The Mayne Report: ABC governance, Afterpay capital raising, Transurban, Musk and the Murdochs

ABC Governance and board composition

It’s hard to think of another governance blow-up quite like what happened at the ABC this past week. First up, it is extremely rare for a major institution to lose its chair and CEO in the same week, both against their wishes.

Chairman Justin Milne was foolish for moving against CEO Michelle Guthrie in such a hostile manner, especially given all the controversial written material that she and her board supporters had at their disposal.

Guthrie was willing to lawyer up as well as hire communications specialist Andrew Butcher, a former colleague at News Corp. The result was devastating as the leaks against Milne for doing Malcolm Turnbull’s bidding and failing to comprehend the concept of editorial independence finished him off in record time.

Just like with Catherine Brenner at AMP, the Milne debate will now move on to the question of whether his ABC record makes him unsuitable to sit on other boards, including because of concerns about his workload, mixed shareholder outcomes, plus his record on gender issues.

How quickly do chairs and CEOs depart in a crisis?

When listed companies blow-up, the chair and CEO will often be gone in relatively quick succession, but rarely in the same week. Here are five memorable corporate examples from over the years, but each time it was a question of months, not days:

AMP: Paul Batchelor was sacked as CEO on September 24, 2002 and chairman Stan Wallis resigned on February 25, 2003 so both were gone within five months.

ANZ: The early retirement of chairman Milton Bridgland and CEO Will Bailey was announced on April 9, 1992 with Bridgland replaced by John Gough in July and Bailey replaced by Don Mercer around the same time after being named successor on May 28, 1992. In November 1992 ANZ announced a record $600 million loss and both chairman and CEO had gone in the previous four months.

BHP: CEO John Prescott was finally sacked on March 4, 1998 and chairman Jerry Ellis announced his early retirement on August 3, 1998 although he wasn't replaced by Don Argus until early in 1999, so both exited within 10 months.

Southcorp: Rick Allert resigned as chairman after 19 years on October 31, 2003 as the Rosemount disaster unfolded and Keith Lambert was sacked as CEO on February 3 2003, so both were gone in less than four months.

Westpac: chairman Sir Eric Neal and four other directors quit on September 30, 1992, and CEO Frank Conroy quit after 15 months as CEO on December 17, 1992, in response to the bank's record $1.6 billion loss. Therefore, both went within three months.

The blood-letting at the ABC may not be done with yet as there is a pretty strong case that several of the other directors should also depart. For instance, if Michelle Guthrie was really that bad, then those directors who most heavily backed her appointment should be considering their positions.

Those directors who strongly backed their chairman in a power struggle against the CEO after reading the full Guthrie dossier should also arguably be considering their positions.

How did Milne get away with his ridiculous workload?

Alan Kohler was spot on in his commentary in The Overview on Saturday, spelling out that the ABC is not a business and needs a chairman who is not overly corporate, as Justin Milne clearly was.

It is also remarkable that Milne was allowed to get away with his ridiculous workload for as long as he did. This is how he put the portfolio together.

After an eight year stint running Telstra’s broadband and media business, Milne retired from executive life in 2010 and joined the Tabcorp board in August 2011.

As the 2012 Tabcorp annual report outlines (see p15), he became pretty busy, pretty quickly. By August 2012 he was sitting on the boards of Basketball Australia, the NBL, Tabcorp, Quickflix, Netcomm Wireless and the Sydney Children’s Hospital building fund and advisory boards.

Milne joined the Quickflix board in June 2011 and was deputy chairman under a founder executive chair when he departed in November 2012 as the streaming business limped along, although it didn’t finally appoint administrators until May 2016.

The moment when Milne’s workload seriously crossed the line was the May 2015 float of MYOB, the accounting software company which is today capitalised at $1.78 billion.

Milne was installed as chairman by private equity firm Bain, which remains the largest shareholder with just over 20%. MYOB has a December 31 balance date so its next AGM won’t be until May 2019. The company suffered a 24.4% protest against the remuneration report last year so shareholders clearly aren’t happy, particularly given the stock remains well below the $3.65 float price.

