want Fairfax to revisit joint ventures with APN, the newspaper and radio group.
Carnegie will not discuss the details of Fairfax, Qantas or Soul Patts, but he agrees to comment broadly on his "shareholder activism". Too much money is at stake, he says, for institutions to stand by and watch underperforming or poorly managed companies squander shareholders' wealth. Activism is becoming a global phenomenon, he adds, and it will be entrenched here within five years. "Your readers want activism to come to Australia because their super funds will earn a better return from the high returns on capital it will deliver."
Much of what our readers know about Carnegie appeared in Good Weekend last July. In it, Singleton described his friend as "a massive f---ing intellect". He also conceded, when it came to that kind of vocabulary, "compared to Mark I'm a choirboy".
Oxford-educated Carnegie, son of the corporate titan Sir Roderick, was still in his 20s, advising on the successful Tourang bid for Fairfax in 1990, when he caught Singleton's attention. Singleton recruited him to chair his advertising outfit. Since then they have built fortunes together, notably through the Macquarie Radio Network, which operates 2GB and 2CH in Sydney. Singleton owns about 71 per cent and Carnegie, now 50, has 15 per cent.
Most observers believe their main interest in Fairfax is as Singleton declares it: the radio stations. Fairfax has 2UE in Sydney, 3AW and Magic in Melbourne, 4BH and 4BC in Brisbane, 6PR and 96FM in Perth, and several regional stations. They had offered between $200 million and $250 million, but Singleton says Fairfax shut the door on the deal. For that money, he said in his statement on December 28, "I could buy a significant amount of all the assets of Fairfax at a far lower price to earnings multiple".
But had Singleton and Carnegie ever demonstrated they had the funds to close the radio deal? One Fairfax executive told The Australian Financial Review their handling of it was "amateur hour".
This time around, Singleton and Carnegie did not want to declare their hand until they had accumulated 4.9 per cent of Fairfax. They were very unhappy when they received unwavering legal advice from lawyers Gilbert + Tobin that they must announce their intentions immediately - because they had just signed their agreement with Rinehart. As their Friday statement noted, with a heavy accent of brinkmanship, Singleton and Rinehart enjoyed "a long friendship, spanning decades".
Their declaration only served to push up the Fairfax share price, which surged 7 per cent on Monday to close at 51¢. It may sound like a bargain to punters who paid about $5 in 2007, but it was an expensive exercise for the pair hoping to acquire a quiet 4.9 per cent.
They bought their starting stake using their Gutenberg Investments Unit Trust, Macquarie and two vehicles associated with Carnegie's Companion Fund - his $130 million activist investment fund dedicated to attacking the "complacency" of Australian companies. Carnegie used the same fund to buy 1.5 per cent of Qantas and a $30 million stake in Soul Pattinson-Brickworks.
His and Singleton's 0.15 per cent in Fairfax brought their alliance with Rinehart to just 15.14 per cent - well short of the almost 20 per cent she held mid-year, when she still couldn't convince Fairfax directors to let her sit on the board because she refuses to sign the charter of editorial independence. While insisting she supports editorial integrity, Rinehart makes no bones about it: fixing the business means changing the journalism.
"Active consideration of content or a change in content is required to attract readers and advertising revenue in the interests of shareholders," said a June statement released by John Klepec, the chief development officer of Rinehart's Hancock Prospecting. Offering some insight into what might change, Klepec said: "We note that the [charter] has been repeatedly overridden in the past - for example, by ordering journalists to support Earth Hour." Rinehart is a noted sceptic when it comes to man-made climate change. She would have plenty to debate with Carnegie, who has argued for higher taxes on the rich, an inheritance tax and - despite what he says would be an undoubted hit to Australians' standard of living - the potential merits of leading the world on reducing carbon.
But in the drive to carve up Fairfax, Rinehart is a critical ally. Turning the screws, Singleton says he wants the charter of independence reviewed in her favour. It's all about leveraging influence. They drip-fed the news this week that Singo's mate, Dixon - a co-brawler in the Qantas scrap - had joined the Rinehart bloc; then that they had drafted another mate, Trevor Kennedy, a former Fairfax editor and executive.
Kennedy, Singleton and Carnegie give Rinehart what she sorely lacked: media know-how. None of them, however, has run a digital media business. In any case, Kennedy had already spoken out for Rinehart and her Fairfax push. So what had really changed? Fairfax insiders have taken to calling it "the Gutenberg circus".
The test will be who they can bring into their tent, circus or not. Will they have enough clout to sway key Fairfax investors such as fund manager Allan Gray?
The critical question for shareholders at Qantas, Fairfax and Soul Patts-Brickworks is this: who knows best? And, perhaps, at what point does an activist fund become a vulture fund if the only way to add value is to break up a company? In June, Fairfax's chairman, Roger Corbett, argued Rinehart's seat on the board at Ten Network had not helped much. Ten's stock had traded 63.4 per cent down since she joined while Fairfax was down 60.6 per cent, Seven West Media 73.3 per cent and APN 64.7 per cent. For 2012, Ten finished 56 per cent down, Fairfax 26 per cent.
At Qantas, Joyce argues its profits would be at record levels if not for the doubling of the fuel bill since the global financial crisis, a $1 billion annual hit. What could the activist clique - Singleton, Carnegie, retailer Gerry Harvey, Dixon and his one-time finance chief at Qantas, Peter Gregg - have done about that? Joyce has accused Dixon, his former mentor, of a flagrant conflict of interest. Dixon is also chairman of Tourism Australia. Joyce retaliated by freezing Qantas's $44 million joint marketing deal with Tourism Australia, but its board has backed Dixon.
The agitators, pointing to the airline's near record-low share price, want Qantas to "unlock value" with a partial float of Jetstar and by selling its Frequent Flyer division, an arm that Joyce counters is profitable and gives the airline a competitive edge. While Qantas has formed an alliance with Emirates to secure connections in Europe, the activists believe it would be more profitable to aggressively expand Asian routes and secure a tie-up with the likes of Cathay Pacific. Joyce has opted to expand Jetstar's routes in Asia. Some may be wary that Dixon, Carnegie and Gregg worked on the failed $11 billion private equity bid for Qantas in 2006.
Perpetual Trustees has put its faith in Carnegie to break up the cross-ownership between Soul Pattinson and Brickworks. Soul Pattinson owns 44 per cent of Brickworks, which owns 42.7 per cent of Soul Patts. This, they argue, insulates them from downturns and hostile takeovers. Perpetual, as a large shareholder in both, says it locks up $1.5 billion in value. It has already tried and failed to split them. Carnegie's Companion Fund has an option over more than 5 per cent of Perpetual's stock in both companies, but he can only exercise it if he unlocks the cross-holdings and lifts shareholder value.
That, Carnegie argues, is what his activism is all about. He cites the McKinsey report Beyond the Boom. "[It] pointed out that $53 billion of national income had been lost due to low returns on shareholders' money, and about a third of that was due to poor management," Carnegie says. "The trustees of super funds know they cannot let that continue. They're going to have to become more activist and they're working out how they wish to do this. This is a global trend. The Kay Report in the UK makes the case for more long-term value creation and less on ceaseless day trading." He adds: "I didn't go out seeking to become an activist investor. Activist investing found me. A series of people who felt they had no influence, despite being big shareholders, liked what I proposed."
How long will they wait to see results? "It's a long game," says one investor, "but that's OK."