QBE AGM, Insight, CFS, Fairfax windfall, Westfield, BrisConnections and dodgy capital raisings

February 2, 2010

Dear Mayne Reporters,

We don't usually send out two editions in a week but there's been so much happening that you're getting this late on Easter Thursday.

First up, we've edited down the one hour executive pay debate on Tuesday night's SBS Insight program to a 12-minute highlights package which basically focuses on the three way exchanges between Telstra director Charles Macek, RiskMetrics boss Dean Paatsch and yours truly.

After initially being upset about this column for the Fairfax websites foreshadowing the debate, the Insight producers were happy after the event - especially given it was the highest rating episode for the season with an estimated 500,000-plus tuning in when you include the regions.

If you get a chance, watch the repeat at 1.30pm on Good Friday, or download it from the SBS website here.

The biggest moment of the night was the final exchange with Charles Macek. It was picked up in the comments thread on the SBS website with the following from Linz in Brisbane:

Charles Macek's response to Stephen Mayne's comments "Don't you think it's hard managing in this sort of economy? The job is tougher, much tougher" in order to justify an increase of 20% in base pay was galling. There are many businesses downsizing or choosing not to replace staff who leave, forcing the remaining employees to work longer and harder for no increase in remuneration and no prospect of salary increase.

Indeed! There is no excuse for CEO base pay to be still rising after it has doubled in 6 years and at a time when everyone is hurting.

Charles also copped some grief in the live online chat after the show, but full marks to him for turning up and being prepared to debate. If only there were more directors like Charles Macek. Maybe he should join the QBE board as the next items explains.

Love and then war with QBE Insurance

It has taken 10 years, but we finally had an AGM exchange with those legends from QBE Insurance on Wednesday in Sydney.

The result was the most lavish praise I've ever heaped on a public company on national television - check out the Lateline Business story here.

Whilst the AGM produced some fascinating exchanges and it was very disappointing that the company's webcast was edited down to remove all of the debate.

It would have been great to bring you some video action from the webcast, but at least there's the audio we captured, apart from the first question on the AIG collapse.

I told Sky's Business View program this afternoon there was quite a bit of interesting news in the AGM debates, including a possible change to the highly conservative investment strategy, a claim that AIG has become uncommercial ever since "Uncle Sam" took over and the revelation that chairman John Cloney will probably retire at the end of this term.

Have a listen to these edited highlights:

With cash rates going to zero, shouldn't we reposition the $27 billion portfolio?

Stop treating us small shareholders badly and what's wrong with renounceable rights issues?

How were the proxies running when you blinked in the face of RiskMetrics recommendation?

Chairman John Cloney on his last term and succession

Congratulations on making history with 3 female directors re-elected

The attack on RiskMetrics was pretty potent with Cloney telling shareholders: “RiskMetrics didn't get it right...what they said was untrue”.

RiskMetrics denies this but the facts of the matter are that QBE changed its policies by cutting the retirement benefit for CEO Frank O'Halloran and promising to put all future equity issues to the vote. However, the updated Risk Metrics report probably went out too late because the remuneration report still copped a hefty 18.8% protest vote, although chairman Cloney didn't bother informing the meeting of this highly relevent information at the time.

Cloney really is an old school combative chairman. At one stage in the meeting he implied that London-based stockbrokers who had put out inaccurate analysis of QBE should possibly go to jail, given he risks such purgatory for telling porkies.

The QBE spindoctors tried to stop ABC television reporter Desley Coleman from even interviewing shareholders before the meeting and both Cloney and CEO Frank O'Halloran refused to go on Inside Business despite having such a great story to tell.

Cloney didn't let any of the three history-making women up for election speak to their candidacy, he didn't show the proxies and he won't even release the full webcast. Despite being a terrific long-term performer, John Cloney is clearly a control freak.

CFS Retail EGM

The trip to Sydney for Insight was fortuitous because it also coincided with an EGM for CFS Retail on Tuesday morning to approve a $325 million placement.

It was very interesting to prod Westfield's strongest Australian competitor which is currently upgrading the giant Chadstone shopping centre in Melbourne, whilst also investing $540 million redeveloping the iconic Myer Melbourne site.

