Leighton could take $500m hit from corruption scandal
Brokerage Deutsche Bank said the "reputational damage" stemming from the bribery scandal - sparked by stories published by Fairfax Media this week - may "limit the amount of future work awarded to Leighton" or lead to cancelled contracts, and could result in a 20 per cent, or $46 million, hit to Leighton's offshore revenues.
With the company's shares plummeting for a second day - almost $1 billion was wiped from its market value in the past two days - Deutsche warned that Leighton may also have to write off a $400 million debt it believes the company is still owed from an oil pipeline project in Iraq at the centre of some of the bribery allegations.
Leighton shares closed 80¢, or 4.6 per cent, lower on Friday at $16.74, having already dropped more than 10 per cent on Thursday.
In a note to clients, Deutsche said Leighton could also face a fine of up to $57 million under the Commonwealth Criminal Code, as well as a shareholder class action.
With the potential fine, lost revenues and debt impairment, Deutsche estimated Leighton could be forced to write down as much as $562 million, not including any class action-related losses.
But the bank said it did not expect the scandal to have a "material" impact on Leighton's Australian operations, "as they are managed separately from where the alleged kickbacks occurred". Leighton's Asia and Middle East division accounted for about 17 per cent of the group's $23.1 billion revenue last year.
Deutsche also said that although the potential losses might lead to Leighton breaching its debt covenants, it believed this was unlikely, with the estimated write-downs of up to $562 million too small to force a breach.
Law firm Maurice Blackburn, which is investigating a shareholder class action against Leighton Holdings, said the drop in Leighton's share price meant the market had "clearly" been surprised by the "serious corruption allegations".
"We are currently investigating the impact of these allegations on both the scope of our clients' current class actions and the length of the claim period," special counsel Jenny Tallis said.
Analysts at JPMorgan said the allegations were a reminder of Leighton's "legacy" issues.
In a note to clients, the bank said if Leighton was charged and found guilty, "it could incur financial penalties and enforceable undertakings to address any shortcomings".
"[Leighton] could also face reputational damage and, in certain circumstances, find it more difficult to bid on work if clients deem that the group is unfit," JPMorgan said. "But we believe these risks are small at this stage until the AFP [Australian Federal Police] reveals its position."
Fairfax Media reported this week about allegations Leighton's international operations in Asia and the Middle East were "rife with corruption, bribery and malfeasance", and that its directors oversaw a "dramatic failure in governance" that enabled corruption. Two years ago, Leighton alerted authorities it might have breached foreign bribery laws in Iraq, a matter under investigation by the Australian police.
In a statement to the Australian Securities Exchange on Thursday, Leighton said it took the allegations seriously. It said it was co-operating with the police investigation into the Iraq matter, which had led to actions including the sacking of a senior executive. It said it was not aware of new allegations or breaches of its ethics, and said its directors had acted with appropriate care and diligence at all times.
Frequently Asked Questions about this Article…
The scandal relates to alleged corrupt activities in Leighton Holdings' offshore operations, reported by Fairfax Media. Analysts at Deutsche Bank warned losses could rise to more than $500 million. Deutsche estimated potential write-downs and costs of up to $562 million (not including any class-action-related losses).
Leighton shares fell sharply over two days, wiping almost $1 billion from the company’s market value. On the most recent trading day reported, shares closed 80c (4.6%) lower at $16.74, after dropping more than 10% the prior day.
Deutsche Bank outlined three main potential hits: a 20% reduction in offshore revenues (about $46 million), a possible $400 million write-off of debt related to an Iraq oil-pipeline project, and a Commonwealth Criminal Code fine of up to $57 million. Those items combined were estimated at up to $562 million, excluding class-action costs.
Deutsche Bank said it did not expect a material impact on Leighton’s Australian operations because they are managed separately from the regions where the alleged kickbacks occurred. The Asia and Middle East division accounted for about 17% of group revenue (from $23.1 billion) last year.
Although Deutsche Bank noted the potential losses might lead to covenant risk, it believed a breach was unlikely. The estimated write-downs of up to $562 million were judged too small to force a covenant breach.
Yes. Law firm Maurice Blackburn said it is investigating a shareholder class action after the share-price fall. Separately, Leighton alerted authorities about possible foreign bribery in Iraq two years ago and the matter is under investigation by Australian police; Leighton says it is cooperating with authorities.
Analysts at Deutsche Bank and JPMorgan warned the scandal could cause reputational damage that limits future work or leads to cancelled contracts. JPMorgan said such risks are small at this stage but noted that if Leighton is charged and found guilty it could face financial penalties and enforceable undertakings.
Investors should monitor Leighton’s ASX announcements, the progress and findings of the police/AFP investigation, any class-action developments, analyst updates on potential write-downs or fines, and resulting impacts on revenue and bidding ability. The company has said it is cooperating with investigators and has taken actions such as sacking a senior executive.
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