Friday, September 9, 2005

3. Rupert piles on the internet takeovers



By Stephen Mayne, who owns $3000 worth of News Corp voting shares

There's never a

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dull movement when it comes to Rupert Murdoch. The acquisitions are coming in a flurry as last night News Corp announced the $US650 million purchase of IGN Entertainment, plus the mopping up of European outdoor advertising company News Out of Home. Check out the Reuters and Bloomberg coverage.

Anyone who doubted Rupert's sudden determination to conquer the internet should relax but Rupert does appear to be paying ridiculous prices. Games, technology and internet company IGN Entertainment is costing News Corp shareholders almost $1 billion yet it was only formed in 1997, turned over just $US45 million last year and has never made a profit.

But the Sun King is excited about his new internet properties such as Askmen.com, Rottentomatoes.com, Gamestats.com, IGN.com, Gamespy.com and TeamXbox.com.

Rupert has clearly ignored John Malone's advice to focus "a little more on shareholder returns and less on empire building."

Some analysts have already slammed the stratospheric prices paid for Intermix and IGN, but Rupert is hailing his expanded internet presence saying News Corp's US sites will now attract 70 million unique monthly users and 12 billion page views a month. Crikey does about 1.5 million monthly page views from almost 500,000 sessions.

The market is not quite as excited as Rupert, as News Corp voting shares were down 21c to $22.28 this morning, meaning they are still below the level they were at before the much promised re-rating from the move to America.

Rupert's latest love affair with the internet now reads as follows:

February 2005: Rupert chairs major internet summit of News Corp executives in New York.

April 13, 2005: Rupert delivers this landmark speech to the American Society of Newspaper Editors hailing the internet revolution.

July 18, 2005: News Corp announces $US580 million cash takeover of Intermix Media.

August 2, 2005: News Ltd offers $94 million or $2 a share for the 56.3 per cent of realestate.com.au it does not already own.

September 8, 2005: News Corp announces $US650 million cash purchase of IGN Entertainment.

September 10-12: Rupert to lead a three day internet summit for News Corp executives in California.


22. Dividend raiding is second nature for Cossie's Treasury



By Stephen Mayne

Declaring a budget surplus and reducing "Labor's $96 billion debt" have been the major political objectives for Peter Costello's first nine budgets. But the dodgy accounting employed to achieve this end have been placed in stark relief this week thanks to disclosures by Telstra and the Reserve Bank.

Crikey has previously pointed out that Australia has one of the lowest stockpiles of foreign reserves in Asia. This is partly because the Howard Government has now ripped out more than $20 billion in dividends from the Reserve Bank since 1995-96. Check out 10 years worth of raiding below:

1995-96: $1.772bn
1996-97: $2.136bn
1997-98: $1.7bn
1998-99: $2.73bn
1999-00: $3bn
2000-01: $1.47bn
2001-02: $2.834bn
2002-03: $2.4bn
2003-04: $694m
2004-05: $1.383bn
Total: $20.11bn

You can see the latest Reserve Bank annual report here. It shows that this year's $1.383 billion raid comes despite the central bank only reporting a profit of $74 million, so our reserves are being further depleted to boost Cossie's claimed surplus. It seems the plunging RBA profit partly resulted from putting too many of our eggs in the US dollar basket at a time when its currency is under pressure from the twin evils of huge and unsustainable budget and current account deficits.

On top of dividend raiding boosting the budget bottom line, Cossie's claimed budget surpluses have been overstated by $16 billion since 1996 because unfunded superannuation liabilities have been allowed to blow out from $74 billion to $90 billion. This is belatedly being addressed in the so-called Future Fund, which is actually a Past Fund because these liabilities have already been incurred.

