When then-Macquarie Bank managing director Tony Berg left the Millionaire’s Factory in 1994 to become CEO of one of his bank’s key clients, building products company Boral, an enduring relationship was cemented for the longer term.

Berg’s time at Boral wasn’t marked by great success, but his term finished in 2000 with the Macquarie-advised demerger of Origin Energy, which went on to be a market star before crashing back to Earth in recent years.

Over the past 20-plus years, one consistent theme at both Boral and Origin Energy has been Macquarie enjoying lucrative corporate advisory gigs.

The total fees paid to Macquarie by Boral and Origin, measured in today’s dollars, would now be approaching $500 million, and the latest gig advising Boral on this week’s $3.69 billion cash splash on US building products firm Headwaters is a particularly good earner.

It might be great for Macquarie, but Boral shareholders are shelling out $175 million in transaction costs, which are a very steep 5% of the $3.52 billion enterprise value of the Headwaters business. This is value that will never be recouped, and already shareholder Perpetual is calling for these fees to be returned given the value destroyed so far.

On top of that there is an excessive US$75 million break fee if US regulators block the deal, and if Boral tried to pull out of the deal, particularly if there was a revolt against the board by shareholders for paying too much, there would be open-ended damages to be paid through the US courts.

The three under-writers of the capital raising — Macquarie, Citi and Morgan Stanley — are being paid fees worth 1.75% of the $2.05 billion being raised, yet they only took risk for a couple of days on the $1.567 billion institutional component, which wrapped up on Wednesday night.

Macquarie doesn’t have a great record when it comes to advising clients to look after retail shareholders in capital raisings, and the latest effort by Boral is no exception.

Boral shares closed at $6.15 last Friday but finished at $4.99 yesterday after completing the institutional raising at $4.80 per share. The 50,000 retail shareholders are now being asked to stump up $483 million over the next three weeks. For the Headwaters deal to be neutral on value, the stock needed to come back on at $5.66. Each 1c drop below that represents $12 million of lost value, so at last night’s close of $4.99, the market is saying Boral has smoked $800 million in value. “Heart breaker, not Headwaters” is the joke currently going around the market.

It’s still early days, but many Australian companies have destroyed shareholder funds with overpriced acquisitions, and the board has taken a huge bite, committing $3.69 billion to an all cash offshore acquisition when Boral was only capitalised at $4.6 billion last week.

Boral used the PAITREO  capital raising structure for its $1.6 billion entitlement offer, emulating the likes of JB Hi Fi, Santos, AGL, Origin, NAB, CBA and Westpac in recent major capital raisings.

Boral’s two financial advisers, Citicorp and Macquarie, also teamed up to deliver the disaster that was Slater and Gordon’s $1.4 billion Quindell acquisition , which was the last major Australian entitlement offer that failed to offer retail shareholders on-market trading of their rights.

Citi and Macquarie were rightly panned for the Slaters raising, and now they’ve incurred the wrath of Boral’s retail shareholders by including a selective $450 million institutional placement at the heavily discounted fixed price of $4.80.

If you were trying to avoid dilution of retail shareholders, it would have made more sense to let the market set the placement price through a book-build, as occurred with the 20 million share shortfall on the institutional entitlement offer, which cleared at $5.25 on Wednesday night, giving non-participating institutional shareholders a 55c compensation payment.

There is no compensation for retail shareholders who have been denied access to and diluted by the separate $450 million institutional placement. Maybe Boral should offer retail shareholders a share purchase plan at $4.80 early next year as a make-good for this dilution.

The transaction, particularly after the early loss of value, also raises the key question of shareholder rights on major acquisitions.

Boral had 743.6 million fully paid ordinary shares on issues last week and is adding 106.6 million from the placement and a further 338 million from 1-for-2.2 entitlement offer, thereby expanding its total shares on issue by almost 60% to 1.19 billion shares.

Just like with the Slater and Gordon purchase of Quindell, such a transformative acquisition again highlights the point that Australia does not require shareholder approval for major acquisitions, as occurs in many other jurisdictions.

If Boral were listed in the UK, South Africa or certain Asian markets, shareholders would get to vote on this deal. Headwaters shareholders are getting a vote, so why not Boral shareholders?

The transactions industry opposes this change because it would represent a risk to getting big deals done. Given that overpriced takeovers has been the dominant theme with lost shareholder in value in Australia, surely that would be a good thing. It’s not all about big fees for conflicted bankers.

The offer is priced at a 50% premium on where Headwaters shares were trading just two months ago, so it looks like Boral has gone way over the top.

It is also never a good sign to see that Boral CEO Mike Kane, a hero of the AFR for his litigation against the CFMEU, used to work with the Headwaters CEO Kirk Benson, who is set to pocket more than $15 million from the full vesting of all incentives.

Kane is an American, so let’s hope he doesn’t try to argue he needs to relocate to the US and be paid a US-style salary. Boral’s remuneration report received a first strike at the November 3 AGM and based on yesterday’s share price collapse, bonuses will be thin on the ground in 2016-17.

Interestingly, Kane is known for refusing to talk to certain fund managers who have voted against his remuneration arrangements. Based on Perpetual’s strident comments to the AFR’s Chanticleer columnist today, there may be more shareholder conflict to come.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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