03 Oct Like watching a pair of spotted hyenas casing a snuggle of tree sloths

Source: The Financial Review

By: Joe Aston

On Tuesday morning, Southern Cross Media announced that it was diluting its shareholders by 49.9 per cent and giving them no say in a predestined merger with Seven West Media. Chaos ensued.

Six months have passed since the once-great James Hardie detonated two decades of market goodwill by pulling a similar manoeuvre: diluting its shareholders by 26 per cent and loading itself with $5 billion of debt to merge with US decking company Azek; a fait accompli with no shareholder vote and no mechanism by which James Hardie could back out.

A retinue of Australia’s biggest equity investors gave the ASX the rounds of the kitchen in April, demanding the bourse end the longstanding ‘exceptions’ to listing rules that allow these dilutive transactions to proceed without shareholder approval.

Six months have passed and nothing has changed. Within five minutes, those investors had been distracted by the next shiny thing (namely dual-class shares) and the ASX had kicked the issue into touch, launching a review that might spit out some recommendations next year, or next Olympiad.

Those fund managers – including two who between them own 20 per cent of the ASX – have squibbed it. Remember, this is only difficult because the ASX – swayed by investment bankers and corporate lawyers – is resisting the necessary change, which is quite simply to reduce the threshold for shareholder approval of share issuance in reverse takeovers from 100 per cent of the existing share count to 20 per cent (bringing Australia into line with the rules of the New York Stock Exchange).

The ASX is St Augustine, crying “Lord, make me chaste, but not yet”.

And now another shocker has slipped through while the drawbridge is still down. The atrocity here is that the merger ratio between SWM and Southern Cross – 49.9 per cent versus 50.1 per cent – was so nakedly contrived for the sole purpose of depriving Southern Cross shareholders of a vote.

Southern Cross is supposedly the senior economic partner yet the Stokes family gets management and board control of the post-merger company for just 20 per cent of its equity. Seven West Media shareholders get a vote on the deal, though that’s another fait accompli because the Stokes-controlled SGH owns 40 per cent of its shares.

This deal may well have its so-called ‘industrial logic’ – Alex Waislitz is a major Southern Cross shareholder, so now the Seven Network can carry even more dire sponsored content on his babymama Rebekah Behbahani – but how absurd that 10 basis points on either side of a merger ratio is the no man’s land between democracy and disenfranchisement.

It reminds me of a scene in 1998 film The Siege, where the FBI agent played by Denzel Washington is told he can’t detain a suspect because the US$9980 ($15,130.04) of cash he was carrying is $20 under the declaration threshold. Denzel’s partner, played by Tony Shalhoub, pulls a $20 bill from his wallet, tosses it in the suspect’s open suitcase and says, “not anymore”.

The last merger hitched on this artifice was that of rival fund managers Perpetual (51.1 per cent) and Pendal (48.9 per cent) in 2022. And how has that worked out?

Kerry Stokes is acquiring the property of Southern Cross shareholders at a price they may or may not agree with, using his own shares as consideration to dilute them by half, and they have no say in that.

They are also assuming Stokes’ debt – SWM is carrying $290 million in net debt, versus Southern Cross’s $70 million. Vending his borrowings into target companies is something Kerry has always loved to do. Public market investors swallowed $1 billion of his debt in Australian Capital Equity when it vended WesTrac into what became Seven Group (now SGH) in 2010.

The next year, West Australian Newspapers inherited $1.7 billion of net debt in its merger with Stokes’ Seven Media Group (creating SWM).

What Southern Cross shareholders are being asked to accept here is that Stokes is a bad seller, which is not the case, ever. Kerry and his son Ryan are incredibly astute and disciplined investors. They did not so much steal Boral, but were gifted it by its dozy shareholders, with the notable assistance of Boral’s board chaired by Kathryn Fagg – named a Companion of the Order of Australia on the King’s Birthday this year for services to the Stokes family.

