Leighton resignations beg a please explain

Leighton's curious status as a majority-owned but independent super-satellite of Germany's Hochtief group and its majority owner, ACS of Spain, is up in the air after the resignation of Leighton chairman Stephen Johns and independent directors Ian Macfarlane and Wayne Osborn on Friday. Leighton needs to explain what has happened.

Johns tried and failed to have Leighton release a letter from him that explained his resignation and backgrounded concerns that Hochtief chief executive and Leighton director Marcelino Fernandez Verdes had attempted to influence the appointment of a new independent Leighton director and then sought Mr Johns' resignation.

The situation is complicated by the fact that the two other independents, Paula Dwyer and Bob Humphris, have not resigned, and Leighton said in a late statement that its remaining Australian directors did not agree with "conclusions drawn" in the correspondence, and were not aware of anything that suggested that Hochtief no longer supported the independence deal. Those who resigned obviously believe otherwise.

Spanish group ACS was in the process of moving from a 30 per cent stake in Hochtief to majority control in November 2010 when Leighton announced that it and ACS had agreed to continue an independence deal struck in 2000 that limited Hochtief to a 55 per cent stake (it owns 54 per cent), a maximum of four seats on a board that could be a dozen strong, and ensured that the chairman was independent.

The governance deal was renewed at the end of Leighton's great growth phase under former chief executive Wal King. Leighton had a market value of $85 million when King took the CEO seat in 1987. Its shares had halved from their December 2007 high of $62.37 by November 2010, but they still valued Leighton at more than $10 billion.

Subsequent big losses on key projects including the Brisbane Airport Link tollway and Melbourne's desalination plant weakened Leighton's position as a big and powerful tail on the Hochtief dog. The group went from a record $612 million profit in 2010 to a $409 million loss in 2011, and while it rebounded to a profit of $450 million last year, its shares are around a third of their peak value after falling by $1.50 or 6.9 per cent to $20.20 on Friday after the surprise resignations. At these levels, they are still not comfortably clear of the November 2012 low of $14.72.

Leighton's weary investors are probably not surprised to learn that their company is once again shrouded in mystery and controversy; the group seems incapable of being sedate.

It said in its initial morning announcement that the trio had resigned over "what they perceive to be a breakdown in relations with the major shareholder Hochtief, and their view that Hochtief no longer supports an independent board". All five independent directors are believed to have expressed concerns on that score in a letter to Fernandez Verdes last month.

But Leighton also said the independence deal was a value-creator, and that "the current arrangements with Hochtief are expected to continue, and we believe that is well understood by the market". Given what has happened, it is not clear how Leighton can make that statement.

Leighton's weight in the ACS-Hochtief-Leighton empire has not been fatally undermined by its project losses and share price dive. Its market value of $6.8 billion still exceeds Hochtief's market value of €4.17 billion or $5.2 billion, and is 94 per cent of ACS's €5.85 billion ($7.25 billion) value.

The independence deal that Leighton renegotiated in 2010 did, however, extend an arrangement that goes against the convention that majority shareholdings convey boardroom control. The arrival of the heavily geared ACS as Hochtief's controlling shareholder was a potential game-changer, particularly when ACS and Hochtief were (and continue to be) exposed in their home markets to Europe's sovereign debt crisis and the associated economic slump.

The legal status of Leighton's 2010 agreement is not clear, but it has been referred to in company documents and company fund-raising exercises, including a $US500 million corporate bond issue at the end of last year. Leighton also copped a record $300,000 fine from ASIC for tardy disclosure last year, and given what has happened, will be under scrutiny over its disclosure performance again.

The situation certainly needs to be clarified: Leighton promised on Friday morning to issue a fuller statement "in due course", and its second statement has not discharged the commitment.

Cabinet loss for business

This was in some ways a week when things didn't happen. Julia Gillard wasn't sacked - and the business world on Friday was sideswiped by the consequences of the aborted coup as resources minister Martin Ferguson stepped down.

The former ACTU president surprised some by being an enemy of class warfare rhetoric and an advocate of sensible economic policy in his portfolio. He recognised that the mining tax debacle was born out of a failure to consult on the first, extreme version of the tax, saw mining as a key part of the economy, and saw that a cooling boom and intense competition and technological change in the aviation industry made union claims against the miners and Qantas unrealistic. He is a key loss for the business community and there is no obvious replacement.

The ACCC also didn't block CBA's takeover of Aussie Home Loans this week, or impose conditions. That at least was no surprise.

Mortgages are a national market, and there are no creeping acquisition barriers in this country. Aussie controlled between 6 per cent and 12 per cent of the mortgage broking market depending on how you measured it, but there were several larger broker competitors including NAB, and Aussie's share of mortgage lending was below 1 per cent.

The big four banks control more than 80 per cent of the home lending market and CBA controls 25 per cent, but adding less than 1 per cent does not substantially lessen competition. That's the test.

mmaiden@fairfaxmedia.com.au