THE DISTILLERY: Leighton's limits

The SGX-ASX story hung around like a bad smell on Saturday in many columns, although some of the contributions were more rounded, less hysterical than earlier in the week. Other commentators with an eye to the wider market focused on the Leighton story, of which we should hear and read a lot more today. The 'will they, won't they' speculation about BHP Billion's intentions towards Woodside got another kick along with a London leak that may have also been put down by other reports. But it's the Leighton loss and recap that will be the big story today – and possibly for the year so far – as it represents the fall of a 'champion', with spillover into questions about management and boardroom performance and a bitter corporate brawl in Europe.
 
Adele Ferguson, who's been leading on this story, wrote in the Fairfax broadsheets this morning: "The soap opera at Leighton Holdings will continue to unfold today, when the market digests whether write-downs of about $1 billion, hundreds of millions of dollars in losses and a possible capital-raising of up to $800 million will be enough to restore its splattered image. As of last night the company was planning to raise up to $800 million, at a rough price of about $22.50, or a discount of more than 20 per cent. The method was still not clear and the board was still to approve. Based on a $1 billion write-down, it would need to change its profit guidance for 2011 from a profit of $480 million to a loss of more than $500 million."
 
Fairfax's Philip Wen wrote: "Leighton's gearing level is at the very limit of its internal target of 40 per cent. A significant downgrade would leave it in danger of breaching its covenants and threatening its investment grade credit rating, meaning a sizeable capital raising would be needed. But the longstanding takeover tension between Leighton's majority shareholder, Hochtief, and its Spanish predator, ACS, adds a further layer of complexity to Leighton's predicament – and its desire to minimise the amount of equity it needs to raise. Hochtief, which owns 55 per cent of Leighton, is understood to be loath to stump up any further cash for equity in Leighton. But any dilution in its stake, combined with a fall in the Leighton (and therefore Hochtief) share price, would make it easier for ACS to build its stake."
 
The Australian reported today: "Leighton Holdings is expected to reveal this morning a recapitalisation plan for the group that is likely to involve its major German shareholder. It is understood Leighton, which has been in a trading halt since Thursday, was still locked in meetings with its 54 per cent owner Hochtief last night, but sources were optimistic a plan would be announced today. The Hochtief and Leighton boards are expected to meet this morning ahead of a pre-market announcement."
 
And John Durie also wrote, perceptively on Saturday in his column in The Weekend Australian: "Full details of the Leighton problems will be revealed on Monday, but even without knowing exactly what has gone wrong it has become exhibit 101 on what happens when the boss stays too long. Wal King had a stellar 42-year career at the company. He was boss for 24 of those years and until 2007 had Dieter Adams (sic, it's Dieter Adamsas) as his right-hand man. Adams hung around on the board until last year. Construction companies take risks and sometimes they fail but Leighton has managed to talk its way out of many scrapes through its infamous contracts variations. The black hole that has emerged is clearly not easily fixed."
 
The Australian Financial Review's Chanticleer also wrote on Saturday: "One of Australia's celebrity bosses of the past two decades, Wal King, is about to suffer a humiliating blow to his reputation." Yep! This is a far more important story for the market. Its the loss of another 'champion'. And the paper wrote this morning: "Leighton is working on a capital raising of up to $900 million to repair its balance sheet as it prepares to announce write-downs and revisions to its earnings guidance totalling up to $1 billion as early as today." 
 
In a story on The Australian's website yesterday The Sunday Times of London reported BHP Billiton, the world's largest miner, is drawing up plans for a $46 billion takeover of Woodside Petroleum, the Australian oil and gas producer. It is understood the FTSE 100 group is holding detailed talks with Royal Dutch Shell, Woodside's biggest shareholder. Shell would give BHP its Woodside shares, and in return receive some of the Australian company's best assets, including the giant Sunrise gas field. Once BHP has agreed the deal with Shell, it would launch a full takeover offer for Woodside shares, which are listed in Sydney. UBS is advising Shell on its options." If true it yet another leak from the sieve known as the City of London of confidential information about the goings on at BHP and for that matter, Rio Tinto. And the AFR wrote: "BHP Billiton is in talks with Royal Dutch Shell about the purchase of its 24.3 per cent stake in Woodside Petroleum as a precursor to a full $40 billion-plus takeover of the West Australian oil and gas company."
 
But The Australian reported today: "Royal Dutch Shell is playing hardball on a possible sale of its 24 per cent stake in Woodside Petroleum to BHP Billiton, its local chief declaring yesterday that Shell was in "no hurry" to do a deal. Speaking on the sidelines of a conference in Perth last night and ahead of this week's annual Australian Petroleum Production and Exploration Association meeting, Shell Australia chair Ann Pickard moved to hose down reports out of London at the weekend that a sale of its stake in the Perth-based oil and gas company was imminent. "There are no commercial discussions," Ms Pickard said, choosing her words carefully. "I'm not in a hurry to do anything. Woodside is a great company." She declined to elaborate on whether any discussions had already taken place."
 
And some papers reported that Shell is taking a stake in a big WA gas project. Here's the Financial Times report: "Royal Dutch Shell has struck a deal with US rival Chevron to take an equity stake in a $25 billion Western Australian natural gas project that is due to be given the investment go ahead later this year. The Chevron-operated Wheatstone project is one of nearly a dozen large liquefied natural gas projects in Australia that Shell and other big oil and gas companies are developing to satisfy demand from China and other energy-hungry markets in Asia. Shell will take a 6.4 per cent stake in Wheatstone and will supply gas into the project from one field in the region where it holds a minority interest. Terms were not disclosed." Wheatstone will get bigger over time. Shell also has a 25 per cent stake in the nearby Gorgon project of Chevron. 
 
