Crikey, Crullers and Charlie Cabbie ganged up on the Millionaire Factory but were well and truly trumped by a couple of angry shareholders who stole the limelight.

And boy, it didn’t disappoint.

But much of the colour came not from Crikey’s balance sheet sleuths, but from a couple of very, very cheesed off shareholders who had some juicy dirt on the Factory and some TV camera crews in tow to capture the event.

Managing director Allan Moss departed from CEO textbook theory and did not deliver a prepared speech. He went into enormous detail about the banks operations in the first strike of a campaign to try and win back the confidence of investors who have been cleaned out by the Sydney Airport/Macquarie Airports Trust share price fiasco.

Still, at the end of the meeting we left with the distinct impression that they have some even more worrying PR battles looming on the horizon.

And there wasn’t even one mention of the Parrot!

We had plenty of questions which we didn’t get around to asking, so we might put a few of the more interesting ones to CEO Allan Moss and see what responses he gives us.

It would be the first year that the Millionaire Factory’s foremen had to deliver glum news to an AGM, and they handled it pretty well, giving a couple of angry punters a long leash and tolerating a fair bit of comment on their options scheme.

Legal stoushes

After more than an hour of detailed presentations, the first two rants were from shareholders caught up in long and nasty litigation with the bank.

Four Corners reporter Andrew Fowler was there and we got the impression he was caught up with the litigants. Greg Hoy from the ABC’s new business show was also at the meeting and appears to be taking an interest in the Parrot’s battles with the Millionaire Factory.

Another journalist at the meeting suggested later that the Parrot has already sicked his lawyer onto Hoy ahead of his story going to air.

Chairman David Clarke was incredibly tolerant of the two speakers who were pushing their legal dispute against the bank at the meeting.

A Mr Locke must have spent about 15 minutes on his feet and was even allowed to ask about 6 questions straight of non executive director Helen Nugent when she was up for re-election. Full marks to David Clarke for allowing the spirited attacks to be launched repeatedly but it was no surprise that he declined to comment on the basis these matters were before the court.

Mr Locke claimed he’d mortgaged his home and was battling to feed his five kids because Macquarie had demanded $250,000 in security of costs before his dispute over “Project Harvest”, “stolen documents” and something to do with the Ravensworth feedlot in southern NSW could be heard in open court.

Mr Locke was handily briefed on the long running dispute that two sacked Hong Kong-based Macquarie executives called Berg and Bell are having with the bank.

He repeatedly quoted from an alleged tape played in open court that purports to quote Macquarie’s Treasury boss Andrew Downe saying that Allan Moss would “have a fit” if he knew the size of its exposures in its South African gold trading business and that the bank effectively kept two sets of accounts.

Both Moss and Clarke refused to deal with the specific claim but said they were aware of South African trading liabilities and there was no second set of books.

The Parrot

The whole battle between the Parrot and Macquarie goes back to an interview that investment banking boss Nicholas Moore, who took home a handy $5.9 million last year, did with Adam Shand from the Fin Review, which you can read about in Hillary’s Parrot Droppings column.

Moore is rumored to have attempted the old retrospective off the record claim with Shand but the story stood and the rest is history, including the grovelling apologies published in the press from Macquarie to both the Parrot and AMP after Moore was explicitly quoted saying that AMP had paid Jones in the cash for comment scandal.

Crullers, Crikey and a taxi driver we befriended got up about 12 times between us but we never got around to launching the planned stinging attack on the Parrot as there were just too many other exciting issues to explore.

The Parrot seemed to go quiet on the Millionaire Factory very quickly after they reportedly had a smoke of the peace pipe together.

We’d love to know whether the Millionaire Factory has entered into any commercial arrangements with the Parrot, whether it be on-air advertisements, agreeing to support any of the Parrot’s causes or the like.

Aside from not commenting on legal issues for obvious reasons, chairman David Clarke and CEO Alan Moss were pretty frank in dealing with a lot of difficult questioning at the AGM, so we might put the Parrot question to them and get a response.

The Millionaire Factory’s bonus scheme

We learnt a bit about the Macquarie bonus scheme which saw Richard Jenkins walk away with $7.4 million when he retired on July 3 last year after 15 years as an executive director.

Executive chairman David Clarke explained that about 30 per cent of bonus payments are paid into a separate bank account accumulated over a 10-year period and then paid out at the end.