And as we all wait to see if the Commonwealth Bank will vote its 7% stake in Westfield against the remuneration report, it was interesting to quiz a Commonwealth Bank managed fund about its relationship with the Commonwealth Bank.

As it turns out, CBA is just one of 9 institutions providing the interest rate hedging for CFS Retail which is now well out of the money and it has also lent more than $150 million as part of a $600 million facility provided by the Big Four Australian banks.

The CFS Retail heavies were very keen to stress the Chinese Walls between the bank and its funds management arm, even though CFS Retail would be an obvious buyer of some Centro assets and this would very much suit the Commonwealth Bank as it attempts to recover more than $1 billion in debt.

CBA's Colonial arm was the biggest equity loser in the Centro collapse having dropped about $600 million but this was a different division (one floor away) from the listed CFS Retail as its managers were keen to point out on Tuesday.

Anyway, have a listen to these edited audio highlights from the EGM:

Exchanges over hedging, loans from CBA and banking covenants

The Centro conflict and relationship with CBA as manager and a big lender

Revealing 30% of the register conflicted from voting on placement resolution

How much did we pay Goldmans and JP Morgan for the $325 million and what is wrong with renounceable rights issues?

Taking out the tiny shareholders - compulsory or voluntary?

We help Westfield raise $60 million

Westfield wouldn't have done a share purchase plan for its shareholders if we hadn't threatened to run for the board on the issue, so it was good to see investors applied for 5.97 million shares worth $60 million as this ASX announcement on Tuesday explains.

With the stock closing at $10.57 for the Easter break, investors are enjoying paper profits of $3.224 million. If only we were on commission?

Ranking the biggest share purchase plans

The primary motivation for attending the QBE Insurance AGM on Thursday was to deliver this spray about the ridiculous scale back of its recent share purchase plan.

Chairman John Cloney's response was disingenuous. Presented with all the facts on what other financial services heavyweights have done, he could only talk about QBE's "morality" of sticking to its promises to the market about capital raisings. Yeah, what about the morality of telling shareholders at the AGM that a webcast would be available after the meeting, but then failing to deliver with all the debate.

QBE treated its small shareholders with contempt in 2007 when it did a $406 million private placement with no follow through share purchase plan for small investors. It then showed further disdain when it placed $2 billion worth of stock with institutions at $20.50 a piece last December and then scaled back $226.5 million worth of share purchase plan applications from 48,000 shareholders to just $114 million, equivalent to only 5.4% of the $2.114 million raised.

Here's how the QBE bastardry compares with other major capital raisings recently:

ComBank: $2 billion institutional placement in December and then raised a record $865 million from an uncapped SPP, equivalent to 30% of the total $2.865 billion raised. Investors could buy up to $10,000 shares, versus just $5000 by QBE, and CBA effort was easily the biggest SPP in history.

Westpac: $2.5 billion placement in December 2009 followed by $442 million SPP, equivalent to 15% of the total $2.942 billion raised.

NAB: $3 billion placement in November 2008 followed by $250 million SPP, equivalent to just 7.7% of the total $3.25 billion raised but at least it wasn't capped.

Tabcorp: $300m placement in February 2009 followed by an uncapped $87 million SPP, equivalent to 22.5% of the $387m raised.

IAG: $450m placement in March 2009 followed by $87m uncapped SPP, equivalent to 16.2% of $537 million raised.

Crown: $300m placement in January 2009, followed by an uncapped $40.2 million SPP, equivalent to 11.8% of $340 million raised.

Bluescope Steel: $300m placement in December 2009, followed by uncapped $113m SPP, equivalent to 27.4% of total raised.

As you can see, QBE is way out of line with all other major companies although it will be interesting to see if Axa follows through on its threat to cap its SPP at $185 million, which would still be 27% of a total $685 million.

The Axa SPP at $2.80 is currently 33% in the money with the stock closing at $3.95 tonight so if you know anyone on the register, tell them to write out a cheque or do the $10,000 BPAY before the offer closes at 5pm on April 24.

We're currently in discussions with Eastern Star Gas and Fortescue Metals about their refusal to do a follow through SPP after a placement and will be sending the audio file of the QBE exchange to both companies.

