Inside the MFS EGM fiasco

February 2, 2010

Dear Mayne Report subscribers,

I've been to some strange shareholder meetings over the past decade, but today's MFS EGM was completely unprecedented on a number of levels.

To start with, chairman Andrew Peacock blithely dropped out at the start of the questions session that he was going to resign today but instead will hang around until May. That will round out the experience at about 12 months, costing shareholders billions and putting $250,000 into the former Foreign Minister's pocket.

CEO Craig White was completely useless but his most stunning effort was suggesting regulators take action against market commentators such as Queensland stockbroker Charlie Green, for ripping into the company at that notorious January 18 conference call.

After opening with some polite questions, this was all too much so I unloaded with the following spray covering everything from the ridiculous 70 day suspension, the failure to lodge the accounts, the shock $550 million capital raising in the de-merger proposal and the possible bankruptcy of the CEO as Citigroup chases down some personal debts.


During the meeting Peacock and the baby-faced Craig White, who was the understudy of former CEO Michael King for years, both stressed how cohesive and fabulous the board was over the previous three days when hostilities with former S8 founder Chris Scott subsided after he was granted three board seats.

My opening salvo related to the question of who wears the liabilities for Scott's impending appearance in the Southport Magistrate's Court for alleged commission rigging at his old travel group S8. Scott wouldn't speak but White confirmed the maximum $44 million liability rested with the current owners of Stella, which is private equity firm CVC with 65% and MFS with 35%.

I also asked Peacock how the board was suddenly so wonderfully cohesive and determined when he told The AFR last month: "for reasons well known to Mr Scott, I have absolutely no respect for him whatsoever."

This wasn't properly explained but Peacock used the following form of words today: "For reasons well known to him now, he now recognises the regard I have for him."

Click here for the full exchange.


Chris Scott was finally allowed to speak at the end of the meeting and joked about he and Peacock getting on better thanks to their life long support of Essendon. His speech was the first time anyone on the top table talked realistically about the situation as he labelled it "really really bad". Scott was very gloomy, saying the MFS share price plunge had ruined his life and he only seemed to be half joking when he said: "I don't dwell on the past - otherwise I would kill myself."

With 8% of MFS held across his broader family, Scott is clearly very upset that at the age of 60 and having retired to Singapore, he's now back working in Australia to save his fortune. Listen to Scott's speech here.


When Peacock does quit, Chris Scott's forces will effectively have board control because they seem to be aligned with newly elevated deputy chairman Paul Manka, who himself has been margin called off the MFS register.

The reality here is that Ansett adminstrator Mark Korda is effectively running MFS. His business now employs 220 people and he personally is pretty much full time on the MFS job as he attempts to salvage some value and use this high profile gig to establish a beach head in Queensland.

Craig White refused to reveal how much Korda Mentha is being paid, but informed sources revealed later that he was doing a good job and wasn't gouging excessively.


Whilst Craig White said that MFS co-founder Michael King is completely out of the picture and no monies are owed either way, it seems that his original business partner Phil Adams, who scurried off to Dubai last financial year as part of his divorce strategy, is still getting paid and this won't stop until the MFS Dubai subsidiary is formally closed down in the coming weeks. Listen to that exchange here.

Adams and King are both set for huge margin calls when trading resumes, but Craig White tried to claim he wasn't aware of any directors who have suffered margin calls. That's funny, my list of margin called directors includes two MFS stars and this recent story in The Courier Mail reveals that Citigroup has also issued proceedings against Michael King and Craig White.

Craig White is just telling bare-faced porkies because here is the shareholder notice filed by Paul Manka after he was forced to sell his 4.97 million shares for a miserable $5.17 million on January 18 - the day the shares collapsed after the ill-fated de-merger proposal was unveiled.


Craig White's lamentable presentation largely trawled over previously announced material. He failed to answer even the most basic questions, such as the size of the book loss that will flow from selling 65% of Stella to CVC for $409 million - representing an enterprise value of $1.53 billion on a business that cost $2.2 billion to put together. Listen to that exchange here.

This bloke cannot keep running a company when he personally will be in court on April 9 defending a claim from Citigroup for $356,000. At least Eddy Groves settled the $8 million Citigroup sued him for. Centro CEO Andrew Scott was margin called and he quit. David Coe was margin called and he quit as the executive chairman. Craig White simply cannot remain in charge.

Besides, the bloke didn't seem across much of the detail today and is certainly not an articulate leader. Twice he tried to talk about the credit crunch exacerbating MFS's troubles, but each time it came out as "exasperating" - which the whole meeting certainly was.


The frozen $770 million MFS premium income fund is arguably the most concerning aspect about this fiasco. This money was raised from 11,000 punters and is now frozen after a run. Royal Bank of Scotland have taken control after a default on a $184 million loan. The MFS board used this fund like a private bank to finance their favourite developers across the country, including numerous related party transactions with associated groups such as MFS Diversified and MFS Leisure & Living, both of which are also in the process of being renamed.

Craig White revealed that the fund has indeed called on MFS to pay up on a $50 million back-up facility but this is being resisted so far. With the more aggressive Paul Manka and Chris Scott set to take control, expect a tough stand on this dispute. Listen to the full exchange on the MFS Premium Income Fund here.


The good thing about today's meeting was that about a dozen different shareholders asked questions. None of them were particularly aggressive, just sad and disbelieving about the whole shemozzle.

The meeting only lasted for an hour and Peacock tried to share the questions around one at a time. He barely answered any himself. It's been a long time since a chairman and CEO at a meeting were so collectively unhelpful in the face of questioning.

So many questions, so few answers and so much denial. These guys really are in denial. Craig White even said he was comfortable with all the company's statements about its debt position last year.


A number of shareholders came up after the meeting to ask whether MFS was going broke and I said "yes". However, the head stock doesn't actually have much normal debt left. There is a put option from its teetering New Zealand business which looms as a big cash drain, plus the $50 million being sort by the Premium Income Fund.

After that, the major liabilities are just things like the MFS notes, where the firm raised $210 million last year. I bought some of these at $72 last year and expect to recover $100. The real problem is the cross-collatoralisation where one part of the empire spills liabilities onto another.

Litigation funding firm IMF is already circling and don't be surprised if the corporate plod formally gets involved.

The group's reputation has been utterly destroyed and no name change to Octovia - a legend from the Roman empire - will save the day. In financial services, your reputation is everything.

Once the fire sale of propery is completed, it will then come down to CVC and its ability to generate some value out of Stella, but that could be a couple of years away and for the time being Stella's cash flow will be devoted to paying down the $900 million debt owed to UBS.


Click here if you want to listen to the full 45 minute question and answer session. All of my questions are packaged up separately here.

I'll be chatting about MFS and other market developments, especially today's collapse of Opes Prime Stockbroking, on Business View from 9am tomorrow on Sky Business Channel.

That's all for now.

Do ya best, Stephen Mayne

* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.