The Mayne Report: Macquarie raising, Chinese investment, Frydenberg’s dividend campaign & more

Macquarie goes with the selective placement, yet again

Macquarie Group completed a $1 billion institutional placement this morning and will shortly launch an uncapped $15,000 Share Purchase Plan for its 130,000 retail shareholders at the same price or a 1 per cent discount to VWAP, whichever is the lower.

Before we get into some analysis about this, have a read of this extract from the transcript of the Macquarie Group AGM in Sydney last month:

STEPHEN MAYNE: Chair, I would like to put the case on behalf of the shareholders for Macquarie to do a Share Purchase Plan over the next 12 months to raise some fresh capital without doing an institutional placement.

What we see from everyone except for the LICs is major corporates need the money in a rush, do a placement, and then they do the little afterthought with the sop to the retail shareholders with the usually ridiculously restricted SPP because it's more capital than they need.

For Macquarie, as a great innovator, worth $43 billion, with $6 billion surplus capital, raising $500 million wouldn't be here nor there in terms of your capital ratios. However, I suspect you may come to market if there are some capital penalties or some APRA changes, and I read the tea leaves and sense you may choose to raise capital.

Rather than doing the conventional, in a rush, "Let's do a $1 billion placement and then we will do the afterthought with the retail" - you have 130,000 cashed-up enthusiastic, supportive retail shareholders. I want to put it to the Board that you come out with an orderly SPP to raise maybe $500 million. Don't do what you have done in the past, which is limit them to $5,000 or $10,000; you do the full $15,000. You do it at a time when your price is high so the cost of capital is relatively low. You go with a fixed price, which is at the market price. Then you throw in the VWAP minus 2, 2.5 per cent - don't do 1 per cent, don't do 5 per cent, which you have done in the past - so that we can all comfortably support the raising, knowing that if the market tanks, we are covered by the secondary pricing of the VWAP model.

I want to briefly take you through the history of the four placement SPPs you have done since 2006 to make this case. So you have raised –

Macquarie chairman PETER WARNE: Stephen, are you looking for a job in our advisory business?

STEPHEN MAYNE: Just briefly –

PETER WARNE: We would like to keep them to two minutes, so quickly.

(Stephen Mayne then lays out the history – go here if you want to read it.)

PETER WARNE: Thank you for that.

STEPHEN MAYNE: I am just asking you to do an orderly raising. In other words, do not do another placement. When we get to the final item of business today, we are going to have another discussion about why on earth are you increasing your capacity to do institutional placements?

Are you looking at raising $6 billion? The only reason for that item being on the agenda today is if you need to raise $6 billion from a placement.

So I am saying don't raise a dollar from a placement. Come to your retail shareholders, not only if you need money, but just do it anyway, because $500 million is not material here nor there and you have a bit of a make-good to do based on that track record that I have just explained to the Board.

PETER WARNE: Stephen, thank you for your advice, which I will undertake to take on board and consider if we are going to raise any capital. I think the relative interests of shareholders, both institutional and retail, are something that we always take into account if and when we look to raise capital. I take on board your views. But, other than that I don't think I will explore that further. Thank you very much.

ENDS

Okay, so first things first, just weeks after paying out $1.23 billion in dividend payments on July 7, the Macquarie board have made a deliberate decision to reject the very explicit and detailed request to blaze the trail with a retail-only capital raising. Thanks for nothing.

If they really needed capital, why didn’t they just cut the dividend or tweak the DRP so more investors opted for stock rather than cash.

However, having gone for the placement-SPP raising, it should be noted that the SPP does have three appealing features which the board consciously chose to embrace, namely:

• It is uncapped, so if the market moves favourably they could conceivably receive more than $1 billion in applications;
• Shareholders can apply for the SPP maximum of $15,000 worth of new shares when Macquarie has previously restricted some of their SPPs to $10,000 and as little as $5,000; and
• There is a secondary pricing formula of a 1 per cent discount to VWAP so retail shareholders may get the benefit of buying the stock for around $1 less than the market price and an uncapped discount to what the institutions have paid in the event of a market crash.

This is a reasonable outcome but it is still disappointing that Macquarie has never done a pro-rata capital raising and they rejected an opportunity to pioneer the SPP-only capital raising option which they were asked to do.

Indeed, this is the sixth placement-SPP that Macquarie has done since 2006, which is a record amongst the current crop of ASX100 companies.

