Sweeteners and snubs in a Macmahon love triangle

Macmahon shareholders have severed their construction arm for better or worse, leaving Sembawang suitors rubbing their heads and Leighton holding an uncertain prize.

Indian firm Sembawang should expect a bouquet of flowers from the board of Macmahon Holdings over the next few days after the latter's shareholders voted to approve rival Leighton Holding’s bid for its construction assets.

Leighton has long been the preferred suitor of Macmahon chairman Ken Scott-Mackenzie and his board, even as Sembawang persisted with its approach – first matching and then besting Leighton’s offer.

But rather than derailing the Leighton proposal, Sembawang’s unrelenting interest in the group likely tipped the scales in favour of the local bid. And there were scales that needed to be tipped – a fact easily overshadowed by the almost comical dog-with-a-bone relentlessness of the Indian suitor’s pursuit.

Among the Macmahon board’s emphatic urgings for shareholders to vote for the Leighton bid – in what has became a large pile of of communiqu to the Australian Securities Exchange – was an understated warning.

An independent analysis by Ernst and Young found the proposed Leighton transaction, valued at $29.6 million, was "not fair but reasonable”, coming in below its own estimated valuation of the assets in a range between $31.3 million and $35 million. Macmahon’s independent directors argued the $1.4 million variance from the fair value range was "not material in the context of Macmahon’s forward strategy”.

They added that the board estimated a vote against Leighton's bid would cost the group more than the $5.4 million difference between the Leighton and Sembawang offers in project delays. Further to that, during yesterday’s address to the extraordinary general meeting, directors said the Leighton deal did not factor into the potential benefits associated with the cap on losses for its Urban Superway project. And that's not to mention the damage it would do the group’s new strategy.

That strategy is, of course, Macmahon’s exit from the construction sector – the driving force behind this long-gestating saga. In the group’s own words, the sale of its construction assets represents a "realignment” of strategy to "deliver a full suite of mining services, which seeks to reduce Macmahon’s risk profile and deliver consistent, sustainable earnings for our shareholders”. Scott-Mackenzie cited increased competition, together with a shrinking construction market, as factors limiting the growth potential of the sector and in turn leading to aggressive pricing and contractual terms and conditions, with resultant risks.

Macmahon’s board said Leighton’s local reputation, and the fact 38 per cent of Macmahon’s construction business was already in joint venture with Leighton – it is also, of course, one of Macmahon’s major shareholders – would not only make it a viable suitor, but offset such risks.

The board has sold the idea that a sale to Leighton would facilitate a smooth transition. However, it has simultaneously flagged a hit of between $10 and $20 million to its full-year earnings on the back of the transaction in its interim report today.

On the other hand, Sembawang’s various proposals, despite financially besting Leighton’s, were deemed to be both inferior and lacking in detail. The board said it was not capable of being practically implemented and required Macmahon to retain significant exposure and risk. Put simply, the bid itself was a risk.

And so Macmahon set about selling security. If stability was what the board was trying to sell its shareholders then the, at times, volatile back-and-forth between Macmahon and Sembawang combined with the threat of legal action over alleged negotiations preceding the target’s initial approach to Leighton, the Leighton offer was by comparison afforded a credibility and stability to which it may not ordinarily have a right. And yesterday’s vote shows that it worked.

Sembawang’s salvo following the vote was as spiteful as it was blunt, with the group plainly stating Macmahon’s construction woes had nothing to do with risks within the sector but "poor executive management”.

"When the single biggest competitor of your company, who is also a shareholder who had their stake for sale on the market from June last year, dictates singular terms there is something wrong,” Sembawang said in a statement to Macmahon shareholders. "When your board refuses to engage with a company because of an agreement which has not been made known to the shareholders there is something wrong.”

But the missive may not be the last to fall onto Macmahon shareholders, as Sembawang warned the saga wasn't over. "We'll be back," it said portentously, in the final sentence of its terse five-paragraph letter.

In either case, the harsh words were made more stark by the fact that Macmahon’s half-yearly earnings report was released today – less than 24 hours after the vote. That shareholders were effectively made to vote to save or sell the construction arm of the business without seeing the most recent black and white figures seems like a convenient oversight.

As expected, the construction division booked a loss of $110.1 million, an 875 per cent decline on the previous corresponding period, somewhat strengthening the Macmahon board’s case that construction was underperforming. Not inconsequently, the group also swung to an overall interim loss of $37.6 million from the $23.2 million profit recorded in the previous corresponding period. What the timing does do is raise questions of transparency, especially in the wake of Sembawang’s claims of executive mismanagement.

And so rather ironically, while the Macmahon board has sold the Leighton deal to shareholders in the name of stability, the group will move into waters that are anything but certain.

Although there has been a recent rally in the iron ore price and the general consensus is that the mining boom's best phase is near its end, Macmahon, in moving away from a diversified portfolio to a streamlined strategy centred on mining services, is gambling on the resources sector. The board may be convinced of the "certainty a mining focused future will provide Macmahon” but it’s the shareholders who have rolled the dice with this approval. And it will be their dividends that either bear the fruit of that gamble or that suffer if Sembawang’s rhetoric turns out to be prophetic.

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