In Fagg’s defence, she put up more fight than the chocolate teapots on WAN’s board and now, the directors of Southern Cross Media. There is nothing the Stokeses enjoy more than circling a few soft-palmed company directors who are not up for a fight. It’s like watching a pair of spotted hyenas casing a snuggle of tree sloths.

This deal plays into every trope about professional directors: that they are shamelessly self-interested, cavalier about shareholder rights, defer wholly to investment bankers and will throw themselves at the feet of any billionaire who even glances in their direction.

A glorious factoid is that the two Southern Cross Media directors who will serve on the board of the merged entity, Marina Go and Heith Mackay-Cruise (who will be chairman at the SWM directors’ pleasure), also serve on the board of the Australian Institute of Company Directors, an organisation that teaches standards of governance that are time and again honoured in their being breached by its highest-profile members. Sally Pitkin was long the AICD’s standard-bearer for this hypocrisy, but now it’s Heith from the hyphen set.

Only last week, substantial Southern Cross shareholder Gabriel Radzyminski of Sandon Capital asked Heith to put an amendment to the company constitution at next month’s AGM, requiring a shareholder vote for any issuance of scrip exceeding 25 per cent of the existing share count – including for a merger. The deal with Stokes announced days later was Heith’s middle finger. 

Radzyminski was seeking to emulate Allan Gray’s Simon Mawhinney, who has had some success de-risking the ASX’s loose listing rules one company at a time by asking them to self-impose a reasonable limit on scrip issuance.

Orora has placed a resolution to amend its constitution on its notice of AGM (the meeting is on October 15). I understand that Sims Limited will be the next to do so. Allan Gray is doing exactly what the big industry super funds should be doing way further up the ASX boards, but where are they?

Mawhinney overplayed his hand by saying in anger that the Southern Cross directors should be “lined up and shot”. His anger was perfectly understandable, and far be it from me (of all people) to hold my nose at strident language. It was a tactical error because Mawhinney made it possible for Heith and friends to play the victims.

Through crocodile tears they spluttered the words “abhorrent”, “inflammatory”, “extremely poor judgement” and “entirely inappropriate”, but they could just as easily have been describing their own conduct in disenfranchising their shareholders. We best not shoot them, but we should absolutely pour scorn on them.

Across the Australian equities market, every analyst on both the buy- and sell-side runs these fabulous company models that spit out the terminal value of cash flows which may or may not exist in five or 10 years’ time. Where in their model is the possibility of being transacted out of their valuation at a price they don’t agree with by some chancer named Kerry Stokes or Aaron Erter?

This is a risk that is not being priced, and it’s such a left-field risk that it’s happened twice in six months. Welcome to the casino, people. Which ASX 50 company will be next?

Protection against dilution is in effect a property right. Subject to the exceptions that denude it, it is enshrined in the ASX listing rules. It is there because nobody should ever trust insiders to allocate equity away from minority shareholders without any limit. Yet we then allow boards to do exactly that in reverse takeovers up to the insane limit of 100 per cent.

Lawyers who earn their fees in these transactions are now warning us that enforcing the right of all investors to vote on transactions that fundamentally change the nature of their investment would be bad for deal flow. I mean, what an unexpected perspective! They also insist that Australian investors are “well protected by a robust regime of shareholder rights” because – wait for it – they get a non-binding vote annually on companies’ remuneration reports. Arguments don’t come much feebler, but hey – unlike the largest institutional investors in this country, at least corporate lawyers can be bothered to agitate energetically in their own self-interest.

Fund managers were, in April, engaged momentarily. You couldn’t interest Treasurer Jim Chalmers in this issue if his Broncos tickets this Sunday depended on it. Who, then, is looking out for the interests of small investors? Literally no one.

As for the ASX, its board and management are only desperate for their invitations to the next JPMorgan golf invitational. Why on the one hand should we believe that the ASX cannot be trusted to manage its core functions as a market operator – as both the Reserve Bank and the Australian Securities and Investments Commission do – yet on the other hand believe that the ASX can run a proper review of listing rules that will efficiently land in the right place? We’d be better off posting the job on AirTasker, whose 2021 IPO, funnily enough, was another Kerry Stokes bonanza.