As was outlined in the July 30 edition of The Mayne Report, the first 5 offers raised $3.96 billion and rolled out as follows:

October-November 2015: $400 million placement at $80 to fund Esanda purchase followed by an SPP needlessly capped at $10,000 at the same $80 offer price (actually $78.40 adjusting for the $1.60 dividend) with a VWAP -1 per cent alternative which raised $147 million, so the retail component was 26.8 per cent of the $547 million raising. See outcome announcement.

March-April 2015: $500m placement at $73.50 followed by an SPP at the same price capped at $10,000 per applicant with a secondary pricing based on a 1 per cent discount to VWAP. 18,000 holders applied for $170 million of stock so the retail component finished at 25 per cent of the $670 million raising.

May-June 2009: A $540 million placement at $26.60. Retail investors were offered a 5 per cent discount to VWAP in the subsequent $15,000 SPP which didn’t come into play as 55,000 investors took up $669 million worth of new shares at $26.60. The offer was uncapped and not scaled back and retail finished up with 55.3 per cent of the $1209 million raising. A rare example of the institutions being diluted.

May-June 2007: A $750 million placement at $87 a share, which was followed by a $79.4 million SPP at a fixed price of $87 a share with no VWAP alternative pricing. Retail scored 9.5 per cent of the $837 million raising.

May-June 2006: A $700 million placement at $66 a share, which was followed by a $5000 SPP at the same price with no VWAP alternative price which only raised $9 million or just 1.2 per cent of the total $709 million raised.

A total of $2.89 billion or 73 per cent of the $3.96 billion raised in those 5 deals came from the institutional placements with $1074.4 million coming through the SPPs.

With a good marketing program and favourable market conditions, wouldn’t it be great if the Millionaire Factory produced only the second $1 billion-plus SPP in ASX history. Check out this SPP league ladder based on size of raising, with ANZ top of the pops after its $2.2 billion SPP in 2009, with the next biggest being CBA’s $865 million, also in 2009.

If you own Macquarie shares, please make an effort to take up the offer, which will always be in the money given the 1 per cent discount to VWAP component. We’ll update you on the paperwork, pricing and timing in the next edition of The Mayne Report, due in a fortnight, and will be writing to Macquarie with some requests about the SPP documentation later today.

Finally, there is the question of what Macquarie does with the money. I hope they discreetly use some of it to pick up a sneaky undisclosed 4.99 per cent stake in AMP at around $1.60 a share, so they have a seat at the table if the stumbling grand lady of Australian financial advice gets taken over.

How to manage the splurge of Chinese capital

Treasurer Josh Frydenberg has a lot on his plate at the moment but perhaps his most vexing issue to manage is the ongoing deluge of Chinese government-linked capital coming into Australia during a period of heightened tension over US-China relations and China’s muscular strategic ambitions.

Whether it is ICAC hearings on Chinese political donations, university campus protests over Hong Kong or the ongoing US-China trade war, it is clear that there is a ferocious and systematic Chinese Government strategy to influence Australia’s political system, including through ownership of strategic assets such as the Port of Darwin.

Numerous Australian political players, including the likes of Andrew Robb, Paul Keating and Bob Carr, have finished up working for or entangled with Chinese interests, both directly and indirectly, sometimes through state-owned institutions and more often through commercial interests or universities. Given what we now know, this is all very troubling and powerful Australian political figures should conscientiously get themselves off the Chinese payroll to re-establish their independence when participating in this debate.

It is too late to do anything much about the deluge of state-owned Chinese investment in Australia which is already through the door, whether it be State Grid’s 20 per cent stake in the listed energy sector giant Ausnet or Hunan Valin Iron and Steel Group’s 12.5 per cent stake in Fortescue Metals.

The Treasurer can only really opine on future investments such as the proposed purchase of a 20 per cent stake in Crown Resorts by the Hong Kong-based Ho family through their Melco casino empire. The Ho family has a colourful history and are regarded as being close to the Beijing power-brokers.

I’ve got a feeling Josh Frydenberg is going to put restrictions on the Melco investment in Crown, which would be a good thing. Perhaps it should be limited to 15 per cent and a single board seat for a non-executive Australian citizen who doesn’t work directly for the Ho family but can represent their interests on the Crown Resorts board.

One recent tiddler investment which caught my eye was this proposed $20 million placement of a 13 per cent stake in aspiring lithium producer Northern Minerals to a 100 per cent Chinese state-owned company. Why should this be allowed? The Australian government can’t buy 13 per cent of a listed Chinese-based lithium explorer.

