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Eureka items with unlock/Crikey potential


December 24, 2020

Eureka items that could be re-heated.

Select Harvest shows how not to raise capital (4)

As far as treatment of retail shareholders in capital raisings, things seem to be going from bad to worse.

As The AFR's Rear Window column noted yesterday, Melbourne-based almond company Select Harvest has pulled off an absolute shocker.

Sure, I'll probably make a lazy $3000 on the coming $15,000 Share Purchase Plan for retail investors, but what sort of company unveils an indicative takeover bid at $5.85 and then voluntarily dilutes shareholders with a $45 million fixed price placement at $4.20.

Selective placements are bad news for incumbent shareholders because they usually involve discounts, dilution and poor disclosure in terms of who is benefitting from the ridiculous discretion Australian boards have to hand over 15% of the issued capital to any non-shareholder every year.

As was spelt out in the August 12 overview, placements are an affront to property rights and capital raisings should be pro-rata with full compensation for those who don't participate and therefore get diluted. It's about treating all shareholders equally.

The market is already full of stories about the winners and losers from the $45 million Select Harvest placement. The board and management, along with corporate adviser David Williams, stockbroker Bell Potter and the other well paid advisers on the job really should fully disclose who received these cheap shares. Based on yesterday's close of $5, they were gifting $8.5 million in windfall profits. And this is a company with no urgent need to raise capital. ASIC and the ASX should be on the job here requiring full disclosure on the allocation policy.

As for the Select Harvest directors, a couple of them should be out on their ear at the forthcoming AGM, but that will depend on whether they've looked after their major institutional shareholders in the placement. The notice of meeting will be out shortly for an AGM in late November.

The lesson from all this is as follows: It's fine to reject a non-binding takeover bid rather than be distracted for 6 months, but if you are going to raise fresh capital in these circumstances, don't do it selectively and by picking a price which is 28% below what you're telling the market is unacceptable for a takeover bid.

Slater Gordon – lessons for all to learn (8)

Never before in the history of ASX listed companies has a company flown so high and then crashed so quickly as listed law firm Slater & Gordon. Have a look at this chart.

Slater and Gordon shares went from $2 at the end of 2012, to a peak of $7.85 in April 2015 and are today trading at 4.3c – and that's after blue chip bank lenders have voluntarily taken an extraordinary haircut of about $550 million.

The $2 billion-plus debacle was all wrapped up yesterday when these voting results came through and control passed to US hedge fund Anchorage which bought $500 million of senior debt off a rather embarrassed NAB and Westpac for a miserable 25c in the dollar.

I was looking forward to asking NAB chairman Ken Henry about this in today's Constant Investor chairman interview, which was due to be published next Monday. Alas, after committing to the chat on September 4, the former Treasury Secretary pulled out on Monday afternoon, citing urgent pre-AGM meetings.

When NAB shareholders gather in Sydney on December 15 they should ask for an explanation about the inexplicable Slaters debacle.

I doubt either Westpac or NAB have had a lending disaster as bad as Slater and Gordon over the past 5 years. Each has written off $187.5 million, plus lost millions in interest since their $250 million loans were advanced on May 29, 2015 when the $1.3 billion cash splash on a colourful UK business called Quindell was settled.

This 80 page Slater and Gordon presentation to the ASX on March 30, 2015 explaining the $1.3 billion Quindell purchase remains perhaps the most disastrous single transaction announced by an ASX listed company.

Remarkably, for the second year straight, yesterday's Slater and Gordon AGM was a tepid affair with the brass who were responsible for the debacle once again getting off way too lightly. Sure, there was a second strike on the remuneration report but the rhetoric from the floor of the meeting should have much longer and stronger.

Long-time CEO Andrew Grech has now departed the scene and chairman John Skippen, who was somehow re-elected yesterday with 87% of the votes in favour, will be gone from the board by Christmas.

There are a number of lessons to be learnt from the collapse of Slaters but the biggest is that shareholders should get a vote when a company proposes a transformational acquisition. This is the case in many other jurisdictions, including the UK and South Africa. If it was Quindell buying Slaters, both sets of shareholders would have voted on the deal.

Given time to contemplate the Quindell transaction, the Slaters shareholders would probably have voted down the proposed deal back in May 2015. But they were never asked. Malcolm Turnbull and Bill Shorten should think about this for a moment because the law needs to be changed.

Under Australia's existing excessively pro-transaction corporate laws, an obscure British legal services business was effectively back-door floated onto the ASX in 48 hours. This obscenely rushed situation was only possible because the Slaters directors were able to persuade the likes of lenders NAB and Westpac, investigating accountant Ernst & Young, along with Citi and Macquarie, the two under-writers of the $890 million equity raising, that it was fine to pay $1.3 billion in cash for a controversial legal services roll-up in the UK.

I've covered the saga of Slaters extensively for Crikey over the past three years as follows, including much focus on the unfair structure of the 2-for-3 $890 million equity raising:

Have Slater and Gordon gone OTT with $1.2b UK takeover deal?
Monday, March 30, 2015

Aussie investors love Slaters UK plunge
Thursday, April 2, 2015

Slaters capital raising confirms unfair deal for retail investors
Friday, April 24, 2015

Slaters ducking for cover on capital raising for insiders
Monday, April 27, 2015

Why Slaters should have done a PAITREO capital raising
Tuesday, April 28, 2015

Slater and Gordon could face a class action
Thursday, July 2, 2015

Who can save Slater and Gordon?
Thursday, March 3, 2016

For the first couple of days after the deal was announced, investors were optimistic because Slaters had a track record of delivery through acquisition and so many credible names were swearing by the Quindell acquisition.

Indeed, the enterprise value of Slaters soared to almost $3.4 billion in April 2015 when the share price peaked at $7.85 – yet just 10 months later the stock was suspended from trading ahead of an $800 million Quindell write-down unveiled on February 29, 2016.

How the leadership team of Grech and Skippen managed to keep their jobs until yesterday in the face of this record fast destruction of value remains the most puzzling element of the affair.

Why did NAB and Westpac stand by them for so long whilst collectively dropping $400 million? What other bosses of failed companies get off so lightly? Presumably, it was because no-one else knew how to run the world's biggest listed law firm and NAB and Westpac didn't want the political head-ache of sending Australia's most Labor-aligned law firm to the wall whilst banks were so on the nose in Canberra. A collapse into receivership would have caused chaos with staff, clients and the courts, so the banks instead kept it afloat, at great cost to their own shareholders.

The contrast with the other most noteworthy collapse of an ASX200 company this year is striking. Indeed, the directors of TEN Network Holdings arguably pulled the pin prematurely because of threats from their lenders, as former chairman David Gordon out-lined in this recent chairman interview with The Constant Investor.

If we're going to have a Royal Commission into the banks, maybe commissioner Ken Hayne should have a look at how more than $1.5 billion of Australian national wealth was squandered on the Slaters-Quindell folly. The Slaters staff and former partners of various acquired law firms, who've collectively dropped more than $500 million from top to bottom, deserve some answers too.

Why on earth did normally conservative and prudently managed banks like Westpac and NAB sign up for maddest offshore acquisition we've ever seen? NAB chairman Ken Henry has presumably been fully briefed on the debacle and perhaps should explain what happened to shareholders at the AGM in Sydney next Friday.

Shareholders were relying on the likes of NAB and Westpac to ensure the Slaters director didn't bet the company on any stupid deals. And there have been none more stupid in Australian than paying $1.3 billion in cash for Quindell.