What is it about billionaires and the way they treat minority shareholders, particularly unsophisticated retail investors?
Solomon Lew thought it was fine for Coles Myer shareholders to spend $18 million on Yannon in the 1990s, Frank Lowy has done numerous Westfield related-party transaction benefiting his family over the years, Rupert Murdoch’s family has gouged more than $1 billion in salary and bonuses from public companies, and now Kerry Stokes has decided to emulate fellow billionaire Gerry Harvey by doing a capital raising that deliberately dilutes 29,000 shareholders in Adelaide-based Beach Petroleum.
It’s a pretty simple trick — announce a discounted pro-rata capital raising and use your insider power to personally underwrite any shortfall, which everyone knows will be substantial when it comes to retail investors.
Foreign government shareholders in Virgin Australia did precisely this during a capital raising in 2013, which was challenged in the Takeovers Panel and ended up transferring 3.88% of the company from 40,000 retail shareholders to Etihad, Air New Zealand and Singapore Airlines. It was all explained in this Crikey story at the time.
No one but Crikey bothered to cover it at the time, but in a 2013 capital raising, Gerry Harvey transferred almost $3 million in value from his 12,000 retail shareholders to himself through this same process. It’s all laid out in this Crikey story, facts that Gerry Harvey has never contested, even during an abusive 20-minute phone on Thursday.
Given that it is illegal for insiders such as directors to receive equity in a selective placement of shares without specific shareholder approval, this underwriting trick exploited by Gerry Harvey and Kerry Stokes should also be banned.
So just what is Stokes doing to the shareholders in Beach Petroleum?
It goes like this. Stokes personally owns 65.6% of Seven Group Holdings, which in turn owns 22.73% of Beach Energy, which last traded at 82.5c.
Beach has agreed to pay $1.59 billion to Origin for a business called Lattice Energy and is partially funding the acquisition through a 3-for-14 entitlement offer at 75c, which will raise $301 million.
Seven Group has committed to take up its $68.4 million share of the capital raising but has also underwritten any shortfall to the tune of 68.26 million shares. Why that many shares? It would increase Seven’s stake in Beach to 25.73%, the maximum permitted for Australian takeovers under the 3% creep rule.
That would all be fine, if the non-participating retail shareholder had their entitlements sold off to the highest bidder in an auction. But they are not, because the raising is what’s called non-renounceable. It you don’t take up your entitlement, you get no compensation and suffer dilution.
Normally, when a company goes non-renounceable like this, they allow retail investors to apply for additional shares to take up any shortfall from their fellow mum and dad investors.
Alas, Beach has not offered that either, because any discounted shares which get left on the table are going straight across to Seven Group Holdings.
While all this is going on, the past week has made it very clear that Kerry Stokes is also losing interest in the media.
He’s done $2 billion acquisitions involving Coates Hire and these Origin gas assets, while at the same selling his stake in Seven’s regional affiliate Prime Media to Bruce Gordon for $15 million.
Seven West Media is increasingly looking like a dog and copped another week of value-destroying bad publicity about its gender culture after 7.30 revealed the Amy Taeuber audio tape on Monday night.
Last week Seven Group Holdings, Stokes’ master company, announced a deal to buy the remaining 53% of Coates Hire for $517 million, plus $1.084 billion in debt. Seven Group then announced a selective placement of $375 million at $11.20 a pop to institutions.
It would have been illegal for Stokes to participate in the placement, so his personal stake in Seven Group Holdings was diluted from 73.6% to 65.4%, as Crikey reported last week.
While the Lattice Energy purchase will lift Beach’s size and value, reserves, output and cash flows, it will also take on a massive debt of more than $1.5 billion, roughly the same size as Beach’s market value.
Beach will set up new debt facilities of up to $1.575 billion. That means the trio of Stokes companies — Seven Group ($2.56 billion), Seven West Media ($795 million) and now Beach ($1.57 billion in debt) — will be a highly leveraged group connected by shareholdings. All up debt in the three companies will be an eye-watering $4.8 billion.
Sharemarket investors have taken the message from these deals and repriced Seven West Media shares — they fell 2.4% yesterday after the Beach deal to 65.5 cents and are within sight again of their all time low of 64 cents hit in December 2016. That in turn saw the company’s market value fall under $1 billion. Seven Group’s 41% share of that figure is close to falling under $400 million. And when you consider that Stokes now only own 65.4% of Seven Group, his fully diluted personal investment in Seven West Media represents less than $300 million of his net worth.
Contrast that with Seven Group Holding, which is trading at around $12 today, giving it a market capitalisation of $3.8 billion and valuing Stokes’ personal stake at $2.5 billion.
Not for 20 years has Stokes’ investment in media assets been so relatively insignificant to his Rich Lister status.
And given the grief it causes him and the exit from Prime, don’t be surprised if Stokes sells out of Seven West Media altogether once the media laws are changed in a few weeks.
Given the economics of print and free-to-air television, the strongest reason for staying in Seven West Media would be to use its political power to protect the interests of Stokes’ investments in the resources industries.
The Prime exit was small beer in the scheme of things, raising $15.6 million after Bruce Gordon bought the 11% stake at 40c a pop.
Seven Group has held the Prime stake for more than five years. Mopping up Prime Media was long seen as the most logical deal for Seven West, but no longer.