THE DISTILLERY: Leighton lament

Many of our jotters have been obsessed by the AGX-ASX separation decision this week (as a couple are today), so they may have missed the importance of the European Central Bank's rate rise last night (and Portugal asking for a bailout); a possible shutdown in the US where a game of financial brinkmanship is underway between the Democrats and Republicans over the budget (not the federal debt limit, which is some weeks away) and the state of affairs in Japan and New Zealand where the economies continue to be battered by the impact of the quakes. And here, there's been a developing story that all have missed, bar one, the financial problems at Leighton Holdings. 

Fairfax's Adele Ferguson spotted the story early this week, and wrote yesterday on smh.com.au that: "Australia's biggest construction group Leighton Holdings had been in crisis meetings for the past few days before finally requesting a trading halt as the board assesses the size of a writedown for some key projects and its Middle Eastern business, which have significant financial and operational issues. I wrote a column in Monday's BusinessDay that said the Leighton board was meeting on Tuesday to discuss the size of the problems and questioned how it would still justify its 2011 profit forecast of $480 million. Since Monday the share price has fallen from $29.40 to a close yesterday of $28.99 as investors traded in a vacuum waiting for some sort of announcement from the company. It is now in a trading halt until Monday as the board completes a review of an announcement into it its profit guidance. When Leighton revised its profit guidance in February to a pre-tax profit of $480 million from a net profit of $510 million, Leighton watchers were sceptical that it had not gone far enough and questioned why." Good one.

This morning, Fairfax's Elizabeth Knight discovered the same subject: "Leighton's David Stewart and his board messed up this fundamental job. Perhaps this is because Stewart was the second-in-command to the former Leighton head King. Perhaps the board was tardy about acknowledging the size of the mess in Leighton because they had been sitting around the table approving all the projects that are now collapsing. Perhaps Stewart and his board were just optimistic."

And The Australian woke up as well: "Leighton Holdings is considering a hefty capital raising to shore up its balance sheet after indicating it would miss its full year profit forecast of $480 million. The nation's largest contractor entered a trading halt yesterday ahead of revealing what would be its third consecutive profit downgrade since former chief Wal King announced he was stepping down in September last year. Leighton is understood to be looking at raising between $600 million and $800 million after writedowns against major projects including the Victorian desalination plant, Brisbane's Airport Link and its Middle East joint venture, Al Habtoor."

And the paper's columnist, John Durie, abandoned the SGX-ASX and wrote: "Wal King was dragged off the throne of Leighton in December, after 24 years as chief, and within months the company has discovered a big black hole, speculated to have burnt as much $1 billion. No one who knew was shouting the figure from the rooftops yesterday. All one source said was: "Imagine the worst and double it." The known problems were well flagged by company finance chief Peter Gregg at the February results briefing, starting with the financial difficulties in its Middle East venture with Habtoor Leighton, the Queensland floods, Brisbane Airport Link and the Victorian desal plant, which according to recent reports is six to 12 months behind schedule, mainly because of the weather. The Leighton board met earlier in the week to review the latest quarterly numbers, and the fact it has taken a two-day trading halt suggests something is awry." This hole didn't just start happening from December. It's obviously been there a while. Watch the blame game start.

Elsewhere, here's a one day wonder. The Sydney Morning Herald said this morning that: "Joe Hockey has retreated from his suggestion that family and other trusts should be taxed in the same way as companies although he has not given up on pursuing the change. It is understood the shadow treasurer backed away yesterday after an angry response from conservative Liberals and a conversation with the Nationals leader, Warren Truss. The Nationals have long fought moves to alter the tax arrangements of family trusts because they are popular in the party's rural constituency. In a speech to the Institute of Chartered Accountants on Wednesday, Hockey floated taxing trusts at the company tax rate of 30 per cent. He also proposed flattening income tax rates to a similar rate as part of a wider reform." Can't see him for the dust.
 
Elsewhere, The Australian Financial Review reported this morning that "Johnson Property Group, one of the largest private land developers in NSW, will go into voluntary administration, weighed down by loans of more than $100 million." And the paper also reported that: "The future of Arafura Pearls is uncertain as the Perth-based company enters into negotiations with lenders days after acknowledging a series of financial irregularities." Oh dear, "financial irregularities".
 
The AFR also reported: "A potential government shutdown in the United States could derail optimism about the country's economic recovery and raises fears about a catastrophic default on government debt." Probably won't happen, hopefully, but if it gets close...
 
Malcolm Turnbull is like that old Beach Boys song, he gets around, as Fairfax's Malcolm Maiden points out: "Malcolm Turnbull certainly gets around. He's the opposition's telecommunications spokesman. But he also turned the wick down on the ASX and Singapore Exchange's chances of getting into bed together halfway through last month when he said the deal was hard to love. The opposition was flying under the radar on the issue when Turnbull said the deal would be easier to embrace if it were structured more as ''an equal partnership''. It underlined that even if the deal was not blocked by the Foreign Investment Review Board or the Treasurer, it would struggle to secure enabling legislation. ASX and the Singapore exchange put new submissions to FIRB yesterday following confirmation by the Treasurer, Wayne Swan, on Wednesday that the deal will be blocked unless it is changed in Australia's favour. And yesterday, Turnbull did it again. He took time off from attacking the national broadband network to become the first senior politician on either side of the fence to openly declare that Australia needs a sovereign wealth fund."
 
