Leighton urgently needs to explain
Mr Johns tried and failed on Friday to have Leighton release a letter from him under its continuous disclosure obligations that explained his resignation, and gave background to concerns Hochtief chief executive and Leighton director Marcelino Fernandez Verdes had attempted to influence the appointment of a new independent Leighton director, and later sought Mr Johns' resignation.
The situation is complicated by the fact that the two other independents, Paula Dwyer and Bob Humphris, did not resign, and Leighton said in a statement that its remaining Australian directors did not agree with "conclusions drawn" in the correspondence, and were not aware of anything that suggested Hochtief no longer supported the independence deal: those who have left obviously believe otherwise.
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 that Leighton first struck with Hochtief at the turn of the century.
An ACS-controlled Hochtief would not boost its stake in Leighton beyond 55 per cent (it owns 54 per cent), would hold a maximum of four of up to 12 board seats, and would allow an independent chairman, then Leighton chairman David Mortimer said.
The independence deal was extended 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 chief executive seat in 1987. At $31.20 on the day the independence agreement was reconfirmed in 2010, Leighton's shares had halved from their December 2007 high of $62.37, but they still valued the group at more than $10 billion.
Subsequent big losses on key projects, including Brisbane's Airport Link tollway and Melbourne's desalination plant, weakened Leighton's position as a big and powerful tail on the Hochtief dog, however. 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 6.9 per cent to $20.20 on Friday after the resignations. At these levels the shares are still not comfortably clear of a low of $14.72 that was reached last November.
Leighton's long-suffering investors are probably not surprised to learn that the resignations are shrouded in mystery. Leighton said in its statement 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 expressed concerns on that score in a letter to Mr Fernandez Verdes last month.
In its statement Leighton added that the independence deal had been a value-creator for the group, and "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 unclear how Leighton can make that statement.
Leighton's weight in the ACS-Hochtief-Leighton empire has not been fatally wounded by its project losses and share price decline. Its market value of $6.8 billion still exceeds Hochtief's market value of €4.17 billion ($5.2 billion), and is 94 per cent of ACS's market value of €5.85 billion ($7.25 billion).
The independence deal that Leighton renegotiated in 2010 did however attempt to 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 associated economic slump.
The situation needs to be clarified. The exact legal status of Leighton 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 copped a record $300,000 fine for tardy disclosure last year, and given what has happened the regulator will obviously be looking at Leighton's disclosure performance again. The group's promise on Friday morning to issue a fuller statement "in due course" needs to be delivered quickly.
FERGUSON WILL BE MISSED
This was a week that in some ways was marked by things that didn't happen. Julia Gillard didn't get rolled, and the business world was on Friday afternoon sideswiped by the consequences of the aborted coup when Resources Minister Martin Ferguson announced that he was stepping down.
The former ACTU president surprised many in the business community 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, recognised 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 the key loss for the business community in the aftermath of the failed putsch. He was probably the minister the business world respected the most, and there is no obvious replacement.
Communications Minister Stephen Conroy's attempt to rush through new media regulation rules before Parliament came a cropper, and the associated plan to scrap the antiquated rule that limits television stations to a 75 per cent share of the national population fell with it, leaving Nine Entertainment's plan to acquire Southern Cross Media in the lurch.
A takeover followed by regional TV asset sales that get the merged group under the 75 per cent limit might create the back door listing that Nine and its hedge fund owners are after, but it's a much more complicated option.
Australian Competition and Consumer Commission chairman Rod Sims also didn't block Commonwealth Bank's planned takeover of Aussie Home Loans, 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 and 12 per cent of the mortgage-broking market, depending on how you measured it, but there were several larger competitors in that space, and Aussie's actual share of mortgage lending was below 1 per cent.
The big four banks control more than 80 per cent of the home lending market between them and CBA controls 25 per cent, but adding less than 1 per cent was never going to constitute a substantial lessening of competition.
Frequently Asked Questions about this Article…
Leighton chairman Stephen Johns and independent directors Ian Macfarlane and Wayne Osborn resigned suddenly, saying they perceived a breakdown in relations with major shareholder Hochtief and believed Hochtief no longer supported an independent Leighton board. Leighton tried but failed to release Mr Johns' explanatory letter under continuous disclosure rules. Two other independents, Paula Dwyer and Bob Humphris, did not resign. The uncertainty around these departures has prompted investor concern about governance and control.
The independence deal, first struck around 2000 and reconfirmed in 2010 as ACS moved toward majority control of Hochtief, limits majority-shareholder influence by capping board seats and allowing an independent chair. Leighton has described the arrangement as a value-creator. For shareholders, the deal affects who controls board appointments and strategic decisions — so any signs it’s breaking down can materially affect Leighton’s governance and value.
After the resignations Leighton shares fell about 6.9% to $20.20. That level is roughly one-third of their peak and not far above a recent low of $14.72 reached last November. The market reaction reflects concern about governance uncertainty and the company’s past project losses.
Leighton recorded big losses on key projects including Brisbane’s Airport Link tollway and Melbourne’s desalination plant. Those setbacks helped push the group from a record $612 million profit in 2010 to a $409 million loss in 2011, before recovering to a $450 million profit the following year — a volatile earnings history that matters to investors.
Yes. Leighton was fined a record $300,000 last year for late disclosure, and the company attempted but failed to publish Mr Johns’ resignation letter under continuous disclosure obligations. Leighton has promised a fuller statement “in due course,” and the regulator is likely to scrutinise its disclosure performance again — something investors should monitor closely.
The exact legal status of the 2010 agreement is unclear from public information. The deal has been referenced in company documents and in fundraising — including a US$500 million corporate bond issue late last year — so its enforceability matters to shareholders and bondholders. Ongoing ambiguity about the agreement increases governance and investment risk until clarified.
In 2010 ACS was moving from a 30% stake toward majority control of Hochtief. Leighton has said an ACS-controlled Hochtief would not push its stake in Leighton beyond about 55% (it already owned 54%), would hold a maximum of four of up to 12 board seats, and would allow for an independent chairman. However, the arrival of a heavily geared ACS as the controlling shareholder was described as a potential game changer, particularly given ACS and Hochtief’s exposure to Europe’s sovereign debt issues — a factor investors should consider when assessing control risk.
Keep monitoring Leighton’s promised fuller statement and any regulator announcements about disclosure. Track share-price moves and company updates on the independence agreement. Review how Leighton’s project performance and governance risks fit your investment time frame and risk tolerance, and consider seeking personalised advice from a financial professional if you hold a meaningful position. This approach helps you respond to governance and disclosure uncertainty without making impulsive decisions.
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