AFIC AGM and poor Macquarie disclosure

Tuesday, October 2, 2007, 1am

Dear Mayne Report subscribers plus a handful of family and friends,

A FASCINATING AGM TODAY

Goldman-Sachs-JB Were is associated with a stable of six listed investment companies and the big daddy of them all is the Australian Foundation Investment Company, which is capitalised at $5.8 billion. The hot issue at today's AFIC AGM in Melbourne will be exactly who said what about John Fletcher before he was hired by Coles in 2001.

Pamela Williams produced a cracking three part series in The AFR earlier this year which basically put Solly Lew's side of the story in the great Coles soap opera.

Williams quoted from a Solly letter to then Coles chairman Stan Wallis in 2002, which suggested he was a liar because the board had been told Fletcher's references had been checked out, yet after a career at Brambles, the company's then chairman Don Argus told Solly he'd never spoken to Wallis about Fletcher.

And guess who's up for re-election at AFIC today. Both Stan Wallis and Don Argus. I'm thinking of framing the question to AFIC chairman Bruce Teele as follows:

Chairman, the annual report shows we own $158.8 million shares in Coles Group – our ninth biggest investment – and this question relates to the re-election of both Don Argus and Stan Wallis. I'd like to first quote from an article in The AFR from earlier this year, which quotes a private letter that Solomon Lew sent to Stan Wallis, who at the time was Coles chairman:

"When we discussed the appointment of John Fletcher you told the board that you had had discussions with Don Argus, John Fletcher's former chairman (at Brambles). I have known Don Argus for many years. As a director concerned about the appointment of a non-retailer to the position of CEO of Coles Myer, I felt I needed to know a little more about John Fletcher. I called Don Argus and he told me that he had never had a discussion with you regarding John Fletcher . . . What sorts of games have been going on?"

AFIC is well known for having weekly investment committee meetings which are attended by directors. Given that Stan and Don have sat on the AFIC board together for 17 years, how on earth did they not speak about John Fletcher before he was put in charge of Coles – something which is now regarded as one of the biggest CEO appointment blunders in recent Australian corporate history? Or is Solly making this stuff and they did really speak?

Fletcher has today revealed he's surrendering a $1 million Coles bonus out of embarrassment about his poor performance running the shambolic supermarket division. The only other prominent corporate figure to do something like that was AFIC's own Stan Wallis who quit AMP in 2002 and declined to take his $1.6 million retirement payout after the insurance giant almost went broke.

YESTERDAY'S EXCHANGES WITH BRUCE TEELE

There were some preliminary exchanges with Bruce Teele at the Hilton today when he hosted the AGM of Djerriwarrh, another of these Goldman Sachs-JB Were associated investment companies.
Bruce also dodged the question about whether boards should be able to use the "no vacancy" rort to keep outside candidates out of their boardrooms.

AFIC is one of the largest shareholders in West Australian Newspapers so I was angling for some support given that this company is about to tell its shareholders to choose between chairman Peter Mansell and yours truly for one board vacancy. WAN only has four non-executive directors, so shareholders such as AFIC should be able to vote in favour of both candidates if they like.

OPENING UP ON CHARLES BARRINGTON GOODE AC

We sent you the script of the Charles Goode item last week, but we think the challenge to the long-serving ANZ chairman is probably our best practice video to date, so check it out here.

Charles is also chairman of two Goldman Sachs-JB Were associated listed investment companies so I'll be popping along to both of their AGMs on Thursday next week for some preliminary exchanges.

POOR DISCLOSURE FROM MACQUARIE BANK

Macquarie Bank chairman David Clarke assured me at the annual meeting in July that all fees paid by its listed associated would be fully disclosed in the respective annual reports.

Lo and behold, the Macquarie Communications Infrastructure Group annual report arrived last week and the only disclosure was a base fee of $31.3 million and a performance fee of $13.5 million.

