THE DISTILLERY: Leighton restraint

Two big issues for the jotteratti this morning: Leighton Holdings' clean up and embarrassing losses and the 'is it, it isn't, yes it is' speculation about whether BHP Billiton will make an honest energy company out of the LNG wallflower called Woodside Petroleum. This is the corporate soap story of the moment and a chance for the scribblers to strut the billion dollar strategic stage. But the substantive story, the one with all the lessons for the rest of business, is the Leighton's disaster and the pickle that once high flying 'champion' now finds itself in. But before starting with that, an update from the IMF basically telling Australia nothing we didn't already know about how the economy will be travelling this year.
 
Early this morning, the International Monetary Fund issued its latest economic forecasts for the world economies. The Australian Financial Review reported on its website: "Soaring commodity prices and booming asset markets in Asia could hurt the global recovery, the IMF has warned, as it downgraded Australia's growth outlook following January's flood disaster." And AAP reported: "For Australia, the IMF expects annual average inflation to be 3.0 per cent both this year and next, the top end of the Reserve Bank's inflation target band. It expects the Australian economy to grow by 3.0 per cent in 2011, rising to 3.5 per cent in 2012. Flooding in key mining and agriculture regions is expected to subtract from growth in early 2011, but over the year this will be offset by stronger private investment in mining and stronger commodity exports, the report says." Nothing to frighten the horses there.
 
On Leighton, Adele Ferguson wrote in the Fairfax broadsheets this morning: "While the capital raising has gone without a hitch given it was fully underwritten by UBS and supported by its 54 per cent shareholder, Hochtief, not to mention being pitched at a big discount, there is a lingering fear that the bad news might not be over and profit guidance of $600 million to $650 million for 2012 might be too bullish. It prompted Moody's to put its credit rating on review. What was more telling was Moody's statement: ''The rating action reflects concerns in relation to the writedowns, and the weakening in Leighton's business profile particularly if further disappointments emerge.'' 
 
That was after Ferguson wrote on smh.com.au yesterday: "With such shocking news to staff and shareholders, chief executive David Stewart will need to show some strong leadership to pull his workforce together and convince shareholders that it can meet its new 2012 forecast. Chief financial officer Peter Gregg has a solid reputation for his financial prowess, which will help sell the capital raising to shareholders, but there are questions about why the company didn't have a bigger raising to give it more wriggle room with its gearing. Leighton will raise $757 million at $22.50 a share which virtually matches the cash impact of the writedowns in 2012. Hochtief will take up its full entitlements to the capital raising. But it begs the question why the company didn't try to raise more money to give it more flexibility. The company will also try to raise money through asset sales, including some listed investments such as Devine and Macmahon Holdings as well as Leighton Properties." The AFR was moved to editorialise on the Leighton news: "The $1.1 billion of losses and write-downs at Leighton Holdings, announced yesterday, are a valuable reminder to boards of directors of the importance of strict succession planning and the need to retain a strong measure of independence from long-serving chief executives." And to get the actual numbers right and not underbid and depend on variations to make the profit on a project.
 
And the AFR sees the Leighton cut as the first of many: "Leighton's $907 million earnings downgrade is not expected to be the last of its kind as investors brace for the effects of natural disasters, currency swings and soft consumer sentiment on corporate bottom lines.
 
The Australian's John Durie wrote on the paper's website yesterday: "Leighton chair David Mortimer faces more questions from shareholders after today's dilutive capital raising and writedowns, which smack of shareholders paying to make life easier for existing management. New boss David Stewart didn't mince words in describing the forecast loss this year of $427 million after $907 million in writedowns as "the most serious crisis the company has faced for 20 years". Those are the words you would use after convening a 6.30am board meeting to approve a $757 million capital raising underwritten by the merchants of fear over at UBS. Leighton shareholders have much to thank Wal King for but not nearly as much as King can thank Mortimer for paying the bulk of his compensation in cash. Since July 2007, King has pulled out about $62 million cash from the company out of the circa $103 million earned in his 42-plus years at the company."
 
This morning Durie wrote: "Shareholders are suffering the pain now, but past management have the cash safely in the bank or invested elsewhere. Management will often favour a capital raising with the knowledge it makes its life easier, because things stay the same, even though past mistakes have cost the company close to $1 billion. Mortimer and the board at Leighton are responsible for ensuring shareholders are the beneficiaries and that proposed actions are the right thing for the company in the long term." Woody Allen made a good film with the title 'Take The Money and Run'. Could that be adapted locally?
 
And the paper's Tim Boreham provided us with a colourful, but accurate bit of imagery: "With the flick of an auditor's quill, Leighton's vaunted $480 million full-year profit – as guided in late February – will morph into a $427 million loss. That's the magic of the construction and contracting giant's game for you: one or two contract snafus among a $45 billion book and the earnings picture becomes as solid as a shimmering mirage in the deserts outside Dubai. While the problems seem isolated to the two projects and the Middle East, the impairments also have the flavour of an old fashioned clearing of the decks following the departure of 24-year veteran CEO Wal King."
 
