The Mayne Report: Australian Open, franking, Royal Commission, Village Roadshow and more

Another cracking Australian Open for Tennis Australia

First up today, let’s talk about last night.

The men’s final might have been a little one-sided, but there’s also an argument that Novak Djokovic played the greatest game of tennis in history as he smashed Rafael Nadal who had smashed everyone else in getting to the Australian Open final without dropping a set.

There’s plenty of excellent coverage elsewhere on the actual tennis, so what about the commercials and governance of the Australian Open?

No matter how you cut the numbers, Tennis Australia and the Victorian Government must be delighted with the commercial success of the Australian Open which is set to deliver a record profit in 2018-19.

As was noted by The Australian’s John Stensholt last August, 2017-18 delivered a net profit of only $6 million for Tennis Australia, but that is expected to more than double in 2018-19 off the back of a record breaking Australian Open which attracted 765,672 through the gates, almost half of whom were not from Victoria.

If those attendance numbers are maintained, stand by for a record profit in 2019-20 when the new $60 million a year broadcast contract with Nine kicks in.

Nine will reportedly suffer a $10 million cash deficit having paid Seven $48 million to surrender the final year of its broadcast contract to instead focus on the cricket.

But Nine should also be delighted given it lifted the ratings whilst the Big Bash has suffered significantly from over-exposure.

Tennis Australia has managed to more than double its revenue over the past 5 years through a combination of record crowd numbers, surging media rights and booming sponsorship, which is increasingly dominated by global brands such as Kia, Emirates and Chinese liquor company Luzhou. This John Stensholt piece in The Australian provides an excellent summary.

Governance at Tennis Australia has been through a pretty rough patch in recent years with board divisions and ASIC charging former President Steve Healy and former deputy chair Harold Mitchell for allegedly manipulating the 2013 TV rights negotiations with Seven (see earlier commentary on that in the December 3 edition last year.)

But the management team has been stable for the past 4 years under hard-charging CEO and tournament director Craig Tiley, whose growth ambitions even extended to trying to take over management of the entire Melbourne Park precinct from the Victorian Government.

The board must have been a little distracted at the time, because Tennis Australia got publicly slapped down last year by then Victorian Sports Minister John Eren, who wrote:

“If the government was of the disposition to open the precinct to independent management, it is likely the government would run an open, global tender in the interests of securing the best commercial arrangements for the Victorian community.”

His spokesman further added when approached by The Age: “Melbourne Park is the people’s precinct – the government has no current plans to privatise its management."

If that’s the case, maybe the Victorian Parliament should re-claim Yarra Park, home to the MCG, which it has handed over to the non-government entity known as the Melbourne Cricket Club, shafting the City of Melbourne in the process.

Tennis Australia was simply trying to emulate that model, although a quick look at the balance sheet of the Melbourne and Olympic Park Trust, shows that taxpayers are sitting on net assets of $2 billion in the precinct and there’s no club, such as the MCC, which can claim ownership of any of it.

A record Australian Open also means record rental payments from Tennis Australia to the MPOT, which last year reported an 18% lift in revenue to $111.7 million and a net profit, after depreciation, of $15.8 million.

An extravagant new 8 storey headquarters for both the Trust and Tennis Australia has been constructed in recent years as part of the $1 billion investment that Victorian taxpayers have signed up for in order to secure the rights to the Australian Open until 2036.

Investing in sporting infrastructure is one of the few topics which tends to get bipartisan support in Australia and what the Victorian Government and the major sporting codes (particularly Cricket, Tennis and AFL) have achieved in Melbourne is something to behold.

If only the same could be said about Sydney which has been divided over what does look like a reckless decision to spend $2 billion demolishing and rebuilding two perfectly good stadiums, apparently to please shock jock Alan Jones and a few other vested interests.

Finally, isn’t it great to see Tennis Australia led by a female President in Jayne Hrdlicka, something the AFL and cricket has never tried.

Governance of sporting associations is often fraught, particularly when they are federations and small states are given too much power.