Sure, it is more difficult to block minority stakes but there have been hundreds of these sorts of investments over the years which Australian companies are simply unable to do in China.

At the very least, if the Chinese Government wants to buy 13 per cent of Northern Minerals they should do it on-market not through a special deal with the board through a selective placement that dilutes all the other shareholders and effectively prevents the likes of lithium aspirant Wesfarmers from coming along and launching a takeover bid.

Australia’s anything goes capital raising system is bad enough, but let’s not see it being exploited by the Chinese Government as part of their ferocious global influencing campaign.

Frydenberg jaw-bones for more investment, less shareholder returns 

Australia has historically relied on foreign capital for business investment but Treasurer Josh Frydenberg stuck his neck out this week with a call for listed companies to wind back shareholder returns and instead crank up investment in productivity-boosting expansions.

His claim that dividends and buybacks soared to $29 billion in 2018-19 against an average of just $12 billion in the 4 years before that sparked a wave of commentary, much of it indignant.

I lean towards the Paul Bassat camp that says Australia needs more national champions like CSL and we shouldn’t be excessively focused on returning cash to shareholders.

That said, there are too many examples of businesses with too much cash which make ill-disciplined expansions. Who can forget the $US44 billion in cash that Rio Tinto spent on Alcan or BHP’s ill-fated splurge on US shale oil assets?

With a deluge of capital coming down the line through Australia’s compulsory superannuation system, it is not as if we are short of capital and ASX listed company balance sheets are the only source of job-creating business investment. This fact makes Frydenberg’s comments a storm in a teacup.

Still, it’s an important discussion but it would have been more useful if Josh Frydenberg made this point ahead of last year’s Federal election when the franking debate was on in earnest.

Australia’s franked dividends system is the single biggest driver of our national obsession with dividends and it has crimped investment in business investment, particularly offshore. Whenever a major acquisition is announced it is usually accompanied by a capital raising because companies don’t generally keep a lot of balance sheet flexibility for expansion courtesy of the pressure they are under to maximise dividend payouts.

Transurban SPP update

Further to the commentary in the August 12 edition of The Mayne Report, we’re down to the wire with the Transurban share purchase plan which is now marginally priced relative to the market.

Transurban is seeking up to $200 million at $14.70 but have offered a 2 per cent discount to VWAP which is likely to come into play with the stock hovering just below $15 in the early part of this week and closing at $14.99 last night.

The VWAP pricing is based on the 5 days up until the close of the offer this Friday, August 28, so I’ve asked Transurban to follow the best practice example set by ANZ in 2015 when it either tweeted or updated the VWAP figures on its website during the pricing period.

Happily, Transurban responded positively with this ASX announcement at 5.30pm last night and they are providing daily VWAP updates on this page on their website. The 2015  ANZ SPP ended up being well supported, raising $720 million at $26.50, a healthy 14.3 per cent discount to the earlier $2.5 billion institutional placement at $30.95 which subsequently became the subject of some ASIC enforcement action.

The most sensible course of action is for Transurban investors to make a final call on whether to back the SPP after the market closes tomorrow (Friday).

Having participated in almost 300 raisings since 2009, I’ve never had one where a Bpay application in the final hours was rejected for being late, so don’t worry about potentially missing out.

AMP SPP windfall potential slides with the falling market

There’s another marginal big company SPP in play at the moment.

AMP has gone from a likely windfall SPP play when the stock surged to more than $1.90 in the aftermath of the capital raising announcement, to a $1.60 offer which won’t be particularly well supported with the stock back to $1.65 at Wednesday’s close.

Still, at least AMP has offered a 2.5 per cent discount to VWAP so it is safe to apply although not many will with the stock wallowing near record lows.

The August 12 edition of The Mayne Report outlined some requests I sent to the AMP board to clarify at what level they would consider capping total applications.

This was studiously ignored as the SPP documentation made no mention of any potential cap or even the likely scale back method that would be deployed.

The offer closes on September 5 and I’m tipping they will raise between $100 million and $200 million with no scale backs.

If retail investors are to score a discount on the $1.60 paid by institutions in this month’s $650 million placement, the 5 day VWAP in the lead up to the closing date will need to finish below $1.64.

It is likely to be a close run thing.