Milne was last re-elected as MYOB chair in May 2016, with more than 99% in favour, so he will be up for re-election next year and will need to have fully addressed his workload issues by then, not to mention questions about his reputation and performance.

The gender issue is also likely to dog Milne in the period ahead given complaints by Michelle Guthrie about his language. It won’t help that he is currently chairman of Netcomm Wireless which has never had a female director.

Milne first joined the Netcomm Wireless  board in March 2012 when the stock was wallowing around 12c and was anointed as chairman at the 2012 AGM by outgoing chair John Brennan.

The stock went for a huge run to hit a peak of $3.06 in April 2016, but has since crashed back to hit a three year low of 69.5c on Friday. Oh dear, time for a new chairman perhaps!

When first appointed as ABC chairman in March 2017, The Australian reported the following:

The government has not ­ordered Mr Milne to relinquish any of his current board duties, meaning he will hold three chairman roles when he starts his ­duties. But Mr Milne has advised the government that he will ­reduce his portfolio of boards in the next few months to ­accommodate his new role.

But this was after Tabcorp shareholders had delivered one of the biggest overboarding protests we’ve seen in October 2016 when Milne’s re-election was opposed by 25.2% of voted shares.

The Australian Shareholder’ Association had been criticising Milne for a couple of years about his workload and went public again with concerns last week. When The Australian ran the ASA criticisms of Milne’s workload on page 1 last Thursday, he made the following comment to the paper:

“I have just dropped one board not announced yet and one not-for-profit. But in any case I disagree with the ASA and their metrics. The companies whose boards I’m on seem happy to have me. I attend all meetings, read my ­papers and the boards I serve seem to feel my contribution is very valuable. Ask them what they think.”

Okay then, here is the timetable for upcoming AGM appearances by Justin Milne who should be tested by investors on his workload challenges, which includes also sitting on the NBN board, along with the industry fund bank, Members Equity.

The Tabcorp AGM is in Brisbane on October 17 and chair Paula Dwyer can expect some questions about Milne.

Netcomm Wireless is holdings its AGM in Sydney on November 21. He was re-elected last year with a protest vote of 12.5%, far higher than the other director up for election.

It does seems bizarre that Milne opted for another term at Netcomm Wireless last year, when the business was struggling and he was massively overloaded, as you see on page 5 of the notice of meeting.

If that is the board that he is planning to exit, then please, make the announcement and get it done.

Risky bringing in outsiders

Another lesson from this sorry ABC saga is the risk of bringing in outsiders to an organisation. If you go for an external chair and CEO at the same time, the failure or disruption risks are even greater.

Coalition Governments are always keen to change the culture at the ABC – hence the appointment of the totally unsuitable Jonathon Shier in 2000. His column today in The Australian was hilarious, but some of the suggestions were good, such as ensuring the new permanent chair is appointed before the CEO.

Insiders host Barrie Cassidy was spot on during his interview with Prime Minister Scott Morrison yesterday when he criticised the optics of Malcolm Turnbull having appointed a close mate as chairman, contrary to the advice of the independent panel, as Stephen Brook pointed out in The Australian today.

Whenever a board has a bad experience with an outsider, they normally revert to an internal candidate who represents a safe pair of hands.

Therefore, don’t be surprised to see acting CEO David Anderson land the top job given he has a proven successful record at the ABC over the past 18 years.

As for the new chairman, Kirsten Ferguson isn’t perfect. Her record as an independent director at CIMIC (the old Leighton) was certainly challenge by the Fairfax Media investigative team. She needs to answer some questions about exactly what she did at CIMIC to progress whistleblowers complaints and uphold good governance as an independent director.

The governance model of having the Prime Minister hand pick the chairman of the ABC is not ideal. Chairman selection should be a matter for the board, just as Prime Ministerial selection is clearly a matter for the Liberal party room.