Unlike the near feral commentaries in News Ltd papers on the SGX-ASX story, Fairfax's Malcolm Maiden explained the government's reservations on the weekend: "Wayne Swan had two broad concerns about the proposed $8 billion takeover of the Australian Securities Exchange by the Singapore Exchange. One of them was technical, and the exchanges were unlucky to be tripped up by it. They had told the Foreign Investment Review Board that all existing ASX businesses, including settlement and clearing, would remain incorporated in Australia, and subject to Australian regulation. But their deal opened the Reserve Bank's eyes to a weak spot in the regulation of the ASX's clearing and settlements system, and Swan says it must be fixed before any new deal is proposed....Swan believed, and was told by FIRB, that the claimed strategic benefits of the union – the quid pro quo for Singapore's exchange gaining strategic control – could not be relied on."
 
The Australian Financial Review asked on Saturday "Everybody's playing the stock exchange global get-together game so why did the ASX fail to make a successful case to government?" But the Singapore exchange was the one making the bid and the application, wasn't it up to them to make the case? That was a further point made by the AFR, which even its main commentator, Chanticleer, failed to note on Saturday when he said it would be "helpful of Swan and his colleagues stopped deceiving themselves that Australia is a significant player". That also is a good point, but not the central reason why the deal fell over.
 
Once again it was another writer on the Fairfax broadsheets, Ian Verrender, who gave the whole SGX-ASX story some context, just as Malcolm Maiden did. Verrender wrote on Saturday: "since Labor was elected in 2007, it has approved 99 foreign transactions and, until yesterday, refused none. So it would appear the architects of the proposed merger between the Singapore and Australian stock exchanges concentrated almost exclusively on the sale price and, incredibly, just ignored or underestimated the potential problems on the national interest front. For those who actually use the ASX to trade, the institutional and retail investors who rely upon it as a service, the proposal simply didn't make commercial sense. Why does the dominant exchange end up the junior partner? What possible benefits would Singapore bring to the table given Australian corporations have shunned the island state? From a political viewpoint, it would be ludicrous to cede control of a vital part of the financial architecture – particularly the clearing and settlement of stock trades – to a country that has essentially operated as a one-party state since independence, dominated by a single family with tentacles stretching across the political and business landscape."
 
Many of these points were ignored by critics in the News Ltd and Fairfax papers who just wanted a sale and used the rejection to score political, not business points. For example, a headline in The Weekend Australian on a story about the deal said "Outrage as Swan kills off ASX merger". But the story itself started far more mildly: "The Australian Securities Exchange and its counterpart in Singapore will need to pursue other growth opportunities after Wayne Swan formally rejected the pair's $8 billion tie-up on national interest grounds. But the Treasurer has held the door open to future global hook-ups with the ASX while declaring that Singapore Exchange's bid would have seen jobs and capital leave Australia's financial markets for Singapore. "It became clear to me that it was a no-brainer that this deal is not in Australia's interest," Mr Swan said. The decision – delivered early yesterday – was quicker than expected and is understood to have sparked private outrage among the parties involved." So the headline outrage was actually only "understood". Curious. 
 
And a touch of reality and not so much knee-jerk in John Durie's analysis on Saturday in The Australian: "The fundamental argument against Singapore was its insistence on control, which meant it – not the ASX – would decide on the next move. Singapore is a small country full of great ideas, and in many ways a lesson to Australia in making the best of its assets, but its insistence on control makes it a hard dance partner. The chance to build another bridge into Asia is now sadly lost, due in part to the stock exchange's poor handling of the public debate and poor decision-making processes in Canberra. The merger should have been approved with conditions but Swan, as Treasurer in a minority government, was not prepared to throw valuable political capital away when the upside looked so limited." A good point. 
Michael Pascoe wrote on smh.com.au yesterday: "Australian media tends to paint every interest rate rise as a terrible thing that will cause impoverishment, starvation and loss of hair. 'Tain't necessarily so, at least the starvation bit. It doesn't make sense to view everything through the eyes of struggling first home buyers – unless you are one of that minority. It's common enough to see comments about Australian rates being terribly high compared with all those ''lucky'' Europeans, Japanese and Americans, but it's much better to be living with our mildly firm rates than the very low rates of most of the rest of the developed world. Our rates are symptomatic of a strong economy with good growth prospects, which means plenty of employment opportunity. The near-zero rates elsewhere generally indicate sick economies going nowhere fast with matching high unemployment."
 
The Australian's economics editor, Michael Stutchbury wrote on Saturday: "On the face of it, his budget already should be back in the black given the terms of trade are at 140-year highs and the jobless rate is below 5 per cent, close to its "natural" level. For the budget, this should be as good as it gets. By now, the budget debate should be about whether to put mounting surpluses into a stabilisation or sovereign wealth fund. Instead, Australia faces a hangover of budget excess. In just over a month, Swan's fourth budget is likely to reveal a blowout in this year's forecast $41 billion deficit, in part because of the Queensland floods and cyclone and Japan's tsunami. While he and Finance Minister Penny Wong can't do much about this, their bigger problem is that the mining boom economy is not gushing out the tax money like it did before the financial crisis." Mr Swan was adamant yesterday that we would have a surplus in 2012-13.