This can lead to excessively long Presidential reigns which has occurred at Tennis Australia when you consider this honour board of past Presidents:

Brian Tobin: 1977-1989

Geoff Pollard: 1989-2010

Steve Healy: 2010-2017

The current board structure sees the state and territory tennis associations electing 6 directors and then the board selecting another 3, from which the chair is chosen.

After significant turnover in 2016, shortly before the exits of Steve Healy and Harold Mitchell, there is now a lot of new blood on the Tennis Australia board but it looks relatively good.

Hrdlicka is doing a good job as President, although her time must be stretched as CEO of A2 Milk. Diane Grady and Graham Bradley are the two other strong independent additions with the only gap now being a respected past player.

Harold Mitchell was a dominant and divisive influence at Tennis Australia during his decade on the board so it is good that he finally departed late last year as the ASIC process heated up. How that plays out will be fascinating to watch.

All up, the commercials and governance of Tennis Australia are looking strong, they just need to address junior participation challenges, particularly with girls who these days are far more attracted to team sports.

There’s also the question of managing spoilt brats like Nick Kyrgios and Bernard Tomic.

Frankly, I reckon both are a write-off and Tennis Australia should just focus on building the next generation of talent, which is looking promising at the moment.

Crank up those fully franked dividends

As we move into the half year reporting season in February, let’s hope to see a record haul of fully franked dividends ahead of the likely Labor move against cash rebates.

A number of listed investment companies such as AFIC, Mirrabooka and Brickworks Investments, have already decided to increase dividend payouts and it has been interesting to observe the tactic of selling down shares in BHP and Rio Tinto (the two largest holders of excess franking credits) in order to fund higher dividends.

It has been disappointing that Rio Tinto hasn’t been able to come up with a capital management strategy to better distribute its circa $12 billion in surplus franking credits. The same goes for BHP which is sitting on franking credits worth $15 billion.

Both companies have international boards and share registers which appears to have taken the focus off getting those franking credits into the hands of low-tax Australian shareholders who can really use them.

A similar phenomenon was evident back in 2014 when Woodside Petroleum proposed a special capital management deal with Shell which didn’t put enough store on the value of franking credits for Australian shareholders and was consequently voted down.

With a Labor landslide on the cards and Shadow Treasurer Chris Bowen showing no sign of backing down, it is time for Australian boards to unleash the biggest possible franked dividend payments they can muster without leveraging their balance sheets too much.

This includes conservatively managed companies controlled by billionaires, such as Harvey Norman and Reece, which should allow the independent directors to make the dividend decision, given the conflict of interest that the billionaires have being in the top tax bracket.

Royal Commission final report to accompany bigger compensation payments

If you’re an investor in the financial services sector, you’ll be nervously watching for Ken Hayne’s final report this week as the banking royal commission wraps up and we get further into the implementation phase.

If there are two certainties that will flow, it is that there will be more turnover of senior executives and directors of the major financial services providers, along with an increase in compensation payments to ripped off customers.

Plus, if Labor gets elected in a landslide as everyone is expecting, stand by for an avalanche of reform in financial services constrained only by the discipline of not impairing industry fund and retail investor investments in the Big Four to the point where the wealth effect causes a major political and economic backlash.

Financial services shareholders will ultimately end up paying billions to compensate customers and they will also want to see the executives responsible sharing the pain through loss of jobs and cuts to remuneration. Given that listed financial services company are currently capitalized at almost $500 billion on the ASX, $10 billion in tax deductible compensation payments isn’t particularly material in the scheme of things.

AMP has already suffered a massive clean out at its upper levels, so it is NAB and IOOF which are the two institutions most likely to usher in significant personnel change and the case for a clean out is strong.

Expect commissioner Hayne to name a few names to help them along in that task.

NAB chairman Ken Henry and CEO Andrew Thorburn are the two most interesting players to watch.

I was always a little uncomfortable with the situation of a former Treasury Secretary in Ken Henry going on to be a Big Four bank chairman. Regulators and public servants should ideally not join the industry they used to oversee, because it creates a perception of cosiness. It also means current and future regulators might go soft on their industry in the knowledge that lucrative employment arrangements await them down the track.

