01 Oct Seven deal chucks a James Hardie. ASX review can’t come fast enough

Source: The Financial Review

By: Anthony Macdonald

This burning issue comes down to trust, and a complete breakdown of it between boards and some of their biggest shareholders. It’s no good for anyone.

While the ASX faffs around with its listing rules review, cheeky companies and their lawyers and bankers are driving trucks through the current framework and its loopholes.

In Southern Cross’ case, it’s a Seven Network outdoor broadcast truck – one of the big white ones you’d see at Melbourne Park in January (back when the broadcaster had the tennis).

Its deal to buy Seven West was deliberately – and some would say cynically – structured to prevent any need for a shareholder vote.

Seven West Media’s shareholders will get a vote (it’s as good as a done deal with SGH Ltd pre-committing its 40 per cent stake as a “yes”), but not the acquirer’s. Why? Because Southern Cross doesn’t have to. It is offering Seven West shareholders, including the Stokes family’s SGH Ltd, 49.9 per cent of the enlarged media group in an all-scrip transaction.

Anything more – like literally another 0.1 percentage point more – and Southern Cross would have to put the deal to its shareholders under ASX listing rules. When a company is buying or selling assets worth 50 per cent or more of the group, it is generally accepted that the deal changes the company’s size and scale, and it should be put to shareholders.

So, Southern Cross sneaks in just under the 50 per cent threshold. What are the chances?! Its move is straight from the How to get clients to do deals manual that they hand out at Chifley Tower in Sydney and 101 Collins Street in Melbourne.

Southern Cross’ board would know its shareholders are a bit of an unruly bunch. Activist in Sandon Capital, stern small-cap investor in Spheria (no stranger to M&A scraps), wildcard media players Antony Catalano and Alex Waislitz, and arch-rival ARN Media all have 10 to 15 per cent-plus stakes. It’d be hard to get their unified support on anything,

Investors slam ‘diworsification’

However, having been severely burnt at James Hardie, institutional investors are pushing back. First, they got the ASX listing rules review (which we can expect to hear more about in the next two months).

Now, they’ve started taking matters into their own hands.

Allan Gray’s Simon Mawhinney got packaging group Orora to change its constitution (or ask shareholders to approve a change, at least) to restrict the number of shares it can issue in any one year, including on a scrip-acquisition without a shareholder vote. Anything more than 25 per cent would require a vote.

Sandon Capital’s Gabriel Radzyminski, equally fed up and as passionate about wasteful M&A as Mawhinney, is now proposing to do the same at Southern Cross. He won’t get the same board support as Orora gave Allan Gray, but lobbed a letter requesting a similar vote to change the constitution on Tuesday night (post-Seven West deal).

What really stings Radzyminski is that he asked Southern Cross chairman Heith Mackay-Cruise to put an Orora-style constitutional change to investors last week. Southern Cross has an annual general meeting in November, so why not?

“The ASX is walking a delicate path between too much red tape and not enough, and is getting knocked over with views from both sides.”

Instead of a yes, he got exactly the sort of transaction he feared – buying back the company’s recently offloaded television assets, along with Seven West’s collection of other TV stations and print media. Justice Michael Lee might refer to this as he did Bruce Lehrmann: “Having escaped the lions’ den, Mr Lehrmann made the mistake of going back for his hat.”

Radzyminski hit the roof. “How the Southern Cross board could [think] this is a good idea beggars belief,” Radzyminski told The Australian Financial Review’s media and marketing reporter Sam Buckingham-Jones. “This deal risks being incredibly value-destructive for Southern Cross shareholders. This epitomises Peter Lynch’s expression of ‘diworsification’.”

We hear there are another few requests to change the constitution out there, similar to Orora’s, where a big shareholder like Allan Gray has convinced the board it’s in their interest. If these clauses are the same as Orora, the constitutional change will be good for two years – long enough to allow the ASX listing rules review to play out, which assumes there are changes coming.

It marks an important step-change in Australian corporate governance and an attempt by investors to exert more control over companies’ boards and strategy.

At the heart of it is a breakdown in trust between investors, such as Allan Gray and Sandon Capital, and issuers (the companies and their boards). Investors think issuers are letting bankers run roughshod on M&A deals, and boards are approving too many transactions that make the bankers rich and shareholders poor.

The ASX is in the middle. But really, who pays the listing fees? So there are suspicions it is slow-walking its way to a nothingburger of a review, which the ASX rejects.

Time will tell on that front – the ASX would argue it has spoken to a long-tail of companies and investors, and it is trying to come up with the best solution for the lot. For every Southern Cross or Orora, there are 10 exploration companies living hand to mouth with much bigger problems.

So, the ASX is walking a delicate path between too much red tape and not enough, and is getting knocked over with views from both sides. ASIC is keeping a close eye on it and is trying to move things along in the background.

Meanwhile, we have those Seven Network trucks driving through big gaps, helped by smart M&A bankers and lawyers whose job it is to extract any advantage possible on behalf of a willing client, only fuelling the rage.