THE DISTILLERY: NAB pressure cooker

The commentariat explains why NAB's shareholders are grumpy, and breaks down Graincorp's unyielding attitude towards ADM.

The discontent on the National Australia Bank register for the lender’s ongoing problems in the UK was there for all to see at yesterday’s annual general meeting. Australia’s business commentators are acutely aware that pressure is building on NAB chairman Michael Chaney, who has revealed that he will not seek re-election when it comes up again in three years time.

It’s at least a double shot from The Distillery this Friday, with a number of senior columnists looking at GrainCorp’s argument for a higher price from Archer Daniels Midland and how chief executive Alison Watkins might sell it to her new hedge fund shareholders. Also this morning, the Federal Reserve has blown hopes that the Reserve Bank of Australia might be able to take some heat out of the Australian dollar out of the water.

But first, Fairfax’s financial services editor Eric Johnston writes that the 21 per cent protest vote that NAB has copped against its remuneration report has shaken the lender.

"This marked one of the biggest protest votes issued to a major bank since the introduction of the non-binding vote seven years ago. The poll fell just short of the 25 per cent ‘first strike’ threshold that, if breached, would have put the bank's board a step closer to facing a spill. Large investors have become increasingly frustrated over the bank's track record of negative surprises, including more than $1 billion in losses on a portfolio of troubled credit instruments since 2008 and this year's UK shock that ultimately cost NAB more than $700 million in restructuring charges and provisions.”

The discontent about NAB’s situation in the UK, courtesy of its mistimed Clydesdale and Yorkshire Bank plays, has gradually been settling on Chaney. The Australian’s John Durie reports that the chair is keenly aware of the register’s disappointment in the bank’s performance.

"Chaney acknowledged the concerns and pledged to address them but will have to do so under the public spotlight and a hostile share register. He told this column the board still strongly believed it had the right strategy and no radical changes were planned on strategy or personnel… He confided after the meeting that, when next due in three years time, he will not stand for re-election, by which time he would have served 10 years on the board. Succession planning will then also be under the spotlight at board and management levels, depending on performance.”

The Australian Financial Review’s Andrew Cornell similarly focuses on Chaney’s position, but broadens the discussion to what we’re not talking about when it comes to the top positions at NAB, as well as the other big four.

"Really though, the interesting issues were those not addressed: we know NAB shareholders are indeed comfortable with Cameron Clyne’s running of NAB but there’s a lingering grumpiness from institutions about Chaney himself. At the Westpac meeting, chairman Lindsay Maxsted defended the massive amounts bankers are paid by referring to standing practice but failed to answer the fundamental question. If running a big four bank is such a desirable job, the pinnacle of an Australian banker’s career, why are those wanting to do the job paid so much extra to do it?”

Moving on to GrainCorp, Australia’s business commentators have focussed largely on two angles to its rejection of Archer Daniels Midland’s improved offer. The first is the reasonable multiples to use when establishing fair value. The second is the challenge facing GrainCorp boss Alison Watkins to convince her new batch of hedge fund shareholders that her board should hold out for that higher price.

Starting with The Australian Financial Review’s Chanticleer columnist Tony Boyd, it’s simply a matter of record that recent transactions in the agricultural sector have been noticeably higher than the price ADM is offering at the moment.

"At $12.20 the proposal is a multiple of about 8.2 times earnings adjusted for debt used to fund current grain marketing inventory. Recent transactions have been at 10 times earnings, including the Glencore takeover of Viterra, the Viterra takeover of ABB Grain and the Agrium takeover of AWB. A transaction at 10 times GrainCorp’s earnings would be closer to $14 a share.”

Business Spectator’s Stephen Bartholomeusz says there is some disagreement about whether these benchmarks apply to GrainCorp.

