Allco's notorious EGM approving Rubicon deal

Dear Mayne Report Subscribers,

Today we saw another classic example of Australia's slack culture of shareholder pressure and engagement.

The controversial $328 million purchase of Rubicon Holdings by Allco Finance Group was comfortably approved with just 69 million proxies (20% of the total capital) in favour and 17 million against.

This was the ultimate insiders deal with $63 million of cash heading to a vehicle controlled by Allco founder and executive chairman David Coe and fellow director and old mate, Gordon Fell, who has just paid $30 million for a mansion in Point Piper.

Despite all the hot air before the meeting and press speculation we didn't even go to poll because the result was a foregone conclusion through the proxies.

That said, we had an interesting debate on the question of independence and who could and couldn't vote. It seems that most of Allco's staff were able to vote and chairman Bob Mansfield tried to make a virtue of the fact that David Coe himself had not voted.

None of the insiders sat at the head table and the deal looked respectable with CEO David Clarke, independent expert Grant Samuel and the independent board committee - comprising Mansfield, Rod Eddington and Barbara Ward - all emphatically backing it.

That said, there was a significant compromise revealed last Friday when the issuance of 4.2 million Allco shares to Rubicon's shareholders were made contingent on future performance. The deal might well have fallen over but for this effective $30 million cut in the up-front purchase price.

Allco still paid a hefty 14 times earnings for Rubicon which comprises three underwater property trusts - Japan, Europe and America - run by 97 staff who control $9 billion worth of property in 9 countries.

The whole model is flawed because it relies on huge fees from sourcing assets and then on-going fees from third party investors.

I'm an investor in about 30 of these vehicles - including 6 Allco/Rubicon offerings - and can tell you most of them are performing badly and trading at a discount to net assets. This is because the fees simply destroy too much value.

As a shareholder activist, I'll be increasingly targeting these vehicles because of the inherent conflict of interest that comes from fee leakage.

The $1 trillion Australian super pile is being gouged every which way and the three main offenders are Macquarie, Babcock and Allco, which has today got itself some serious scale to better challenge Macquarie's booming real estate business.

Many of them are now doing buy backs, fee rebates or straight on market purchases in the funds to try and protect the earnings stream and reduce the discount to net assets.

The other problem is gearing in the context of the current sub-prime debacle. Allco-Rubicon is loaded with more than $10 billion of debt across its assets and finding new loans ain't going to be easy in the current market.

There were four different speakers from the floor, all of whom had reservations, and the meeting was finished by 11.05am.

I jumped straight in a cab for Star City and arrived at the Channel Ten AGM at 11.20am to see the last security guy tidying up.

Apparently, the 10am meeting was all finished after just 45 minutes. So much for a culture of shareholder pressure.

Seven and Ten have both got away with sod all shareholder scrutiny this year when there were so many fascinating issues to work through.

Oh well, at least Rupert and James Packer were put through their paces.

Do ya best, Stephen Mayne

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