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Monday, 3 March 2008

If you jump into bed with MFS, well…

Adam Schwab writes:

Of all the recent debt-funded corporate implosions, the rapid demise of MFS is probably the greatest tale of incompetence and greed. While Centro and ABC Learning Centres have a media higher profile, their collapses were primarily due to an isolated US debt-funded expansion. By contrast, MFS seems to have adopted Alan Bond’s business strategy: rampantly over-pay for assets through excessive use of debt.

MFS remains suspended from trading and it seems difficult to imagine that shareholders will see much from their investment. Meanwhile, an almighty fight has broken out between a major MFS shareholder and beleaguered chairman, Andrew Peacock.

After selling two-thirds of its Stella Travel business for $461 million cash, MFS is left with businesses including:

MFS Living and Leisure (ASX Listed)

Suspended for trading and looking to sell off ski field assets and its aquarium businesses to pay back $180 million in short-term debt. CEO has resigned.

MFS Diversified (ASX Listed)

Currently suspended from trading after receiving a notice from its major lender that it had breached a liquidity ratio on one of its debt covenants. 

MFS New Zealand

Suspended from trading after defaulting on interest payments to investors. Needs to repay $220 million debt by end of March. Administrator appointed by Perpetual. 38.5% owned by MFS.

MFS Premium Income Fund (unlisted)

Recently froze redemptions to investors, somewhat belying the notion of being ‘premium’ or providing ‘income’. Is owed $64 million by MFS Living and Leisure. City Pacific last week declined to make offer for assets. 

In-house Corporate and Investment banking

Earned $132 million of MFS’s income last year by “facilitating the acquisition of strategic assets…with the intention of creating value”. Given that MFS’ fund managements businesses are gone, its fate appears less bright than Michael King’s polo career.

Aside from its founders, Michael King and Phil Adams, the biggest victim of MFS’s downfall appears to be S8 founder, Chris Scott. When MFS acquired S8 (which formed the majority of its Stella business) for $780 million in cash and scrip in 2006, Scott received consideration of around $220 million in MFS scrip. Based on MFS’s last sale, Scott’s stake has dwindled to $40 million. It’s worth even less now.

Scott claimed that the sale of Stella to CVC was “the scandal of the year”, while Scott’s adviser (and the former chairwoman of S8), Jenny Hutson, attacked MFS chairman Andrew Peacock, claiming that:

Andrew Peacock has refused to step aside in the gentlemanly fashion. He is the general on the field who has failed. When he took over the company in the role of chair in March last year the company was worth more than $2 billion. It last trades at less than 25 percent of that value.

The feeling is clearly mutual though, with Peacock telling the AFR that “for reasons well known to Mr Scott, I have no respect for him whatsoever.”

Peacock’s feelings towards Scott may have something to do with Scott’s scheduled appearance in the Southport Magistrates Court in August in relation to charges relating to commissions deducted at S8 apartments. If found guilty, Stella could be liable to pay $44 million in fines while Scott could face a two-year jail term.

It would also be fair to argue that Scott’s predicament was largely self-imposed. When Scott sold S8 to MFS, he chose to accept scrip (not cash) and even set the wheels in motion by entering into a pre-bid agreement with MFS for 19.3% of S8. When he sold his business, Scott was in effect putting all his eggs in MFS’s basket.

It would be fair to say that Chris Scott chose to jump into bed with MFS, he just didn’t realise he was about to get completely screwed.