The government has also received more than $12 billion in Telstra dividends since T1 and a further $1.5 billion-plus from Australia Post. Finance Minister Nick Minchin was right on AM yesterday when he said the following:

MINCHIN: This allegation that the company has been keeping secret that it borrowed to pay dividends – that is a lie. The Chief Financial Officer of Telstra on the 21st of June last year, 2004, said publicly, and I have the transcript in front of me: "That we will need to borrow some new money shortly to provide for the 04/05 return of capital. That new borrowing is probably going to be around $1-billion."


However, the scale of the borrowing wasn't exactly in the public consciousness as Telstra's debt rose from $10 billion to $13 billion to fund the sudden deluge of buybacks, super dividends and capital returns - the last two of which significantly boosted the government's budget revenues.

The sensitive information in the August 11 briefing was not the fact of borrowing to pay dividends, but the board's concern about this and then the prospect of a change in policy. That was very price-sensitive because many investors were buying Telstra as a yield play although it should be pointed out that CFO John Stanhope flagged at the earlier results briefing on August 11 that next year's capital return could be in doubt given the sudden decline in Telstra's fixed line business.


23. IAG defends its lack of disclosure


Stephen Mayne yesterday criticised Insurance Australian Group for making no disclosure to the market after the storms that hit Melbourne in February this year cost it $100 million. Today, IAG company secretary and investor relations chief Anne O'Driscoll defends the insurance giant's silence:

IAG is aware of, and is confident it has adhered to, its continuous disclosure obligations in respect of this matter.

The $100 million of gross claims incurred by IAG for the Melbourne storms in February 2005 should be considered in the context of the Group's gross incurred claims costs of $4.7 billion for the year. Both of these figures are stated gross of recoveries – which amounted to $660 million for the year, of which $378 million was in the six months to 30 June 2005, driven largely by storm costs. Storm costs are a normal part of our business as an insurance group and, as such, are allowed for in our budgets and any guidance we provide to the market.

We would only be required to make a disclosure where the costs of such events, net of reinsurance, meant there was significant uncertainty about our ability to deliver the guidance we provided (and analysts' consensus if that is materially different). The costs incurred for the Melbourne storm did not alter the guidance provided to the market prior to the storms occurring.

IAG delivered an insurance margin of 16.3% for FY05, meeting its guidance (above 12%) announced in August 2004 and its updated guidance (above 15%) announced in February 2005 (which was increased after factoring in the Melbourne storm costs and other matters). Importantly, IAG's insurance margin for FY05 was in line with market consensus leading into the announcement of those results.

IAG understands the impact that external influences, such as weather-related events, investment returns and changing regulation, can
have on its business. We take these into consideration to manage our business in such a way to be here for the long term.

As part of this responsibility, IAG will continue to meet its obligations to disclose what it considers to be price-sensitive information, as it has
in the past.

Stephen Mayne writes:

IAG shares have fallen from a record high of almost $7 to a 10-month low of $5.24 since the storms hit in early February – a drop of almost 25%. The Melbourne storms weren't the only factor, but dropping $100 million in 25 minutes is a major event and I still think IAG should have made a specific announcement as soon as they had a feel for the size of their exposure.

Terry McCrann has today explained why the ASIC investigation into Telstra is a complete joke. In my opinion there was more justification for an IAG announcement about its losses from the Melbourne storms than in Telstra simply updating the market on Monday by saying a previously forecast profit drop would more specifically be a fall of 7-10% in 2005-06.


24. Garry Weaven's frustration over Pacific Hydro



By Stephen Mayne, unpaid speaker at the last four annual industry funds conferences

The undisputed king of Australia's industry funds movement, Garry Weaven, is a classic example of the old adage that the smartest unionists often don't finish up pensioned off sitting on red or green leather in a Parliament.

Weaven rose through the ranks of the ACTU but then forged a career during the Hawke-Keating years as the guru of superannuation, which included a stint working for Westpac. The father of the $50 billion-plus industry funds movement has created a hell of a lot of value for his members and part of the success has been the unchallenged way that the Weaven faction has retained control.