MCIG has spent more than $10 billion on highly priced offshore acquisitions this year and it wasn't until I trawled through the full financial report, which wasn't sent to shareholders, that this treasure trove of fees was uncovered:

 Responsible Entity/Manager's/Advisor's fees

Base management fees paid or payable to the Responsible Entity/Manager/Advisor were $31,293,337 (2006: $25,681,617) during the year. MCIL's share was $13,274,196 (2006: $10,112,052), MCIT's share was $10,429,945 (2006: $11,050,818) and MMCGIL's share was $7,589,196 (2006: $4,518,747). The base fee is calculated as 1.50% per annum of the net investment value of MCG at the end of each quarter up to $500 million, 1.25% per annum of the net investment value of MCG at the end of each quarter from $500 million to $1,000 million and 1.00% per annum of the net investment value of MCG at the end of each quarter over $1,000 million.

Performance fees paid or payable to the Responsible Entity/Manager/Advisor were $13,436,119 (2006: $nil) during the year. MCIT's share was $10,263,852 (2006: $nil), MCIL's share was $3,172,268 (2006: $nil) and MMCGIL's share was $nil (2006: $nil).

 Other transactions - Year to 30 June 2007

Dealings with MBL – Transactions in relation to acquisitions and capital raisings

During the year MBL acted as one of three joint lead underwriters in relation to MCG's equity placements and EB issuance. MCG paid $13,651,461 (2006: nil) to MBL as underwriting fees. Fees for the unconditional placement were $4,164,117, fees for the conditional placement were $1,754,010 and fees for the exchangeable bond offering were $7,733,333. Of these, MCIT's share was $9,726,990, MCIL's share was $2,542,347 and MMCGIL's share was $1,382,124.

During the year MBL acted as one of three joint lead underwriters in relation to a bridge debt facility established by MCG. MCG paid $2,448,113 (2006: nil) to MBL as advisory fees, $5,316,601 (2006: nil) in associated debt costs and $3,559,503 in interest expense (2006: nil). Of these, MCIT's share was $6,692,736, MCIL's share was $2,879,027 and MMCGIL's share was $1,752,410.

During the year Guardian (a 50% owned subsidiary of MCG) paid MBL $14,868,878 (£6,045,000) in transaction advisory fees and $22,303,317 (£9,067,500) in debt advisory fees for the acquisition of Airwave. During the year Arqiva paid MBL $30,301,713 (£12,319,275) to refinance the existing £1,600 million loan facilities of Arqiva. Arqiva also paid MBL $1,385,497 (2006:$2,249,580) in relation to interest rate swaps interest. During the year Arqiva paid MBL $20,497,487 (£8,333,333) in transaction advisory fees and $18,030,990 (£7,730,569) in debt advisory fees for the acquisition of NGW. Arqiva also paid MBL $2,471,997 (£1,005,000) in transaction advisory fees for the acquisition of BT Satellite. During the year Arqiva reimbursed MBL $7,704,418 (2006: $422,927) representing out of pocket costs associated with the acquisitions and refinancing projects, including transitional services agreement fees and employee cost recharges from the original acquisition of Ariqva.

Other transactions - Year to 30 June 2007 (cont'd)

Dealings with MBL – Other transactions

At 30 June 2007, companies within the MBL Group held 73.3 million stapled securities (30 June 2006: 73.6 million) in MCG.

During the year MCG reimbursed MBL $374,044 (2006: $715,917) representing out-of-pocket expenses incurred by the Responsible Entity/Manager/Advisor in the performance of its duties. The MCIL Group's share was $129,269 (2006: $247,878), MCIT's share was $103,030 (2006: $238,682) and the MMCGIL Group's share was $141,744 (2006: $229,357).

Yep, that's more than $175 million in fees in one year from one associated listed vehicle. And how about the cheek of Macquarie Bank hitting MCIG with all those additional out of pocket expenses when surely the huge fees should cover this stuff.

And guess what? Shares in MCG have gone precisely nowhere over the past 12 months despite a booming stockmarket and this unprecedented takeover binge. There's been no value created for shareholders, but MCIG director Nicholas Moore will presumably personally pocket many of those millions given that his bonus is directly driven by deal flow.

The MCIG AGM in Sydney this year will be one of the 10 highest priorities for the coming AGM season.

That's all for now.

Do ya best, Stephen Mayne