In the market for a BrisConnections proxy

There was another lively debate about BrisConnections on Sky's Business View this afternoon and I repeated the prediction that the project would proceed with Macquarie dropping a packet.

The updated information for Tuesday's EGM arrived by Express Post this morning and shareholders have got until 10am on Sunday morning to find a proxy if anyone knows someone in Brisbane who might be available.

Unfortunately, it would cost about $700 in flights to get there and I can't miss two Tuesday night council briefings in a row. It would have been great fun to be in the thick of the debate, but it wasn't to be.

The following email has just been sent to BrisConnections:

Sir, I'm a BrisConnections shareholder in Melbourne who can't afford the time or money to come on Tuesday so could you please arrange for the meeting to be webcast, as occurs with the vast majority of Macquarie-management funds.

Yours Sincerely
Stephen Mayne
BrisConnections shareholder

Don't hold your breath, folks.

The letter The AFR declined to publish

After some discussion with The AFR's letters editor, this contribution was all set to appear in Tuesday's paper and then....no appearance, your worship. The shafting of John B Fairfax is a very important issue and I gave it a good rev on Sky's Business View program this afternoon which will be repeated at 9am on Saturday morning if you've got Foxtel. Anyway, here's the text of the letter:

Dear Sir

“ASIC probes investment banks on capital raisings” was The AFR's front page story yesterday and there is indeed a very important debate to be had.

For instance, as the owner of 109 Fairfax Media shares, I'm mystified why my application for 146,334 additional shares in the recent capital raising was scaled back to just 50,000.

After raising $501 million in the accelerated entitlement offer, there was a maximum of $183 million to be raised from the retail investors and Fairfax received applications for just $148 million. Why on earth would a company hungry for capital reject $25 million from small shareholders and settle for $123 million, only 67.2% of the pool available for retail investors?

Fairfax told the ASX on Friday that it allocated the shares “on an equitable basis”.

Hang on a minute. Fairfax's retail shareholders weren't offered any of the 130 million shares that Marinya Media, controlled by Fairfax director and former largest shareholder John B Fairfax, declined to take up in the 3-for-5 offer.

They all went to the other institutional investors such as Maple-Brown Abbott and the Commonwealth Bank, as arranged by Fairfax Media's investment banking advisers.

And poor old Marinya didn't get offered a premium. The $97.5 million entitlement was tipped out at just 75c each because Fairfax declined to make the offer renounceable or sell them into a book build, as occurs with some other capital raisings.

The net effect is that John B Fairfax and retail shareholders as a class have been diluted and the institutions who shelled out $489 million received a disproportionate benefit and were showing paper profits of more than $220 million when the shares peaked at $1.13 yesterday morning.

Why can't we just get back to the good old days of renounceable rights issues that treat all shareholders fairly rather than having conflicted investment bankers deciding who gets an inside run when there are extra shares to be allocated?

A good outcome from Fairfax capital raising

All up we've made a gross profit of just over $20,000 on the Fairfax Media capital raising, having sold two parcels of shares on Wednesday - 50,000 at $1.05 a share in our own name and 20,000 through another party at $1.10 a share.

There will be some considerable profit-share with financiers and facilitators, but it just goes to show that it can pay to be on lots of share registers and then apply for additional shares in capital raisings that are forfeited by other retail investors. Paying 75c for Fairfax shares and then exiting at an average of $1.07 represents a profit of 42.7% in less than two weeks. That also tells you how much John B Fairfax has been ripped off.

That said, the fairest way to raise capital is through a renounceable rights issue, something I pushed at the QBE and CFS Retail meetings this week, even though it would work against us financially. Heavily discounted non-renounceable entitlement offers such as that done by Fairfax discriminate against those who can't or don't take up the offer.

Selective placements are also fundamentally corrupt because the underwriter can play favourites with the allocations. For instance, electricity infrastructure play DUET Group is jointly managed by AMP and Macquarie and this week unveiled a $264 million capital raising.

Why $130 million of this had to be through a selective placement beats me. I emailed the Macquarie spinner responsible for DUET this week to ask if Macquarie would be getting looked after in the discounted offer and received this rather incredible reply: "In terms of Macquarie and AMP's participation this is a matter for them to determine so you would need to speak to them."

Chinese walls and all that, folks!

Until next time, 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.