And Business Spectator's Stephen Bartholomeusz made a very good point in his commentary: "It is now obvious, albeit with hindsight, that the board of Leighton Holdings did the right thing when it forced long-serving chief executive Wal King to reluctantly resign last year. Had he still been in place, the $1.1 billion of losses and write-downs announced today would have destabilised the group. Mind you, had King still been there, there would have been a temptation to minimise the amount of red ink to preserve his 23-year legacy as CEO. For his successor, David Stewart, the incentive is to be as conservative as possible and to rebase the business to ensure that he doesn't have to accept responsibility for any future shocks flowing from the previous administration. While the market had been anticipating, with some precision, both the losses and the $757 million equity raising to restore Leighton's balance sheet and protect its credit rating, today's announcement nevertheless is shocking for a group with Leighton's track record."
 
This morning Boreham looks at Cellestis where a mini revolt seems to be developing: "Unmoved by the 24 per cent-plus premium on offer, a rump of long-standing Cellestis holders want to stymie the Frankfurt-based Qiagen's $3.55-a-share offer for the TB diagnostic group, unveiled last Monday. The dissidents – mobilised as the Cellestis Shareholders Action Group – reckon they account for at least 30 per cent of Cellestis's share base, enough to block the 75 per cent approval threshold under the scheme of arrangement. Leading the refusenik push is Melbourne-based private portfolio manager Gavin Ross, who claims to account for 20 per cent of the register (both directly and via clients)."
 
Fairfax's broadsheet business pages reported today: "Despite the West Australian Premier, Colin Barnett, revealing he had been asked by BHP for his view on the prospect of the global miner taking a stake in Woodside, BHP released a statement to the stock exchange declaring it was not poised to make any announcements on the issue. Early trading was stoked by weekend reports in London which claimed that BHP was poised to make a bid for Woodside, starting with a deal to acquire Shell's 24 per cent stake and to be followed by a full $46 billion takeover. The speculation pushed Woodside above $50 yesterday morning, but was at odds with the opinions of many analysts, who believe there are headwinds working against a BHP takeover."
 
On BHP Billiton and Woodside's ring a ring a rosy, Fairfax's Ian Verrender wrote: "At least three global suitors for Woodside are waiting in the wings, to see which way BHP will jump. They include Chevron, with extensive interests on the North West Shelf; BG Group, which recently committed to a $16 billion coal seam LNG project in Gladstone; and ConocoPhillips, the American group that has a joint venture with Origin in the same area as BG. Woodside has officially been in play since last November, when Royal Dutch Shell offloaded about a third of its 34 per cent stake in the company. By scattering that 10 per cent onto the market, Shell was signalling two things. First, that it wanted out. And second, it was dangling its remaining 24 per cent stake, a rare prize any potential bidder would relish."
 
The Australian's Matthew Stevens wrote this morning that there are: "three questions to ask about BHP Billiton and the intensity of its lingering ambitions for Woodside Petroleum. They are, in confirming order, does BHP believe it is a natural owner of Woodside, does it then need to acquire Shell's 24 per cent stake in the operator of their historic and fabulous North West Shelf joint venture and, finally, is BHP about to finally bite the bullet and launch a potentially contentious takeover offer for Australia's home-grown petroleum major? For mine, the answers to those questions run yes, certainly yes and no, not quite yet. At least, that seems to me to be the most likely set of conclusions to draw from the rare and necessarily cryptic communique BHP yesterday delivered to the ASX in response to some super-heated speculation about the Global Australian's immediate intentions for Woodside." 
 
Business Spectator's Stephen Bartholmeusz wrote late yesterday that: "BHP Billiton has, perhaps temporarily, doused the flames of expectation that it was about to mount a $46 billion bid for Woodside Petroleum. Whether or not BHP Billiton has ambitions to eventually own Woodside, with Shell holding a 24 per cent stake in the big LNG group that doesn't fit within its strategies, sooner or later there is going to be a restructuring of Woodside's ownership. BHP Billiton said today the market was fully informed and it wasn't aware of any basis for the speculation. To reinforce the point it said it was not relying on the confidentiality exception within the continuous disclosure regime. There is logic, if not current fact, to the speculation. Ever since Shell off-loaded a 10 per cent interest in Woodside last November, raising $3.34 billion in the process, it has been apparent that the remaining 24 per cent stake is non-strategic." And the AFR reported: "BHP Billiton says it is not aware of any basis for speculation it is examining a bid for Woodside Petroleum, despite West Australian premier Colin Barnett saying the resources giant sounded him out on his reaction to a potential bid late last year."
 
And that saw The Australian's Bryan Frith make the telling point: "The market in Woodside Petroleum shares is arguably uninformed following apparently contradictory statements yesterday by BHP Billiton and the WA Premier Colin Barnett. The essential difference between Barnett's remarks and BHP's carefully considered denial of the media speculation is that BHP bears liability for remarks it makes to the ASX. There may be a move by BHP on Woodside eventually, but it appears from BHP's statement yesterday that it's unlikely to be anytime in the near future."
 
And News Ltd tabloidist, Terry McCrann says BHP Billiton's CEO, Marius Kloppers is in the gun: "BHPB knew it didn't have to talk to Shell any time soon. But that it had to do the buyback. Not doing it, when its balance sheet was bulging with cash, would have been all but an announcement it was planning a takeover. After three failed deals that cost BHPB shareholders a cool $1 billion, he's got one last throw. It's got to make sense, and it's got to succeed. Now that its buyback is done and dusted, BHPB can entertain the idea of – confidential – talks.
 
And finally, the AFR's Chanticleer columnist was a bit off the pace this morning with this commentary: "In resurrecting Bank of Melbourne, the chief executive of Westpac Banking Corp, Gail Kelly, is putting all her chips on the table and rolling the dice."