Sent: 14-06-2011 12:02:25
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Strategic Shareholders: The Need to be Wary
The Leighton predicament referred to in the ATC email two weeks ago highlights another problem: large shareholders whose interests run contrary to those of smaller investors.
Leighton Holdings offers an interesting case study in how a seemingly highly successful company can quickly find itself in strife on multiple fronts. Some of the recent controversy swirling around the company has involved the role of its major shareholders.
German construction group Hochtief, with a holding of 55% in Leighton, has been under siege by Spanish construction firm Grupo ACS. With a 43% holding in Hochtief, ACS is potentially in a position to indirectly influence the direction of Leighton.
Recent news reports put ACS at the centre of a plan to reinstall former Leighton CEO Wal King as a director. For most of his two decade reign, King had been highly regarded but left the company with several problem projects including the desalination plant in Victoria and the airport link project in Brisbane. These came after delays and heavy losses from its development of the Spencer Street railway station property in Melbourne.
Most boards now accept that former CEOs should leave the scene to their successors rather than hover around the board table second guessing them. In another context, the relationship between Kevin Rudd and Julia Gillard at the apex of Australian power is a conspicuous example of the problems that can arise when a complete break with the past cannot be completed.
Despite that, the temptation to avoid the change is strong. Tabcorp, for example, has announced that its departing CEO will return after a brief sabbatical to re-take a place on the board.
Leighton's case is more complicated by having a large shareholder seemingly prepared to throw its weight around.
Almost by definition, a shareholder with a large strategic stake is going to have a different set of interests to those of the ordinary retail shareholder or even the large institution. All would like to see a higher share price but the strategic shareholder might be prepared to trade that off against other objectives from time to time.
Axa, for example, did not have a shareholding in Axa Asia Pacific because it was enamoured with the Australian financial services industry. As it proved in being prepared to offload its Australian businesses to AMP or NAB, its strategic interests were primarily in Asia.
Competing strategic interests could mean support for redirecting investment and business development activities in a way not optimal for all shareholders.
Frequently, the large shareholder is forced to accept a less than proportionate number of board positions to signal that other shareholders are being appropriately considered. That is a protection but can risk stalemate and unsettled relationships among all the parties. In the Axa case, it led to a split in the business.
The large shareholder is becoming more frequent in the resources industry as Chinese corporates have begun to be more active as investors.
An increasingly common development model is for resource companies to attract capital rich Chinese companies as joint venture partners. The Chinese party buys a share of a project reducing or eliminating the need for the vendor to seek outside development capital.
The certainty of a joint venture partner is intended to boost investor confidence. Having removed some important risks, valuations should improve. The Chinese participants typically have different agendas. They are looking for strategic access to raw materials.
Mount Gibson Iron is one Australian company that suffered after being forced into the embrace of Chinese investors in the midst of the global credit crisis in 2008. Despite holding minority positions in the company, the head of Chinese steel maker Shougang gave the game away in addressing the Asia Mining Congress in 2010 when he quite proudly proclaimed that his group had a full monopoly on all of the production coming from Mount Gibson.
The dangers of the Chinese connection, in particular, have been highlighted recently in another context. US back door listings by apparently high growth Chinese businesses had excited considerable investor interest but many have failed dismally to deliver the anticipated investment returns. In some cases, information on which the listings were approved has proved inaccurate.
A survey by the US Public Accounting Oversight Board found that 159 US listed companies were taken over by Chinese commercial interests between the beginning of 2007 and March 2010. This past week, the chief executive of the New York Stock Exchange, Duncan Niederauer, confirmed that the back door listings have resulted in a loss of normally expected shareholder rights. He said today "a lot of those companies probably wouldn't pass muster".
Whether the shareholders in question are Chinese, Spanish or home-grown entrepreneurs, the message is the same. Their participation will be dressed up as being highly beneficial. It may be. However, investors need to be wary whenever a single party has an obviously different motivation to the bulk of shareholders and can control enough votes to overturn actions that might be in the best interests of the largest number.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.