However, that won't necessarily stay the case forever. Some trustees have raised issues about the amount of money being spent by industry funds on the initial advertising blitz after the onset of what Weaven calls the "so-called choice legislation".

There were also rumbles about the successful $788 million takeover bid for renewable energy company Pacific Hydro, when the industry funds could have walked away from this year's takeover battle with a $200 million profit on their original 30% stake.

Having placed a very large $600 million bet on renewable energy, Weaven appeared a little frustrated at the 2005 industry funds conference in Cairns earlier this week. His opening address attacked George Bush for not recognising the dangers of global warming and pointed out that only Australia, the US and Lichtenstein remain implacably opposed to the Kyoto Protocol.

Weaven said he hoped the devastation of Hurricane Katrina would prompt the US President to reconsider his opposition to the likes of a carbon tax as a way of tackling greenhouse gas induced climate change.

Later on in the conference, Weaven said the lack of a carbon tax and emission trading in Australia meant that Pacific Hydro's growth prospects for the short term would remain focused outside Australia.

When it came to the question of seeking better returning investments outside what looks like fully priced equity and property markets, someone mentioned commodities and Weaven pointed out that carbon credits in Europe have been the best performed commodity over the past 12 months, rising from 6 euros to 20 euros.

The session at the conference which most pleased Weaven was the presentation by IAG CEO Michael Hawker, which highlighted all the dangers to insurers from climate change. When challenged by a CBUS trustee about the progress of industry funds influence, Weaven said getting Hawker to address the conference and openly speak about a major split in the Business Council of Australia on the question of climate change policies was a major step forward.

Hawker said energy companies and major power users had stopped the BCA developing a progressive and united position on the need for a carbon tax and emissions trading, but he said even these recalcitrant CEOs now wanted certainty over long term policies when weighing up major energy industry investments decisions.

Hawker left the distinct impression that the Howard Government will come under growing pressure to finally enter the ring on renewable energy policies. Former Environment Minister David Kemp bowed out of politics when John Howard rejected his proposals two years ago and came up with what was more of an Energy Policy than an Environment Policy.

The Howard Government has done much to try and cruel the growth and power of industry funds over the years, so the chances of a policy change are perhaps reduced by the fact these same union-associated industry funds are standing by as the biggest potential beneficiaries of any carbon tax and emission trading system.


25. Telstra and the biggest protest votes against directors



By Stephen Mayne, Australia's most unsuccessful boardroom candidate

While the Howard Government is unlikely to vote out incumbent Telstra directors such as Catherine Livingstone at the November AGM, Michael Pascoe's piece from yesterday's Crikey did highlight the prospect of what could be a substantial protest vote against directors who were responsible for hiring Sol Trujillo and his three amigos.

Yesterday we pointed out that the government has voted its entire controlling stake in favour of incumbent directors 27 times since 1998, while all 25 outside nominations have been rejected by the government even though the government's stake was never needed to decide the outcome.

The closest a Telstra incumbent has come to being voted out was now-departed American Admiral William Owens in 2001, when he only received 824 million proxies in favour and a heavy 574.7 million against.

This puts Owens in the Crikey Top 10 in terms of protest proxy votes against directors. The government never votes its Telstra stake by proxy, preferring to wait until the end of the AGM and voting in a poll:

Ten biggest proxy protest votes against incumbent directors

John Ducker: Aristocrat, 2004, 2.42%
John Cassidy: Hills Motorway, 2004, resigned day before AGM knowing proxies were against him
Solly Lew: Coles Myer, 2002, 44.83%
Mark Leibler: Coles Myer, 2002, 49.74%
William Owen: Telstra, 2001, 58.91%
Maurice James: Patrick Corp, 2005, 64.55%
David Asimus: BHP, 1998, 70.9%
Dick Warburton: David Jones, 2002, 75%
Lord Killearn: AMP, 2003, 79.98%
Richard Grellman: AMP, 2003, 80.86%

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