Six SPPs where retail scored a discount to the institutional placement

We love a good list at The Mayne Report so here are six examples of placement-SPP capital raisings from over the years where companies not only offered a VWAP pricing alternative, but it actually kicked into play such that retail investors paid less than their institutional colleagues. AMP has history on this front and may become the first ASX100 company to do this twice:

Afterpay, 2018: retail paid $16.96 for $25 million in a scaled back $15,000 SPP based on a VWAP with no discount after an earlier $117 million institutional placement at $17. Then again, a 4c discount is hardly earth-shattering. See announcement.

AMP, 2003: raised $95.7 million from retail investors in a $5000 SPP priced at $4.82, which was a 5 per cent discount to VWAP based on the 15 days of trading after the offer closed. UBS under-wrote the SPP to the tune of $550 million so it picked up the balance. There was an earlier $1.2 billion institutional placement at $5.50 in May 2003, so retail received a 12.3 per cent discount but the take-up from AMP's 900,000 shareholders at the time was modest. 

ANZ, 2015: The ANZ SPP ended up raising $720 million at $26.50, a healthy 14.37 per cent discount to the earlier $2.5 billion institutional placement at $30.95 which subsequently became the subject of some ASIC enforcement action. Investors were offered a 2 per cent discount to VWAP in the SPP and the original $500 million cap was lifted to $720 million so there were no scale backs.

Bendigo and Adelaide Bank, 2012: after a $150m placement at $8.45, the SPP was offered at a 2.5 per cent discount to VWAP. The needlessly constrained $7000 SPP ended up raising $46 million at $7.43 so this was a useful 12 per cent discount to what the institutions paid. See announcement.

Challenger Financial Group, 2014: raised $250 million in a placement at $7.53 but then the $15,000 SPP was offered with a 2.5 per cent discount to VWAP. The pricing finished at $7.10, a 5.71 per cent discount to what the institutions paid. The soft cap of $30 million was lifted to accept all of the $40 million in applications. See announcement. 

Over Fifty Group, 2010: $6.5 million placement at 72c followed by a $15,000 SPP at 72c or a 10 per cent discount to VWAP which came in at 64c, an 11.1 per cent discount to what the institutions paid. SPP was capped at $4 million but the full $4.28 million in applications were accepted. See announcement.

Seven moves on Worner, what will Kerry Stokes do next?

After the Amber Harrison scandal blew up in late 2016, Seven West Media CEO Tim Worner immediately became one of the most likely CEOs in the ASX200 to depart. Kerry Stokes and the board initially stuck with Worner, but then Seven West Media got booted from the ASX200 as its share price tumbled to a record low of 38c.

Worner was summarily exited, a resignation by agreement, earlier this month just 4 days before Seven West Media unveiled another heavy loss courtesy of $574 million in write-downs.

After nearly 7 years in the job and $25 million in gross salary payments, Worner has departed with a dreadful record of share price decline although much of this is courtesy of Seven West Media overpaying with the ridiculous $4.1 billion acquisition of the Seven television and magazine businesses in 2011.

The Seven West Media accounts would already have been finalised by the time James Warburton signed on as the new CEO, but we’ve still added him to this long list tracking new CEOs who cleared the decks with big write-downs.

It was a little puzzling why the Seven West directors went so hard with write-downs causing a $444 million net loss which reduced net assets to just $103 million or a miserable 6.8c a share. (There are 1.5 billion shares on issue.)

What does that say about the confidence of the directors when the stock is still trading close to 40c?

Indeed, if the Seven Group Holdings directors really believe Seven West Media shares are only worth 6.8c each, they should immediately move to dump their 41 per cent stake at market prices. The stock finished at 36.5c last night.

One smokey in the pack is the intentions of Kerry Stokes himself, who owns 61 per cent of Seven Group Holdings which in turn owns 41 per cent of Seven West Media. However, Kerry’s son Ryan Stokes runs Seven Group Holdings and he made it very clear during last week’s results presentation that his focus is oil, gas, infrastructure and equipment hire, not media.

It is widely expected that something will give at Seven West Media, but Seven Group Holdings is unlikely to be a bidder. Maybe it will end up being Stokes in a private capacity who makes a bid for control of the company, although that would involve an untidy related party transaction with Seven Group Holdings.

When the assets are in the books at such knock-down prices it would be harder for the independent directors to argue that any bidder, an external party or their own chairman, should pay a big premium for control.

For now the big question is whether Seven West Media can keep making in-roads into its excessive $640 million debt and how long this two year break from dividends will continue.

As for James Warburton’s claim that his tiddler company is “a hunter” – that is a total joke. Without a big Stokes-supported capital raising, Seven West Media has no capacity to participate in any cash acquisitions. The bankers owed that $640 million simply wouldn’t allow it.

