Steel maker a harbinger of post-crisis reporting

BlueScope joins a growing list of companies announcing impairment charges and cancelling short-term bonuses. As reporting season ramps up, there will be more.

In the past few months, companies with share prices that have fallen below the book value of their assets have received letters from the corporate regulator warning them about the need to justify these carrying values by conducting full blown impairment tests.

Boards have also been meeting with investors and proxy groups to discuss executive pay before the annual meeting season. The message they have received is there will be no tolerance for generous packages in those companies that have watched their share prices get torched and even less tolerance for those who hit them with asset write-downs this reporting season.

With 108 companies, including BlueScope, suffering a "first strike" a "no" vote of 25 per cent or more against their remuneration reports last year, many have decided not to test the "two strike" rule this year, which could trigger a board spill.

According to Martin Lawrence at Ownership Matters, there is a view among institutions that pay levels in the property sector are high and pay outcomes have not reflected the terrible experience for investors in the sector over the past five years. "This and a low return environment means there is a real lack of tolerance for pay increases and large bonuses," he said.

Interestingly, Dexus Property Group unveiled sweeping changes to its executive pay and Stockland recently announced an overhaul of the pay packages of its senior executives. Others will follow suit.

In BlueScope's case, investors lapped up both announcements, pushing the stock up 34 per cent by the day's close. It was in sharp contrast to a year ago when investors had almost given up on the struggling steel maker and sent the board a stern warning when almost 40 per cent voted against Mr O'Malley's remuneration package.

The board opted to announce its new approach on executive pay in tandem with $310 million of new write-downs in its Australian business.

Unlike some other companies, including BHP Billiton, which announced chief executive Marius Kloppers had given up his bonus after revealing a $US2.8 billion write-down last week, BlueScope was able to sugar coat it with the promise of a new beginning.

The deal involves the sale of 50 per cent of its Asian coated products operations to Nippon Steel for $US540 million, which is equivalent to half the company's market cap and that's after the stock soared almost 40 per cent.

It is the first positive piece of news from the company in a long time after suffering big impairment costs, a large and dilutive equity raising and hefty losses, all of which pushed the share price from $8 three years ago to 26? on Friday.

The deal with Nippon rescues BlueScope from a death spiral by giving it enough capital to grow its other businesses and at the same time resets the small value the market had ascribed to the company.

The capital gives BlueScope a few options, including the ability either to buy out the remaining 50 per cent of a small, but profitable, US mini steel mill, or expand its pre-engineered steel frame business, which makes frames for warehouse buildings such as for the big Costco supermarket building at Melbourne Docklands.

Both businesses are doing well but have been drowned out by the negative parts of its business.

BlueScope is a victim of the global financial crisis, which created a situation where the steel industry is going through its worst crisis in 60 years after the global recession caused demand to collapse, raw material costs to rise and the Australian dollar to strengthen.

It is a dramatic example of how savage the market has become on stocks that are no longer in favour. If it had not announced the deal with Nippon yesterday and instead fronted the market on results day with a $1 billion loss there is no knowing how far the share price would have fallen.

There are other companies that will be feeling similar pressure in the next few weeks as they feel the weight of the Australian Securities and Investments Commission bearing bearing down to make sure the outcome of impairment tests are bona fide and, at the same time, knowing that the annual meeting season is fast approaching and investors are out for blood.

At the end of the exercise, if a company can't show that its assets reflect fair value, then the board will be forced to make an impairment charge, which will trigger exactly what got it into the situation in the first place another round of share price falls.

In the case of stocks such as Qantas, which is trading at $1.18 after slumping at a record low of less than $1 after a shock profit warning, and Fairfax Media, which is trading at 53? a share, there will be a lot of hand wringing by the boards over their asset valuations.

Without a smart deal to counter it, a restructure of short- and long-term incentives might be the only bone they can throw investors who want a piece of their flesh.