For instance, should the last two Reserve Bank governors, Ian MacFarlane and Glenn Stevens, really have joined the boards of ANZ and Macquarie respectively?

Let’s hope Commissioner Hayne has some strong comments to make on this issue and we don’t see any more Treasury Secretaries and Reserve Bank governors crossing to the other side of the table.

 Kirby vs Kirby at Village Roadshow

We in the media love a good stoush so this unique Village roadshow battle between the Kirby brothers cannot pass un-remarked.

I’ve long been unimpressed with Village’s governance from the excessive salaries, related party transactions, aggressive tax planning, poor disclosure and lack of independent directors. The recent airing of dirty linen has just further highlighted some of these issues.

Therefore, anything which unscrambles the controlling shareholder situation is a good thing.

The gang of 3 – CEO Graham Burke and the two Kirby brothers, John and Robert - have jointly controlled more than 40% of the voting stock ever since the death of founder Roc Kirby in January 2008.

We now have a situation where it is 2 against 1 with John Kirby attempting reform through a media and legal campaign which is seeking a new CEO, new independent chair and potentially a change of control.

It is very rare to see two siblings duking it out like this, although we did have the dispute between Gretel and James Packer in recent years and the Murdoch boys, Lachlan and James, now look like going their own ways after working together for the past 4 years.

The strangest thing about the Village battle has been the company’s refusal to even acknowledge the dispute through an announcement to the ASX.

The ASX should be forcing some sort of update, rather than requiring investors to follow the action through the press, particularly when most of the noise is emanating from John Kirby, who is still on the Village Roadshow board.

This Fairfax feature on January 19 was particularly instructive as both sides are clearly extensively briefing journalists. It sparked this interesting piece (pay) in The AFR contemplating the various options and scenarios for the parties.

John Kirby is clearly as mad as a hell and is not going to take it any more. It would make sense for the controlling duo to take him out, but with such longstanding equity arrangements (ie pre-1985) the tax bill will be large. So be it.

Another new CEO clears the decks as Challenger shares routed by 17%

We love a good list at The Mayne Report and one that hasn’t been rolled out as yet for The Constant Investor is the list of new CEOs who come into the job and immediately announce disastrous results, usually through big one-off write-downs.

It’s quite a common phenomenon but doesn’t reflect well on the board who probably should have persuaded the previous CEO to admit there were problems earlier, although that is harder than it sounds considering the egos of CEOs.

No long serving CEO likes to exit with a profit downgrade and that seems to have been the issue at Challenger Financial Group, which we have added to our list in the following terms:

Challenger: while they weren't sweeping one-off write-downs the new CEO Richard Howes triggered a 17% share rout when he announced this profit downgrade on January 23, 2019. He had worked with Challenger since 2003 and the transition from long serving predecessor Brian Benari was announced on October 26, 2018 with a proposed hand over in January. Howes only formally joined the board on January 2, 2019, so the profit warning took just 3 weeks to deliver. 

Here are 19 other favourite examples of a new CEO “clearing the decks” since the early 1990s.

AMP: the $5.542 billion loss in 2004 was the final clearing of the decks by new CEO Andrew Mohl from the disastrous move into the UK over the previous 25 years.

ANZ: when Don Mercer replaced Will Bailey as CEO in 1992 he cleared the decks and reported a $600 million net loss due to a huge surge in bad debts caused by Paul Keating's recession we had to have and reckless property lending. 

AMP: AMP recorded a net loss of $403 million in 1999 after new CEO Paul Batchelor took a $1 billion write off on its investment in GIO, something he had driven as finance director at the time. 

Aristocrat Leisure: the gaming machine maker had a net loss of $106 million for 2003, after new CEO Paul Oneile wrote down the value of contracts and business operations. This was laughable given the business had positive cash flow of $200 million for the year and book asset were already only a fraction of market value.

BHP: When Paul Anderson and finance director Chip Goodyear took the reins in the late 1990s they cleared the decks and declared a then Australian record $2.3 billion loss for BHP in 1998-99 with write-offs across the board but especially in the Magma Copper division. This was after incumbent John Prescott announced $3 billion in write-offs and a $1.47 billion loss in 1997-98.