However, because all of this is expensed through the profit and loss account each year, they were able to decline my invitation to spell out what the other executive directors stand to collect when they retire.

But Clarke was up for re-election this year and is also chairman of the remuneration committee so Crikey asked him to spell out his golden parachute and he replied that “I have not got the slightest idea” but then speculated that it would be “at least what Mr Jenkins got, probably more”.

Surely David Clarke is a candidate for the Rich List as he owns $16 million worth of shares in his own right, has options over another $5 million and took home a salary of $3 million last year.

He has also sold plenty of shares over the years.

Airport exposures

Neither David Clarke nor Allan Moss mentioned the Parrot by name but there were apologies for not communicating well with the investment community and a pledge to better communicate with the wider public now that they own assets of broad public interest such as tollroads and airports.

Moss went to great lengths to spell out what a great investment Sydney Airport will be over 100 years and stressed that revenue will grow at double GDP, a much better prospect than shopping centres or utilities. He admitted Macquarie had deluged the market with $6 billion worth of Macquarie-related securities in just 10 months. And yes folks, that $6 billion is now worth about $5 billion and all those passive institutions have arked up at the huge fees Macquarie continues to pull out.

Crikey asked why they didn’t see the writing on the wall when the Commonwealth Bank pulled its $200 million equity commitment to the Sydney Airport bid, meaning that Macquarie funds had to step up and take 53 per cent of the equity.

Moss was disingenuous on this point as he stressed that ComBank remained a debt provider and was at the signing ceremony. Yes, but Allan, they took equity in your other infrastructure buys such as Transurban but this time they said the price got too high and they retreated to just providing debt.

Why didn’t Macquarie heed that warning and bid something closer to $5 billion rather than the stupid $5.6 billion they paid for Sydney Airport?

Crullers also pointed out that Moss’s figures were based on price paid as against predicted EBITDA and asked the obvious – could it be that the market hit to the share price is because the predicted EBITDA assumptions are too bullish?

Mossy went to some lengths to point out that the figures were over a 100-year period and factored in one-offs such as September 11, so the figures were solid.

So little spats like Chris Corrigan’s recent grandstanding over the price they are asking for the terminal lease wouldn’t hurt their projections too much, he reckoned.

Allan Moss was able to claim that profit was up substantially in the first quarter but the quality of this result remains up in the air. CFO Greg Ward admitted that this included their $50 million Sydney airport fee as the deal settled on a Sunday afternoon, which just happened to be June 30.

We also raised the question of taking risky infrastructure assets onto the balance after Allan Moss put up a slide showing that there is about $500 million worth of infrastructure assets on the balance sheet right now.

When pressed for the assumptions about this figure, Greg Ward admitted that it was a worst case scenario, assuming that the Macquarie Airports and Macquarie Communications (the vehicle for the NTL assets) capital raisings both flop and the Millionaire Factory is left holding the underwriting baby.

There’s every chance this could happen.

Conflicts of interest

What has happened here is that the investment community has finally arked up about Macquarie’s excessive fees. They have banded together as a group and demanded they take less cash out upfront and have a bigger investment in the trusts so that the conflict of interest is reduced.

The Queensland Investment Corporation is Macquarie’s fourth largest shareholder, having increased its stake from 5.6 million shares to 7.4 million shares over the past year.

Presumably, poor old Queensland taxpayers took an additional 1.8 million shares in last year’s institutional placement at $35 a pop. They wrote out a cheque for $60 million and have already dropped $18 million of that.

Crikey queried the re-election of Macquarie director John Allpass because he is also on the board of the QIC. The QIC should be a leader in pushing for change at Macquarie, yet one of their directors is part of the gravy train.

The same applies to Helen Nugent who is chairman of Funds SA, the $5 billion outfit that looks after the super of South Australian public servants.

These directors are double dipping when it comes to the funds management industry. Macquarie has a whopping $41.3 million under management, so a directorship of Macquarie should rule them out of being a director of a rival fund manager such as the QIC or Funds SA. It should be one board per industry folks.

And if Australia is to ever get a culture of shareholder pressure, we need a complete divide between the people who control the institutions and the companies they invest in. So a QIC director should not sit on the board of Macquarie which is one of Australia’s most controversial listed companies from a corporate governance point of view.

