Shareholders in Washington H. Soul Pattinson were told their dividends could be threatened by the company being forced to sell assets if a restructuring proposal put forward by dissident shareholders Perpetual and M.H. Carnegie wins support.
The dissidents want to narrow the gap between the sharemarket worth of Soul Patts and the value of its assets, and have put forward a complex proposal aimed at breaking the cross-shareholding between Soul Patts and Brickworks Ltd and distributing to shareholders the shares held in TPG Telecom, one of the group's most successful recent investments, along with other measures.
"The nub of the problem" is the gap between the $3.5 billion sharemarket value of the company and the $4.5 billion value of the assets controlled by the group, Perpetual head of equity investments Matt Williams told shareholders at Friday's annual meeting. "Why do we have that gap?" he asked. "Our proposal could be the first step in reducing that."
Perpetual has a 12.5 per cent stake in Soul Pattinson, which rises to 22 per cent if the Brickworks 42.7 per cent stake in Soul Pattinson is excluded.
Mr Williams said it was not Perpetual's intention to alter the board or the management. "We've got no long-term plan," he said.
"You stay there and run the business. Our issue is not you [the board] but the valuation gap. We would all benefit if that gap were closed."
The complex proposal put forward by Perpetual and Carnegie would see Soul Patts emerge with $1.5 billion of debt but it had not "traditionally had debt at the parent level", chairman Rob Millner said. "It is unlikely [Soul Pattinson] would pay dividends with that debt."
Mr Millner said there would also be a lack of franking credits, while it was "unclear how the debt would be repaid".
"It is unlikely assets could support that level of debt. This means New Hope [the coal business] would likely be sold," he said, which would be bad for New Hope shareholders since any sale of a large block of shares would depress the group's share price and mean Soul Pattinson would be unlikely to receive the full book value of its investment.
Soul Pattinson has a 59.7 per cent stake in New Hope, which is predominantly a coalminer but has $1.25 billion in cash sitting on its balance sheet that makes up 42 per cent of its total sharemarket value.
"New Hope has some cash if we're keen to buy something in the coal sector," shareholders were told.
Mr Millner also warned shareholders that there was no certainty the Tax Office would provide rulings on the Perpetual-Carnegie proposal that would be supportive.
Mr Millner defended the cross shareholding with Brickworks, which is at the heart of the criticism of the dissident shareholders.
"While there is a long-standing relationship, it is not outdated," he told shareholders. The link was forged in 1969.