Maiden also made another good point: "Turnbull, a former boss of Goldman Sachs, no doubt noted that Goldman finally moved to buy the outstanding 55 per cent of its Australian investment banking operation yesterday. The deal is structured as 80 per cent cash and 20 per cent Goldman shares, and values the former JBWere operation at $1.2 billion. With Goldman in charge, there will be IT upgrades and expanded Australian dollar trading. Goldman will be more a formidable competitor here now – and you won't see Swan blocking the deal." And the AFR's Chanticleer wrote this morning: "Whether financial services deals do or don't make sense in this day and age has an enormous amount to do with technology." Meanwhile, The Australian's Nabila Ahmed wrote: "the hope is the deal struck between the US investment bank and its Australian joint-venture partners yesterday, valuing the local offshoot at about $1 billion, will receive a warm welcome by its 133 shareholders last month, at least partly on those grounds. Goldman Sachs's Australian partners believe the merger, which brings with it full access to the Wall Street bank's $1 trillion balance sheet, will give them an added competitive edge in investment banking and securities trading, so it can take on the No 1 ranked UBS." But The Australian's John Durie remarked: "The buyout is obviously a step forward for the local franchise to be fully integrated into the Goldman franchise, but local industry ramifications are not large."
 
Fairfax's Stuart Washington says: "On Monday Seven Media Group is likely to be sold to the Western Australian Newspaper business for $4.1 billion, well below the independent expert's valuation of between $4.6 billion to $5.1 billion. The sale ends a four-and-a-half-year private equity odyssey for Seven, which is divided between Seven Group Holdings and the private equity player Kohlberg Kravis Roberts. It also signals the end of the odd couple marriage between Seven and Stokes's earth-moving equipment business, Westrac. As well the deal elevates WAN into a national media player, more than tripling its enterprise value."
 
The AFR has found support for a carbon tax, reporting this morning: "A carbon price will have a minimal impact on company earnings and investment will be lost offshore without it, the chief executives of Australia's largest investment managers and superannuation funds say."
 
Michael Pascoe gave the Qantas austerity budget model a test flight yesterday. He wasn't impressed, as he wrote on smh.com.au: "There's been an amazing amount of bluff and bluster from Qantas CEO Alan Joyce over the past week. If you only read the headlines, you'd almost think Qantas was tightening its seat belt. It's not. Putting 21 tired old 737s and a couple of near-ancient 767s up for sale makes for a good headline, but the real surprise is buried in the fine print: despite the well-publicised impact of natural and nuclear disasters, the oil price, fragile domestic tourism, currency damage to inbound travel and the annoying John Travolta flight safety video, Qantas is expanding its domestic and international capacity in the second half of this year by 8 per cent and 7 per cent respectively. That is not belt tightening. Alan Joyce might be fiddling with the buckle, but the belt is sitting loosely over a pair of comfort-fit pants with the hidden waist expander as the airline goes for a second helping of roast turkey. And if Boeing can ever get its 787 to stay airborne for longer than the Spruce Goose, Qantas is looking at dessert with a shovel."
 
Yesterday The Australian's John Durie was still flogging the poor animal known as the ASX-SGX deal: "Instead, an elaborate web of spin is being weaved so Swan can avoid wasting precious political capital on a deal which, frankly, is not a make or break one. Tragically, Swan's efforts are being seen around the world as more trade barriers being erected by a government which is irrational and impossible to deal with. The best that can be hoped is come Sunday Swan provides a real reason for rejecting the deal and not a fabrication which can be rectified by simple contractual obligations between Australia and Singapore."

And this morning, Fairfax's Elizabeth Knight was found on the same tired steed: "The Singapore Exchange has declined the opportunity to amend the terms of its takeover offer for the ASX based on the disposition of the federal Treasurer, Wayne Swan, to disallow the marriage. This is not surprising given the Singaporeans have nowhere left to go. Swan has all but blocked the deal because of perceived systemic risks to the financial system. According to reports yesterday, Swan appeared to doubt the workings of the exchange and Australia's regulatory ability to protect the integrity of the clearing and settlement system. This is far-fetched. Just because ownership of the Australian stock exchange changes there is no reason that the government cannot have an overarching role in its regulation."

And there's more onboard the poor animal. The Australian's Bryan Frith is still on his back as well this morning, flogging away: "Swan has come under criticism for failing to spell out his reasons, which appears to have taken him by surprise. Now talk of a review because of perceptions of a systemic risk to the financial system is leaking out of Canberra. It may be politically expedient, but such a review is unnecessary and likely to prove a waste of time and money. Australia's regulatory systems generally are among the most transparent and well regarded in the world. APRA's oversight of the banks and other financial intermediaries is regarded as having saved Australia form the worst of the GFC." Poor SGX-ASX is overloaded, call the RSPCS – The Royal Society for the Protection of Cruelty To Stories. Others made this point the day before.

And finally, Tim Boreham wrote on The Australian's website yesterday: "New Woolies chief Grant O'Brien may not be inheriting as big a trolley load of troubles as the market thinks when the boy from Penguin waddles into the big chair in October. While price wars in bread, milk, beer and even chicken have dominated the checkout talk, investors may have factored in too much gloom on food deflation. That's the theory of Morgan Stanley's retail watchers, who argue that Coles – the discounting aggressor – is acting rationally and that the price cuts are likely to be confined to a few items. Food inflation – which was actually negative in the second quarter – is likely to have ticked up in the third quarter."