YUCK!! All AFR coverage below. How about instead of monitoring the register Credit Suisse and Goldman you try to stop management doing stupid acquisitions. Wait that's not how the fee structure works no deal no banking fee.. About time the entire sector is reviewed and banks paid on results of their advice. Slater & Gordon, Vocus, BHP, RIO the list is endless!!! The parts that Vocus bought were overpaid for, their key stakeholders have cashed or checked out, integration is failing and aside from the billions in equity raised to pay for this stupidity debt is now high too. Good luck getting anywhere near what you paid for the parts Vocus. What a DOG stock. YUCK!!
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The
spectacular 20 per cent profit downgrade at Vocus Communications about two months after it confirmed its full year profit guidance delivers a possibly fatal blow to the credibility of the management and board.
Chief executive Geoff Horth and chairman David Spence will have to face the wrath of shareholders who watched as
Vocus shares plunged 27 per cent on Wednesday morning. The fall wiped out about $500 million in value.
A market update issued by Vocus at 7.10 pm on Tuesday night shattered the general market perception that the company was well managed and on track to deliver higher profits this financial year.
The reality is that Vocus is failing on so many fronts it is hard to know where to start.
Chief executive Geoff Horth shed more light on the mess inside Vocus during an analyst briefing on Wednesday morning and later during a presentation to the Macquarie conference in Sydney.
It is now clear that one of the fastest growing telecommunications in Australia has been unable to integrate the acquisition of Amcom, M2 and NextGen Networks.
Each of the acquisitions made sense at the time but the execution of the integration has failed miserably.
Horth revealed that as a result of the expansion Vocus went backwards in terms of the quality of financial information, the systems of control over sales and in its service to wholesale customers. He admitted the company bit off more than it could chew.
Chanticleer understands that the new head of enterprise and wholesale Michael Simmons discovered that sales numbers being recorded in the division were not actually delivering the promised revenue. He calls it a failing in the "sold to toll".
This particular problem hit revenue by $12 million this financial year.
Horth told the Macquarie conference that the provisioning of telco customers in the enterprise and wholesale business was broken. He admitted that orders were disappearing "into a black hole" and this was harming the company's reputation.
Horth said there was no common set of products in the enterprise and wholesale division but there was a plan to fix this.
Simmons stepped down from being a Vocus director just before Christmas to run wholesale following the departure of Matt Hollis. Hollis went to a rival company and Vocus wholesale customer, Bevan Slattery's Superloop.
Simmons is a highly experienced telco executive who could step up to be chief executive if Horth was forced out by angry shareholders.
The profit downgrade included a change in the way the company reports the revenues and profits from long term telco contracts. The company had previously thought that when it received cash up front it could report this in the current financial year.
But the new chief financial officer Mark Wratten, who took over in January from Rick Correll, took a hard line and said the recognition of revenue and profits must be over the life of each contract.
Six contracts accounted for the $40 million hit to revenue in this fiscal year. The positive cash flow benefit of $45 million will now be recognised across 2017 and 2018.
Wratten was previously the CFO of ASX-listed Recall Holdings, and before that held a number of senior roles at Brambles.
He barely had his feet under the desk before the release of the half year results. It is only since then that he has been able to get his head around the Vocus financials.
The profit downgrade has the same look and feel as the "kitchen sink" approach taken by a new CEO. Everything that could be written off or reviewed has been.
Wratten told the Macquarie conference soon after he joined the company he was concerned about the cash flow in the first half. He says key business leaders now have a "massive focus on that".
Wratten said he was comfortable with the company's balance sheet and current leverage ratio. That should dampen the discussion among analysts about a potential capital raising.
The question about accountability for the failure of the company to integrate and manage the expanded business will inevitably fall at the feet of Horth and chairman David Spence.
Spence told Chanticleer: "We are very disappointed in the result. The transformation of four businesses into one in Australia and two in New Zealand has proven to be a much bigger and more costly endeavour than we had originally thought."
"We still believe in our overall strategy and the opportunities to leverage the national fibre networks we have built and acquired. It's just going to take longer to merge."
Spence is probably safe for the time being but if the pressure on him proves too much the board could turn to experienced businessman Bob Mansfield, who joined the board in January.
Wholesale changes in management and board positions at this time would probably cause more disruption than it is worth.
But shareholders are likely to ask Spence to dust off the medium term corporate succession plan for himself and Horth.
The latest problems faced by Vocus will inevitably resurrect discussion about last year's board room split in October when Tony Grist and James Spenceley left the company.
Spenceley argued he was the best person to run the company. The clear implication was that Horth was not up to the job.
However, Spenceley did not endear himself to Vocus shareholders when he sold the bulk of his shareholding in the company in August.
Shareholders were not pleased that he abandoned the company so soon after pushing through the $700 million acquisition of fibre networks company, NextGen, which required a $650 million capital raising.
A fresh profit downgrade is throwing renewed doubt over whether Vocus Group can combine the four businesses it was two years ago into one, as private equity opportunistically eyes the telecommunications provider's falling share price.
In a market update well after the market closed on Tuesday night, Vocus slashed its underlying profit forecast for financial 2017 to between $160 million and $160 million, after previously forecasting a net profit between $205 million and $215 million.
It followed a weaker-than-expected trading update in November.
Vocus shares plunged close to 30 per cent on Wednesday, sitting at $2.43 just after lunch. The company's shares have plummeted close to 74 per cent per cent in the last 12 months.
Vocus said the downgrade was caused by an accounting review of contract terms on large projects, lower billings in enterprise and wholesale combined with increased staff costs, higher than forecast energy market costs and rising technology costs.
In the last two years
Vocus has completed a $1.2 billion merger with Amcom, a
$3.8 billion merger with M2 Group and finally
bought Nextgen for $807 million.
The merger between Vocus and M2 create tension within the executive ranks about what direct the business should take moving forward.
In October last year,
Vocus founder James Spenceley and Amcom founder Tony Grist took a proposal to the company's board of directors that would see chief executive Geoff Horth, who ran M2, ousted.
But, the move was voted down and both Mr Spenceley and Mr Grist left the company.
There is doubt among insiders about whether Vocus, primarily run by M2's previous management group, can realise the potential of all the businesses and assets the company was pooled together.
"This management team has no track record of successfully integrating the companies they have bought. That's an anchor on their share price. Spenceley does," an industry source said.
As revealed by
The Australian Financial Review's Street Talk column,
multiple private equity firms, and at least one activist investor, are believed to be circling Vocus, with sources suggesting the interest is serious enough that Mr Spenceley may have been approached for his views on what needs to be done to the business.
Private equity firm KKR and investment bank UBS are some of the parties that are being talked about. Vocus is believed to have its advisors Goldman Sachs and Credit Suisse closely monitoring its share register.
Citi analyst David Kaynes has downgraded Vocus to neutral - stating while the company has serious challenges, the underlying assets are valuable and the stock price has fallen significantly.
"With revenue falling short of expectations and operating costs rising, we no longer have confidence that Vocus will be able to deliver on the full potential of its recently combined businesses. We have downgraded FY17-19 EPS by 22-28 per cent," he said.
"The stock now trades on 12.8x our lowered (2016-17 price-to-earnings ratio estimates), and the scope for improvement in earnings if the issues can be turned around by either the current management team or alternative owners is significant. We do maintain our view that self-inflicted problems are generally fixable, however it will clearly take significant time and changes from here."
Analysts also suggested Vocus' gearing is "an issue."