John Allpass and the rest of the QIC board should be leading the charge against Macquarie’s excess fees and conflicts of interest because they’ve got a whopping $200 million of public servant super tied up in it.

David Clarke responded with the stock standard “it’s not whether you have a conflict but how you deal with it that matters” spiel.

He pointed out that, looking at every member of the board, they would all be disqualified if you ruled out any director with a potential conflict of interest by virtue of the other boards that they sit on.

Options, options everywhere and plenty in the drink

With the recent share price slump and the most recent options issued at the June share price of around $31, there are plenty of options under water at the moment.

That didn’t prevent plenty of shareholder angst at yet another potentially lucrative options package being put before the meeting.

Leading the charge was our mate, Charlie Cabbie, who got plenty of laughs and sympathy from the crowd when insisting that if even he could shell out his hard-earned for shares on his humble cabbie’s wage, then surely the well remunerated execs at MacBank could do the same.

During his address, chairman Clarke spent a bit of time talking about options and mentioned that the cost of Macquarie Bank’s options would be around $50 million before tax, spread over a five-year period. He boasted that the Factory’s accounts are so transparent that anyone in the financial services caper could take a quick gander at their accounts and figure out roughly that cost.

Crullers knows nothing about the Black-Scholes model and humbly suggested to the chairman that mug shareholders with little financial sophistication could do with that disclosure on the face of the accounts.

Crullers questioned whether the bank was too “options happy”, given that there are some 21 million options at year-end (compared to 180 million shares on issue). Clarke said that the option scheme operated under the same terms as it always had, namely that not more than 20% of the company’s share capital could be in options.

They wouldn’t come close to that yet, even if all outstanding options were exercised, but still, the 21 options outstanding look a little generous.

Some that were exercised during the year had a strike price as little as $6.50, so shareholders could be forgiven for thinking that the estimate of $50 million over five years seemed a little conservative.

Crullers also suggested that he had no problem with options but a more modest scheme would be in order.

Assuming the cost this year was about $10 million before tax, that works out to about 2.85% of profit before tax.

Compare that to CSR, who at their AGM the week before told shareholders that their options package worked out to about 0.3% of EBIT.

Testing the Tax Office

Last year we noted that the Factory was involved in an ongoing ATO audit and asked for an assurance that the bank wouldn’t enter into any adventurous tax schemes.

We got the predictable assurance that all of their tax advice was robust and they weren’t taking any unnecessary risks.

Imagine our surprise, then, when we open up the accounts and find that MacBank has been issued some amended assessments by the Tax Man and were currently involved in litigation.

On top of that, they also noted that they were following advice which was in conflict with a draft public ruling from the ATO!

David Clarke wouldn’t (or couldn’t) tell us how much was at stake with the amended assessments, but he did say that they took heart in the fact that the ATO hasn’t issued its ruling as a final and there seems to be some consensus that the ruling is flawed.

Whether the ATO fixes it or not is another matter entirely!

We should also point out that the tax note relating to the ongoing audit doesn’t seem to have changed since last year. Things move slowly with the ATO.

Just a few more questions…

Clarkey and Mossy were such nice blokes at the meeting that we couldn’t bring ourselves to drag it on with any more long-winded and boring questions, but we have a few left so we might put them to the company to get their response. Such as:

– Why did they leave Nick Moore hanging out to dry when he did what so few are prepared to do – stick it up the Parrot?

– Have they entered or are they contemplating entering any commercial arrangements with the Parrot? If not, how was it that they managed to convince the Parrot to go easy on them after his recent outbursts?

– Why didn’t they heed ComBank’s warning and lower their bid for Sydney Airport?

– Is an anonymous Crikey Sole Subscriber and former Factory worker on the money when he says that staff turnover is around 30% and most graduates who start their professional careers at MacBank barely last more than 3 years?

– How do they avoid the conflict of interest with Macquarie Office Trust owning their head office at 1 Martin Place in Sydney?

– How is the film and TV investment fund with PBL travelling?

– What is going on with their troubled investment funds that we analysed on the site recently and which have come nowhere near meeting the expectations set out in the prospectuses? E.g. Macquarie Aircraft Notes, Macquarie Apollo Trust, Global Infrastructure Fund, Mac IT 2000 Trust, Macquarie Private Equity Trust, Macquarie Managed Investments Australian Share Funds.