ASIC boss Greg Medcraft is making plenty of noise about reviewing Australia’s takeover provisions to protect minority shareholders from so-called creeping takeover bids.
Small shareholders in Seven West Media and Ten Network Holdings are the two best examples of losers when control has passed without a full bid from the likes of Kerry Stokes, James Packer and Gina Rinehart. There are also substantial concerns that Gina Rinehart and James Packer aspire to do the same at Fairfax Media and Echo Entertainment Group respectively.
So precisely what sort of changes should be contemplated?
At the moment, investors are limited to owning 20% of an ASX-listed company without launching a full bid that treats everyone equally. However, a predator can creep up the register buying an additional 3% every six months, eventually getting to a controlling position after two or three years.
When Kerry Stokes first raided the share register of WA News in October 2006 after Family First’s Steve Fielding delivered watered down media diversity laws, Seven paid the lucky exiting investors $343 million or $11 a share to secure a 14.9% stake. A full takeover bid at that price would have cost $2.3 billion for the equity, before considering the company’s $400 million-plus debt at the time.
These days, shares in the debt-laden Seven West Media are wallowing at just $1.69, valuing the expanded equity base after the Channel Seven merger at $1.2 billion.
When share market raids are on, it is rare for retail investors to benefit. Listed fund manager Perpetual has become the best practitioner in the market at profitably delivering strategic stakes to predators. It happily sold its entire stake in Echo Entertainment Group to Malaysian predator Genting last month and also benefitted selling into Kerry Stokes’ raid on Consolidated Media Holdings and the over-priced 2010 raids by RPM (Rinehart-Packer-Murdoch) on Ten Network Holdings.
Medcraft’s intervention looks a little opportunistic. He’s talking things up before a parliamentary committee after some big media stories and we’ve subsequently had a fairly shallow public debate.
Canberra’s fragmenting ruling Coalition of Labor, Greens and independents have a little over a year left before control is likely to pass courtesy of a Tony Abbott takeover bid. Minorities are getting nervous, so here is a list of reforms the current controlling groups might want to consider:
1. Retain the 20% takeover threshold but marginally reduce creeping to 5% every year, rather than 3% every six months.
2. Mandate that all creeping must take place on-market so there are no repeats of the recent creep by the controlling Cash Converters shareholder through an off-market placement.
3. Limit the ability to change control through under-writing capital raisings as recently occurred with Abacus Property Group.
4. Limit the scope of buybacks and share placements to 10% of the total shares on issue per year.
5. Mandate disclosure of institutional voting and extend disclosure of voting outcomes to include shareholders as well as shares, as currently occurs with schemes of arrangement.
6. Extend the definition of related parties so that various directors, insiders or strategic shareholders are unable to vote on proposals which change control dynamics within a company.
Unlike the Americans, Australia has a strong record of equality in takeover bids and protection for minorities. When Rupert Murdoch shifted News Corp’s domicile to the shareholder unfriendly US state of Delaware in 2004, it further legitimised his undemocratic dual class voting structure and also opened the door for poison pills to cement family control.
However, Australian investors, supported by key proxy advisers at the time, extracted commitments from the Murdoch family that they would never deal their shares without insisting on a follow-through offer on the same terms to all shareholders.
Any other strategic shareholder in a US-listed company can pocket a control premium for themselves without all shareholders benefitting. It’s a “no rules” approach which punishes minorities.
Australian takeover targets have enjoyed many windfall gains down the years from predators deciding to pay inflated control premiums. But that is no reason to dramatically change or reform a system which has worked well, save for high profile recent example involving some colourful power players in the media sector.
Whilst the system should be tightened at the margins — especially with off-market share dealing — there is no need for an over-reach that excessively restricts the ability of investors to purchase property rights on the open market.
*Stephen Mayne is a director of the Australian Shareholders’ Association and is delivering a one hour lecture on corporate governance at midday tomorrow in the first ASA Investor Hour in Melbourne (free for members, $5 for non-members)