The AFR’s Street Talk column today reflected on Lazard Asset Management’s courageous stand in rejecting the proposed Flight Centre management buy-out last year after the funds manager offloaded some of its stake recently. In February this year, Lazard rejected a $17.20 MBO from Pacific Equity Partners together with Flight Centre founders, Graham Turner and Geoff Harris. Lazard’s 12 percent stake was enough to easily sink the deal.
Shortly after the initial scheme was rejected, Flight Centre founder, Graham Turner claimed that the private equity consortium (of which he was a part) had offered a “fair and full price” and that “[Flight Centre’s] share price will return to somewhere between $10 and $13.” A similar view was proposed by Independent Expert, Ernst & Young, who valued Flight Centre at $16.84 per share.
Flight Centre shares are currently trading at around $29.30 – a hefty 70 per cent premium to what the private equity consortium were offering ten months previously. As Henry Kravis once noted, the barbarians were trying to steal the company.
At last month’s Annual General Meeting, Flight Centre Chairman, Bruce Brown, told shareholders that “based on our performance to date, we expect the net profit before tax at the end of the first half will be in the order of 40 per cent above what was a relatively poor previous corresponding period.” The good times certainly weren’t rolling earlier in the year when management were trying to buy the company. Back then, Turner noted that the private equity consortium would “need to take some short-term pain” if they purchased the company. With the Flight Centre share price now trading 70 percent higher than the offer – the pain would have been very short term indeed.
There is no more conflicted a transaction as when insiders (specifically, senior management) team with financial backers to acquire a company. That is because management are employed by the very people they are purchasing the asset from. Despite best intentions, it is a conflict that seems impossible to reconcile. That proved apt in the Flight Centre and Qantas cases. In both instances, management actively portrayed the company in a negative light to shareholders, while attempting to secure ownership of the company.
Despite the Qantas and Flight Centre boards and independent experts recommending shareholders vote in favour of the deals, shareholders remain far better off having rejected the management buyout proposals. Shareholders 2, Barbarians 0.