Leighton feeling the heat as Spain burns

Less than six months after facing a hostile annual general meeting in Sydney, the chairman of Leighton Holdings, Stephen Johns, will do the same again today, only this time the share price is lower, there have been a few more scandals and another round of profit write-downs and disappointments.

Less than six months after facing a hostile annual general meeting in Sydney, the chairman of Leighton Holdings, Stephen Johns, will do the same again today, only this time the share price is lower, there have been a few more scandals and another round of profit write-downs and disappointments.

As Europe continues to burn, it is putting untold pressure on Leighton's major shareholder, Hochtief, and, more importantly, Hochtief's major shareholder, Spain's ACS - which has massive debts - is badly underwater on its investment in Hochtief and indirectly Leighton and is exposed to Spain's imploding economy.

To put it into perspective, ACS's group net debt was ?10.49 billion ($13.6 billion) at March 31, which is almost three times the size of ACS's ?4 billion market value. If the banks put pressure on ACS to further reduce debt, it could have a profound impact on Hochtief and Leighton, including asset sales or something more radical.

While ?5.8 billion of the debt is non-recourse financing for shareholders, ACS has been actively selling some assets in the past few weeks to reduce debt. It sold a 3.7 per cent stake in Iberdrola, and followed a week later with the sale of its stake in infrastructure group Abertis. It has also sold down its services business unit Clece to a joint venture formed by Permira Advisers.

Against this backdrop, Leighton is still trying to restore its credibility with minority shareholders after a series of disappointments in the past six months, including another profit write-down in March. Johns tried to soften up shareholders before the AGM. He was quoted as saying Leighton should never have formed a joint venture with Al Habtoor in the Middle East and warned it had become a "long-term problem".

While it was a commendable admission, 20-20 hindsight is always easy, particularly since he was not on the board when the deal was done in 2007. Not so for his fellow directors who sanctioned the deal and continue to watch it bleed red ink.

Leighton is getting close to facing a watershed moment. How it manages its affairs and problem projects - and other potential problem projects - will determine its future and its overall structure.

It won't be easy with Hochtief and ACS breathing down its neck. But it would help if it had a board with more construction and engineering experience. The importance of this was apparent yesterday in Johns' statement that the company would unveil changes today to risk management, including a ban on facilitation payments.

Facilitation payments that are made to an agent are not illegal if they are small and administered properly. They are fundamental to doing business in some overseas markets. If Leighton bans such payments holus-bolus in a knee-jerk reaction to an Australian Federal Police investigation linked to a contract in Iraq, it could shoot itself in the foot.

The hot topic at the Australian stockbrokers conference next week will be the move by the ASX under Richard Murphy to jack up its clearing fees on certain products by 30 per cent from July 2. It is seen as the thin edge of the wedge by most brokers, who are bracing for more fee increases in clearing and settlement at a time when they are being bludgeoned from all directions.

It is classic monopoly behaviour and will add to the resolve of groups, including LCH Clearnet, to apply to the regulator for a licence to set up as an alternative to the ASX clearing and settlement.

Last year, the ASX lost its monopoly exchange position when Chi-X was granted a licence to set up an alternative exchange. Since then, brokers have watched fees fall as the ASX faced competition for the first time.

The ASX is a listed entity and as such its prime motivation is to make money for its shareholders. With competition from Chi-X and threats that it might lose its monopoly in clearing and settlement, the ASX is trying to find ways to bolster revenue.

To this end, it is trying to push through changes to the listing rules to encourage more start-up companies to list on the ASX. The only problem is the proposed changes - released in a paper being pushed by Richard Murphy - are highly dilutionary to existing shareholders, are open to abuse and relate to companies with a market cap up to $300 million, many of which are not start-ups.

The proposal is to allow such companies to issue up to 25 per cent of new shares each year on a non-pro rata basis, subject to two caveats: shareholder approval by ordinary resolution within a one-year period (a blanket mandate) and a maximum discount of 25 per cent.

Under existing rules, companies can issue up to 15 per cent of new shares every year without shareholder approval. This is bad enough as it allows companies to issue 15 per cent more shares through a placement to a select number of investors at a huge discount. It has caused a big backlash from super funds, some stockbrokers and governance experts, who are concerned it will hurt the integrity of the market.

It should be a wake-up call to the government and Australian Securities and Investments Commission to flex their muscles and intervene. At best, the proposal should be scrapped - at least, it should be watered down to cover stocks with a market cap up to $100 million and tweak the caveats so that shareholder approval is conducted by a special resolution rather than an ordinary resolution and a reduced maximum discount.

If not, every abusive placement that goes through will become ASIC's headache.

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