Boral’s Mike Kane emerges as most sackable CEO

Speaking of CEOs under pressure, with Tim Worner’s resignation secured from Seven West Media there’s a new “most sackable” long serving CEO in the ASX200 and that is Boral’s Mike Kane.

Like Worner, Mike Kane has been in the job for seven years since 2012. He’s now onto his third chair in Kathryn Fagg.

Kane became a hero of the political right through his fights with the CFMEU in Melbourne but, in my view, it was overpaying with a $3.5 billion bid for US business Headwaters which should lead to his exit.

Consider what happened on Monday when Boral released disappointing results and the stock tanked almost 20 per cent to finish at a 6 year low of $3.94. In late 2016, Boral raised $2 billion in fresh equity at $4.80 when the stock closed at $6.15 before the Headwaters deals were launched.

Boral has subsequently refused to bite the bullet on Headwaters with write-downs even though its market capitalisation has tumbled to $4.62 billion against claimed net assets of $5.8 billion.

We’ve all seen this movie before – stand by for a new CEO to be appointed who will take write-downs on the Headwaters acquisition once Mike Kane is safely back in the US.

In terms of American CEOs who came to Australia, no-one will ever be as bad as AMP’s George Trumbull, but Kane is almost certainly going to finish in the “mistake” category alongside the likes of Telstra’s Sol Trujillo and Coles Myer’s Dennis Eck.

Update on the AFIC tilt

The starters gun has been fired in the contested board tilt for the board of AFIC, Australia’s biggest listed investment company.

There was a summary of the issues in the August 12 edition of The Mayne Report but now the board has just released the notice of meeting to the ASX.

This will be the 49^th public company board tilt in 20 years and also the first time that a full board has interviewed the challenging candidate, albeit just for 10 minutes on August 14.

I suspect this invitation to present came after a one hour session two days earlier with two members of the nomination committee, AFIC chair John Paterson and veteran director Catherine Walter, where I asked how the full board could have unanimously rejected my 2013 AFIC board tilt when most of them had never met or heard from me. Talk about directors not doing their own due diligence.

Lo and behold, yesterday’s notice of meeting says that the full board unanimously opposes the nomination.

It was also disappointing that the platform and CV submitted had been altered somewhat.

Here is the full unedited version, complete with a mention of Alan Kohler and The Eureka Report.

Stephen Mayne, 50, BCom (Melbourne) GAICD

Stephen Mayne is a Walkley Award winning business journalist, shareholder advocate and occasional politician with board experience. He served 4 years as a councillor at City of Manningham and a further 4 years (2012-16) at City of Melbourne where he chaired the Finance and Governance committee. He has served two stints on the Australian Shareholders’ Association board and also held the position of ASA Policy and Engagement coordinator in 2012-14, a role which involved being a public spokesman on behalf of retail investors.

Stephen is Australia’s best known shareholder advocate having asked questions at more than 500 AGMs and commented on thousands of occasions in media and public forums about the financial and governance arrangements of ASX listed companies within the AFIC portfolio. He has questioned, interviewed or met with hundreds of public company chairs, directors and senior executives over the past 30 years and also owns the world’s biggest small share portfolio (almost 500 stocks worth less than $25,000) which has enabled him to participate in almost 300 capital raisings over the past decade, acquiring insight and knowledge which will be benefit to AFIC.

Professionally, Stephen worked for The Alliance for Gambling Reform for two years until July 2019, an experience which aligns with AFIC’s commendable policy to avoid investing in gambling stocks.

He is currently freelance writing for www.crikey.com, a business he founded in 2000, Alan Kohler’s Eureka Report under the Investsmart.com brand and his own website, www.maynereport.com.

If elected to the AFIC board, Stephen will strongly advocate for Australia’s biggest listed investment company to adopt best practice by publically disclosing its voting decisions across its portfolio of stocks, something it has declined to do when asked in recent years. This is standard practice at most industry funds.

Ends

If you own AFIC shares and would like to discuss your voting options, drop us a line to stephen@maynereport.com or call on 0412 106 241. Feel free to reach out over anything else in this edition as all feedback and advice is greatly appreciated.

That’s all for now.

Just keep doin’ ya best, Stephen Mayne

PS. If you weren’t a Constant Investor subscriber, the full 100,000-word plus back catalogue of Mayne Report editions, plus more than 20 interviews with public company chairs, is available here. Have a surf.