Governments likes to control things, but they should get out of the business of selecting chairs, instead leaving it to the directors to determine who is the best amongst them to lead the institution.

Elon Musk deservedly cops it from the SEC

Well done to the SEC for fining Telsa and its founder over Elon Musk’s crazy privatisation tweet and also negotiating his resignation as chairman of the board.

Check out the full SEC announcement from Saturday detailing the $US20 million fines that Musk and Tesla will separately have to pay, plus the governance reforms that were negotiated.

Why can’t ASIC be this pro-active against some of Australia’s more combative executive chairs of public companies, such as Gerry Harvey?

In relation to Tesla, you can’t have an unhinged dope smoking founder as chairman of a major public company. Sure, let him stay on as CEO but insist on a strong independent chairman and a fully independent board who will moderate some of the recent poor behaviours.

Well done to the SEC!

More remarkable developments involving the Murdochs

Last weekend’s auction for control of Sky PLC was a remarkable exercise which saw Comcast emerge victorious with a knock out bid that will deliver 21^st Century Fox a cash payment of $A21 billion for its 39% stake.

In the remarkable 66 year career of Rupert Murdoch as a public company CEO, this outcome is arguably his most impressive.

Sky PLC has been a great innovator and largely controversy free during its time as a public company.

The UK Takeovers Panel initiated last Saturday’s auction (see the background and rules) after 21^st Century Fox declined to trump Comcast’s £14.75 per share offer on July 11 but also refused to say it wouldn’t.

Sky then lifted its offer to £15.67 in the opening round before Comcast came through in the final round with a knock out bid of £17.28. We don’t know how much this pipped the final Fox offer by, but we do know it values the enterprise at $A64 billion, making it one of the most expensive cash offers ever landed.

It is unlikely any of this would have happened but for Disney agreeing to pay $98.7 billion for Fox’s entertainment asset, including that 39% stake in Sky Plc. The majority of this will be in Disney shares, which will leave the Murdoch family as the largest shareholder in Disney, albeit without board representation.

As of Friday night, here are the market capitalisations of the three old media conglomerates which have been squabbling over Sky PLC:

Disney: $US174 billion

Comcast: $US162 billion

21^st Century Fox: $US85.5 billion

We also got some interesting news about Murdoch family salaries over the weekend ahead of the upcoming 21^st Century Fox AGM. The surging Fox share price courtesy of the Disney deal sent the family pay packets up to a record $208 million for the year.

It will be interesting to see if there are any protest votes against the remuneration report at the 21^st Century Fox AGM to be held, as usual, at the Zanuck Theatre, inside the 20^th Century Fox studio in Los Angeles, on November 14 at 10am.

The proxy statement is worth a read as the Nathan Cummings Foundation is once again putting up a shareholder resolution to unwind the dual class voting structure, which Rupert will be able to afford to do, whilst retaining control of the residual parts of his empire, once the Disney deal has gone through.

Afterpay prices SPP at a discount to what institutions paid

Given the regular rip-offs that retail investors suffer in the capital raising space, relative to how institutions fair, it is always nice to see a capital raising where institutions either get diluted as a class or end up paying more than retail.

We had a rare example of that, albeit a marginal one, with the recent Afterpay capital raising, which started with a $117 million placement at $17.05, a price reached through a bookbuild on an offer which had an under-written floor price of $15.75.

The placement outcome announcement talked about the follow-up share purchase plan for retail only raising $20 million, but this was lifted to $25 million after strong demand with applications hitting $36.8 million from 3500 investors.

Retail investors were offered a VWAP pricing alternative, although it wasn’t particularly generous being only the VWAP over the last 5 days of the offer, rounded down to the nearest cent. The SPP ended up bring priced at $16.95, a 10c discount to the placement price.

The level of support from retail was a touch surprising given the share price weakness, but that’s where the secondary pricing through a VWAP kicks in to protect investors on the downside.

As the graph of the share price shows, Afterpay shares cracked $20, but then plunged back to $15 after the $17.05 placement, but have now resumed its upward march to finish at $17.95 on Friday.