Davids Holdings: once again, it was the new broom CEO in action as former Packer finance man Don Bourke took over the running of the company and came up with massive write-downs and a $240 million net loss in 1996-97.

Fairfax Media: new CEO Brian McCarthy took an axe to the balance sheet with write-downs of $447.4 million announced in February 2009, producing a net loss of $365.3 million. However, this still left claimed net assets of $4.5 billion which completely dwarfed the market capitalisation for a number of years.

Futuris: Malcolm Jackman came in as the new CEO in September 2008 and managed a net loss of $329 million in the December half after $346 million in write-downs. However, with debt of $1.2 billion and a market capitalisation below $300 million, the write-downs could have been much larger because net assets were only cut from $1.3 billion to $850 million.

GIO: analysts were expecting a $160 million profit but after just five weeks in the job, new CEO Nick Steffey took an axe to reinsurance and workers compensation provisions to come up with a net loss of $26.7 million for 1997-98, a move that sparked an opportunistic hostile bid by AMP.

Insurance Australia Group: new CEO Michael Wilkins wrote down the value of its UK assets by $350 million in his strategic review unveiled a few weeks after taking over as CEO in 2008. The final losses from the UK adventure finished at $1.3 billion so he could have gone further at the time.

Lend Lease: new CEO Greg Clarke announced a $715 million loss for 2002-03 after $945 million worth of writedowns in the value of its US, Asian and European real estate businesses.

Mayne Nickless: new CEO Peter Smedley cleared the decks in 1999-00 with $243 million in write-downs which produced a net loss of $174 million as the share price surged and then later plunged again as the Smedley miracle proved to be a mirage. 

MIM: the perennially struggling miner recruited Nick Stump from Comalco and he did the usual thing and cleared the decks in his first outing to announce a $216 million bottom-line loss for 1994-95.

Newcrest: announced a $2.21 billion statutory loss in August 2014, mainly due to write-downs on Lihir, just 6 weeks after new CEO Sandeep Biswas had formally succeeded Greg Robinson on July 4.

Orica: the chemical giant reported a $195 million bottom-line loss for the year to the end of September 2001 after new CEO Malcolm Broomhead came in and cleared the decks with large write-offs and job cuts before overseeing an impressive turnaround. 

Sausage Software: the IT company was renamed SMS Management and Technology but with the likes of Steve Outtrim, Wayne Bos and Gil Hoskins out the door, new CEO Lloyd Roberts cleared the decks in 2000-01 reporting a net loss of $264 million. 

Southcorp: John Ballard replaced Keith Lambert as CEO and announced a net loss of $922 million for 2002-03, blaming difficult trading conditions in the UK and Australia and a lower contribution from super premium wines because of the smaller 2000 vintage.

Tabcorp: plunged to a net loss of $164.6 million in 2007-08 after writing down its Victorian pokies licence by $487.7 million and taking a $194 million charge against its wagering business as the new CEO Elmo Funke Kupper wielded the axe.

Woolworths: new CEO Brad Banducci announced $955 million in write-downs in July 2016, 5 months after he took over when the board had already initiated more than $3 billion in write-downs, largely related to Masters.

Wanted: strong non-left independent female to run against Kevin Andrews

After 28 years in Parliament as the Federal member for Menzies in Melbourne’s affluent eastern suburbs, Capital C conservative Kevin Andrews is poised to become the father of the Parliament, replacing out-going Queensland LNP Senator Ian Macdonald as the longest serving MP, if he can survive the coming Labor landslide in May.

There’s a lot of talk about independents, such as Zali Stegall, running against Tony Abbott in Warringah and Julia Banks is reportedly going to take a crack at Nepean to try and oust Dutton-supporting Health Minister Greg Hunt.

But so far there has been little discussion about who could or would emulate Kerryn Phelps, Cathy McGowan or Rebekha Sharkie and defeat Abbott’s closest mate in the Parliament in Menzies.

