THE DISTILLERY: Transfield tremors

Jotters questions Transfield's future, while one suggests Australia facing a classic case of "Dutch disease".

The departure of Transfield Services chief executive Peter Goode has created an M&A-inspired discussion on two fronts. Firstly, the company is more vulnerable to predators with leadership transition following almost four years of a lifeless share price. Secondly, a poorly timed acquisition has helped put Transfield in the position it’s in now.

Also this morning, we’ve got a keen company forecast watcher finding something to crow about this earnings season despite the gloom.

Firstly, Fairfax’s Adele Ferguson lets readers in on the speculation that Transfield will be in a shakier position if a suitor comes knocking.

"It wasn't that long ago that UGL was believed to have made an approach to buy Transfield at more than $4 a share, which is more than double its current price. Chatter resurfaced with news that Transfield chief executive Peter Goode had resigned just a week after a board reshuffle when the biggest shareholder, the Belgiorno-Nettis family, which own 10.5 per cent of stock, decided to resign its two board seats and appoint an independent representative. This development has prompted at least one investor to question whether the family, namely Luca and Guido Belgiorno-Nettis, are about to reduce their stake in the company, which would result in an overhang of stock in the market or make it easier for UGL and Transfield to get together. A merger would create some significant synergies.”

Business Spectator’s Stephen Bartholomeusz explains how a transaction helped bring Transfield undone, adding that the KGB Interview with CSL legend Brian McNamee shows the difference in destinies for companies that pay too much for acquisitions and those that don’t.

"A significant factor in the investor discontent about Transfield’s performance has been Goode’s $575 million acquisition of the oil and gas drilling and services group Easternwell in 2010, which has contributed to a string of earnings downgrades. The market view was that, whatever the merits of the strategy, Transfield paid too much. McNamee, who has made two company-reshaping acquisitions as well as a number of smaller deals during his 23 years as CSL’s chief executive said CSL tried to buy well when making acquisitions "because, of course, one of the big parts of TSR (total shareholder returns) is making sure your purchase price is as low as possible." He said CSL bought assets at a time when they weren’t fully valued. Value, of course, is better understood by the market with hindsight – there was a period when the market wasn’t as enthusiastic about the ZLB acquisition as McNamee.”

Meanwhile, Fairfax’s Malcolm Maiden has a terrifically funny opening as he takes stock of this reporting season that’s almost three-quarters done. The writer says companies are enthusiastic users of the ‘C-word’…challenging.

"With the reporting season three quarters complete, most companies have met their challenges and survived, however. What's more interesting is what they are saying about the year that's coming, and it's not pretty. A total of 117 major companies covered by Goldman Sachs that account for 77 per cent of the market's total value had reported on their June year or June half by the start of this week. They had been expected to deliver modest earnings growth, and have done so… There has been a surprisingly large number of surprisingly good profits, with 42 per cent of the companies in Goldman's latest sample beating the investment bank's profit forecasts. That is the best performance since the first phase of the global financial crisis ended in 2009.”

In other domestic economic affairs, Fairfax’s Peter Martin has got his hands on a report from boutique US advisory firm Variant Perception, warning about the problems Australia faces when the mining boom is over. Most readers will be well aware of the warnings by now, with Variant arguing that Australia is a "classic” case of Dutch Disease.

Fairfax’s Ian Verrender doesn’t add too much to the discussion about market competition in his piece this morning. However, he does have a fantastic opening about how Noah would definitely moor his ark in Australia: "Two airlines, two brewers, two retailers.”

The Australian’s economics editor David Uren says neither side of politics is really addressing the disconnect between government tax receipts and spending pledges.

Fairfax’s Michael Pascoe urges Federal Reserve Chairman Ben Bernanke not to opt for a third round of quantitative easing, while expecting that he won’t reveal anything concrete at Jackson Hole. The Australian’s Robin Bromby investigates how significant an affect Bernanke could have on commodity prices.

In company news, Fairfax’s Insider columnist Ian McIlwraith is at a loss to explain why Toll Holdings felt the need to actually pay former chief executive Paul Little "no compete” money.

The Australian’s John Durie speaks to outgoing Australia Post chairman David Mortimer after 11 years of service.

And finally, The Australian Financial Review’s Chanticleer columnist Tony Boyd shares some interesting details about WorleyParsons boss John Grill.


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