Looking back at hundreds of capital raising offers that have arrived in the mail over the past decade, here are some other rare examples of a VWAP pricing alternative actually delivering a lower price for retail participants in an SPP, compared with the earlier institutional placement price:

Afterpay (2018): retail paid $16.96 for $25m in a scaled back SPP based on a VWAP after a $117m institutional placement at $17.05. See announcement. 

Over Fifty Group (2010): $6.5m placement at 72c then the $15,000 SPP came with a secondary pricing offer of a 10% discount to VWAP, which finished at 64c, or a tidy 11.1% discount to the placement price. It was capped at $4m but the board commendably accepted the full $4.28 million in applications.

Challenger Financial Group (2014):  raised $250 million in a placement at $7.53 but then the $15,000 SPP was priced at $7.10, based on a 2.5% discount to VWAP. The soft cap of $30 million was lifted to accept all of the $40 million in applications. See announcement. 

Bendigo and Adelaide Bank (2012): A $150m placement at $8.45 and the accompanying $7000 SPP had a 2.5% discount to VWAP alternative. Came in at a heavily discounted $7.33 and ended up raising $46 million so a big win for retail.

From here on in, it really should be adopted as a best practice to have a VWAP pricing alternative on SPPs as a standard feature. You can debate the merits of whether it should be at the price or some form of modest discount, but it should always be there.

Transurban PAITREO will deliver more compensation to institutions

The September 17 Mayne Report served up chapter and verse on Transurban’s record breaking run of 4 renounceable entitlement offers which have raised $10 billion over the past 5 years.

There’s an interesting final post script from the outcome of the retail bookbuild where Transurban commendably repeated its new market best practice on disclosure. See this announcement. The bits we really liked were:

• Precise disclosure on participation being 53,800 retail investors.
• Rights trading was revealed to be worth $5.9 million with a VWAP of 55c and a trading range of 40c to $1.01.
• The size of the shortfall – 36.7 million securities worth $396 million at the $10.80 offer price – was disclosed to the market before the auction commenced.

No other issuer can match Transurban for transparency and fairness on capital raising although the 20c compensation payment which went to non-participating retail investors was clearly disappointing relative to both rights trading and the $1 premium payment which went to non-participating institutional investors in the earlier bookbuild.

If you look at this one month graph of the share price, it is disappointing to see the stock tumble from $11.48 to $11.13 in the two days leading up to the retail shortfall offer and then bounce back to close at $11.24 on the day after, giving bidders in the auction a one day gain of $8.8 million.

The final bookbuild price of $11, delivering just 20c for non-participants, confirms that it was better for retail to exit on market. In hindsight, perhaps Transurban should have pre-sold some of the retail shortfall into the institutional shortfall offer because we still have the problem of much bigger retail bookbuilds. In this case the institutional offer was $131 million (including $11 million in premium payment that went to non-participants), versus a retail bookbuild which was 3 times as large at $403.7 million.

Anyway, here is the full summary of the 28^th PAITREO capital raising that we’ve witnessed in the Australian market over the past 7 years since Origin Energy and Merrill Lynch pioneered the uniquely Australian capital raising method back in March 2011.

Transurban. September 2018: $4.2b 10-for-57 PAITREO at $10.80 with the stock trading at $12.06 before it was launched. There was also a $600m placement at $10.85. The $3 billion institutional offer was 96% subscribed with the $120 million shortfall clearing at a $1 premium of $11.80. The $1.222 billion retail offer offered rights trading from September 5 until September 11 and traded between 40c and $1.01 with a VWAP of 55c. The retail offer was 67.56% subscribed as 53,800 investors bought $827 million worth of new shares. The shortfall of 36.7m shares cleared at $11, raising $403.7 million and giving about 47,000 non-participants a 20c compensation payment collectively worth $7.34 million. Therefore, another win for instos who got $1 versus 20c.

That’s all for now.

Thanks for reading and keep doin’ ya best.

Stephen Mayne

Feedback to Stephen@maynereport.com