I had a crack in 2016 and spent $55,000 (see full disclosure on what) polling 6.72% in Menzies, the second highest independent vote in Victoria after Cathy McGowan in Indi.

The regular calls keep coming about running again in 2019, but alas, this is now unlikely because the better half, Paula Piccinini, is currently the mayor of Manningham, which takes in most of Menzies.

The mayor is regularly out and about with Kevin in the community. They spent 6 hours together on Saturday (see this picture with some new citizens) as Kevin dished out his Menzies awards to community leaders and then mayor Piccinini presided over the Australia Day citizenship ceremony where Kevin also delivered a speech and shook the hand of 122 new Australians from 25 countries.

The mayor has declared that it wouldn’t be appropriate for her husband, formally known as Mr Mayoress in Manningham, to contest Menzies as an independent, so the hunt is now on for alternative independent candidates.

Most of the 500 local Liberals don’t want Kevin as their candidate. Last August, an ultimatum of sorts was issued to the Victorian Liberal Party when this email was sent to the 20 members of the Administrative Committee. In essence, it said that if the local preselection was abandoned in Menzies, I would run again as an independent.

The Conservative cabal which then dominated the Admin Committee ignored this and went ahead endorsing all incumbent Victorian MPs, so, as the local Manningham Leader reported, it was game on for another tilt in Menzies.

So, who is an alternative independent who could threaten to win the seat or, at the very least, deliver the crucial preferences needed to get the Labor candidate Stella Yee over the line and rid the Parliament of a corrosive Dutton-supporting conservative?

Julia Banks is the Liberal-turned-independent incumbent in the neighbouring seat of Chisholm and would be best placed to take on Kevin, although she has her eyes set on Greg Hunt in Nepean.

The main problem with no independent in the Menzies field is that Kevin would potentially recover much of the 6.72% I took off him in 2016, allowing an argument that he should re-contest in 2022 based on the strength of his personal following and relatively good performance in 2019.

Unlike what Russell Broadbent is saying in Monash-McMillan (“I’m not prepared to hand over the electorate to the Labor Party. I believe that’s what would happen in Monash if I retired.”) Kevin can’t say that in 2019 because his Menzies primary vote crashed from 58.88% in 2013 to 51.72% in 2016 (ie almost one in every 8^th Liberal abandoned him) and there was a 3.89% two party preferred swing against him.

Throw in a redistribution which has narrowed the margin from 10.6% to 7.9%, as Antony Green explains here, and Menzies has gone from being ultra-safe with a 14.5% margin in 2013 when Tony Abbott was elected PM, to at risk with a 7.9% margin going into a coming Labor landslide with an increasingly toxic incumbent.

Our campaign team did a Reachtel poll of Menzies voters in 2016 and these results very clearly showed that the electorate supported Malcolm Turnbull and didn’t want Kevin Andrews to be undermining him in favour of Tony Abbott.

But despite pledging loyalty to Malcolm Turnbull in order to win votes locally in 2016, Kevin Andrews was then the 5^th MP to sign the notorious Dutton  petition calling for a spill of the Liberal leadership, even after Malcolm helped fund this personal letter to Menzies voters in 2016 to help see off the independent challenge.

This sort of wrecking and disloyalty won’t play well in Menzies, nor will Kevin’s decision to vote against same sex marriage even though his electorate voted 57% in favour.

Get-up! declined to get seriously involved in 2016 but are making noises about deploying heavily against Kevin as this story in the local Murdoch paper last week explains.

It doesn’t look like Labor is trying very hard thus far, although candidate Stella Yee is hoping to raise some money at a campaign fundraiser and launch in Menzies next Sunday, after which she may have some resources to deploy.

Give Kevin Andrews’ attitude towards women, if Labor was serious about its gender credentials it would be heavily deploying in Menzies. Thus far, it only seems to be Emily’s List which is lending a bit of support to Stella Yee.

That’s all for now.

Send any feedback, including on the situation in Menzies, to Stephen@maynereport.com or give us a call on 0412 106 241.

Do ya best, Stephen Mayne