Less than six months ago, former Leighton Holdings boss Wal King received cheers from adoring shareholders at the company’s 2010 annual general meeting. The millionaire engineering boss, who had been in the top job for more than 20 years, cut a celebratory one-meter cake (adorned with a toy Caterpillar bulldozer) and later passed around copies of a booklet celebrating his achievements, humbly called The Wal King Years. A few months later, King was feted by Sydney’s business elite and powerful politicians at a farewell dinner.

Leighton shareholders are unlikely to be cheering at this year’s meeting, after Leighton Holdings announced it would write down more $1.14 billion from the value of its assets. The asset purchases, overseen during King’s fabled tenure, include Middle Eastern operations, Brisbane’s $4.2 billion Airport Link Road and Victoria’s controversial $3.5 billion desalination plant, which is believed to be up to a year behind schedule. In a desperate bid to shore up its capital position, Leighton announced it would raise $757 million through an entitlement offer at only $22.50 per share.

Make no mistake. This is a serious threat to Leighton’s ongoing viability. The $1.1 billion write-down represents almost half of the company’s net assets (or equity). Hence the need for the urgent capital raising.

Leighton’s write-down and dilatory capital raising draws questions on King’s legacy. As this column has noted at length, despite Leighton’s worsening performance in recent years, King’s remuneration skyrocketed. In 2004 he was paid $8.2 million ($1.49 million in cash); this rose to $9 million in 2006 ($5 million in cash). The appointment of David Mortimer as chairman in 2007 allowed the floodgates to really open, with King’s pay in 2008 rocketing to $16 million ($10 million in cash). In 2009, King collected another $16.4 million, more than half in cash.

Despite King’s rapidly increasing bank balance, Leighton shareholders were not faring quite so well, with the company’s share price slumping from $65.62 in December 2007 to only $28.94 now, before the company’s trading halt. Based on the value of the capital raising, Leighton shares have lost two-thirds of the value. Of course, the reason King’s remuneration was so high was because Leighton’s paid him a cash bonus based purely on the company’ “net profit”. This compelled King to drive short-term earnings gains rather than stable long-term growth. The ramifications of those actions are now being felt.

In its announcement, Leighton’s effectively repudiated King’s management of the company, bluntly telling investors that:

“Moving forward we will be changing the way we tender and deliver major projects. We will be enhancing our focus on tender accuracy and risk identification, adequate pricing of risk, adequate time allowances, project delivery and risk management, and client cooperation issues that could impact project performance.”

Aside from his extraordinary remuneration, King also stands to receive one of corporate Australia’s most generous golden handshakes — a $5 million payment for “achieving satisfactory transition to a new CEO and leadership team” and another $4.9 million for a restraint of trade (the full extent of King’s termination payments will be revealed later this year).

But King handed over to long-term deputy David Steward, so not only is succession part of his job, he handed to his second in charge anyway, which is hardly befitting of a $5 million bounty. As for the “non-compete” payment, given Leighton’s subsequent performance, a reasonable observer wouldn’t expect a non-compete provision would be necessary.

King himself has managed to divest most of his holdings in the company, conveniently offloading 165,000 shares just before Christmas last year, leaving him with only a small holding of 6500 shares and some options. King’s sale reaped him more than $5 million, and was well timed shortly before the full extent of Leighton’s horrendous performance has become public. Had King not sold those shares, they would be worth about $1 million less.

King sits on the board of Coca-Cola Amatil and last week was appointed a director of Ausdrill. Ausdrill chairman Terry O’Connor may be somewhat embarrassed to have boasted to shareholders just last week the appointment of King “is a most significant step for Ausdrill to secure the services of a person who is widely acknowledged as one of Australia’s finest business leaders”.

Leighton shares are expected to restart trading on Wednesday.

Peter Fray

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Peter Fray
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