Not a squawk as fee hunters descend on Duet
Duet owns pipelines and transmission towers, which might sound a tad droll. But don't be fooled by this veneer of hard assets; the real value of Duet resides in its intangibles, in the assets of its imagination.
It was only late last year that shareholders voted for Duet's "Internalisation Proposal". The effect of this proposal was to pay $100 million to Duet's managers - Macquarie and AMP - to chuff off and not be managers any more.
The other upshot from the "Internalisation", or "Restructure", as it was also monikered, was to increase the number of entities in the Duet Group. And so it was that, only eight months ago, Duet entities rose from four to six.
This week, Duet shareholders dutifully voted in favour of the "Group Simplification Proposal", the effect of which was to reduce the number of Duet entities from six to four - yes, back from six to four, again, all for a bargain basement price of $10 million in fees. Naturally, Macquarie and AMP snipped $5 million in "Simplification Fees", as you do.
A cynic might inquire as to why Duet did not execute its "Simplification" at the same time as its "Internalisation". A cynic might even inquire as to what the blazes a company was doing paying hundreds of millions, year in year out, to outsider parties to manage such a ludicrously labyrinthine structure in the first place. The answer would indubitably be fees.
But a cynic has no place in the rarefied world of deals struck between fund managers, who spend other people's super, and company managers, who spend other people's super. This is the domain of the great fee hunter.
In any case, if you wanted to know why - it is probably tax - you could ask one of Duet's two boards - or somebody from Allens, Ashurst, PwC or KPMG who shared in Duet's latest $10 million symphony of fees.
Citi Research sallied forth with a glowing report on McMillan Shakespeare, a salary-packaging and novated-leasing company - all right, if you insist, tax loophole stock - just four weeks ago.
As they bolstered their "buy" recommendation with a spruced-up profit forecast, the Citi analysts noted that although the "perceived risk" of regulatory action was high, "our view is that actual risk is often materially overstated".
Anybody in the business of predicting the future, this writer included, knows the feeling. The Citi call was a shocker of the first order.
Out of the blue, four weeks later, new Prime Minister Kevin Rudd unveiled his plan to tighten the fringe benefits tax - insisting, that is, that people claiming tax deductions for a work car actually use their car for ... ahem, work.
McMillan Shakespeare went into trading halt, and emerged a week later minus half its market capitalisation.
It wasn't just Citi; it was the whole market that had missed the risk. Here was one of the glamour stocks: 20 per cent compound growth in revenue and profits each year, ennobled by a rampaging share price and a P/E ratio of almost 17.
McMillan directors, it should be said, were sage enough not to leave all their eggs in one basket. According to 14 disclosures to the ASX since 2010, the company's management and board managed to offload $120 million in shares and options.
Moral of the story No.1: watch what directors are doing. Moral No.2: if you are playing in loopholes, be prepared to be closed down at any moment.
McMillan had asked to suspend trading until the election, whenever that might be, but the ASX wanted the market to stay open.
Tony Abbott has pledged to jettison Rudd's FBT changes should the Coalition win office. Such would constitute a reprieve for McMillan but no panacea. The damage is done to the premium in the stock. The spectre of the Coalition backtracking would see to that.
McMillan, like the rest of the loopholes industry, and the car industry, squealed blue murder when the FBT changes were announced. Hundreds of thousands of jobs would be lost, billions shredded in value. It was a disaster they said, as the prospective toll of victims swelled with each press release.
Intelligent Investor, historically the best of the market tip sheets, made no attempt to conceal its pride. It was never a fan of the stock and it reminded its faithful this week.
Frequently Asked Questions about this Article…
Duet Group's "Group Simplification Proposal" was a plan to reduce the number of Duet entities from six back to four. Shareholders approved it this week, accepting the change even though it involved paying around $10 million in fees to advisers and managers to complete the simplification.
The earlier "Internalisation Proposal" (also called a "Restructure") was approved late last year and resulted in Duet paying about $100 million to its managers, Macquarie and AMP, to stop acting as external managers. That restructure also increased the number of Duet entities from four to six at the time.
According to the article, Duet increased from four to six entities as a result of the "Internalisation" or "Restructure" approved last year. The recent "Group Simplification" vote reversed that move, bringing the structure back to four entities. The piece suggests fees and possible tax reasons played a role in why the changes were executed in separate steps.
The article says Macquarie and AMP collectively took about $5 million in "Simplification Fees" as part of the overall $10 million paid. For investors, these fees matter because they reduce shareholder value and highlight how management and advisers can profit from corporate restructures.
Citi Research upgraded McMillan Shakespeare with a positive profit forecast, but weeks later Prime Minister Kevin Rudd announced plans to tighten fringe benefits tax (FBT) rules. McMillan suspended trading and then emerged with about half its market capitalisation. The episode shows that perceived regulatory risk can quickly become real and materially affect share prices.
The article highlights two lessons: watch what company directors are doing (McMillan directors and management disclosed around $120 million in share and option sales since 2010), and be aware that businesses relying on tax loopholes or favourable regulation can be closed down quickly, creating sudden investment risk.
Citi analysts acknowledged high perceived regulatory risk but believed actual risk was often overstated. The market and many analysts were caught out when the government announced FBT changes, demonstrating that analyst forecasts and market sentiment can underestimate the speed and impact of regulatory policy shifts.
Everyday investors should note that restructures and internalisations can involve large fees paid to managers, advisers and law firms, which can reduce shareholder value. The Duet story suggests asking why changes are done in stages, monitoring fee disclosures, and being skeptical of complex structures that appear to create opportunities for recurring fees.
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