"ADM believes GrainCorp is a much more cyclical company than its northern hemisphere counterparts while GrainCorp, experiencing a bumper grain crop, believes that the growth in its processing activities to the point where they constitute about half its business will muffle any cyclicality. There is, however, little doubt that if some of those recent offshore agribusiness deals were used as a guide to value, GrainCorp would be worth considerably more than $12.20 a share, providing a reasonable basis for GrainCorp’s stance. There is also the tactical consideration that ADM would have to again bid against itself to get access to due diligence. Why give it access, and lose negotiating leverage, unless its indicative price is close to GrainCorp’s own view of value?”

Meanwhile, The Australian’s Bryan Frith reminds readers that hedge funds swooped onto the GrainCorp register once news broke that ADM was having a crack at $11.75 a share.

"The hedge funds will be unhappy that GrainCorp has not at least agreed to allow ADM to undertake due diligence to see whether it changes the Illinois-based group's current view of value, enabling negotiations which could lead to an offer price that GrainCorp would be prepared to recommend. GrainCorp may therefore come under questioning at the AGM to justify its stance.”

The Australian Financial Review’s Michael Smith has got an interesting detail for his readers about how the target’s chief executive, who’s also a board member of ANZ Bank, is handling the changing dynamic.

"It is understood she was in London last week meeting some of the company’s new hedge fund investors and spent the weekend in the Middle East where some of GrainCorp’s biggest customers are based.”

Elsewhere, Fairfax’s Malcolm Maiden says Federal Reserve Chairman Ben Bernanke made history overnight by specifically tying his quantitative easing program to an unemployment rate target of 6.5 per cent.

"The Fed held between $US700 billion and $US800 billion of government debt when it launched its first QE programme at the end of 2008 and now holds almost $US2.9 trillion of government debt, bank debt and high-grade securitised residential mortgage debt. A double-barrel programme that ran for 22 months could boost its balance sheet to about $US4.8 trillion – but it is possible that unemployment will take more than 22 months to get to 6.5 per cent, keeping the Fed in the market for longer. That's because the fall in US unemployment owes more to Americans giving up their search for jobs than it does to outright job creation: 60 per cent of the fall since October 2009 is due to lower workforce participation. If participation rises again, unemployment will fall more slowly.”

How the Reserve Bank of Australia can compete with this sort of market power in its own efforts to bring down the Australian dollar is a serious question. This is something the The Australian Financial Review’s Philip Baker is very mindful of.

"Australia was always going to attract further flows but, as the US continues to devalue its own currency, it might just mean any global investor thinking about buying has just been reminded there’s no need to wait. The $A was little changed on Thursday but it has risen around 9 per cent against the US dollar since June as investors readied for more quantitative easing.”

In other economics news, The Australian’s economics correspondent Adam Creighton notes not just that this year marks the 150th anniversary of the British parliament’s Companies Act of 1862, which ushered in the era of limited liability of modern corporations, but also that the debates about the wisdom of this decision are remarkably similar today.

"Conservatives today typically laud the success and spread of companies, rightly pointing out the relationship between corporate activity and economic prosperity. But their intellectual forebears were equally right to decry their shortcomings: ‘A disputed, legally suspect and morally dubious organisational form,’ said one. The obscene corporate salaries and lavish corporate perks that attract the ire of socialist activists today were foreseen by the father of free-market economics, Adam Smith, more than 200 years ago.”

Fairfax’s Adele Ferguson surveys the shifting plates of Australia’s clearing system with new players emerging as potential rivals for the ASX. For good measure the senior columnist throws in the fact that it’s her understanding the Australian Securities and Investments Commission (ASIC) is looking at the issue of broker identification, and possibly client identification, for trades made on the Australian Securities Exchange. The regulator was unavailable for comment.

And finally, Fairfax’s Michael Pascoe revisits a point he’s made earlier, that coalition voters are gloomier about the economy than Labor voters. This is part of the Westpac-Melbourne Institute consumer confidence survey, where the latest edition shows the gap between the sentiments of coalition and ALP voters has widened.