give investors a vote , page-39

pardon - article is not SMH - it's Bryan Frith 'Australian':

THERE is growing dissatisfaction that the ASX has agreed to the sale by the troubled financial services and tourism group MFS of a 65 per cent stake in its Stella travel and tourist accommodation activities without requiring prior shareholder approval.

Shareholders are unhappy because they consider that the straitened MFS has agreed to sell the majority stake in Stella to the private equity group CVC Asia Pacific at a knock-down price - $775 million to $1.2 billion below the equity value of the business.

Yesterday's disclosure that former suitor City Pacific is back, hoping to cherry-pick MFS assets within its financial business, including the prize asset Premium Income Fund, will do nothing to alleviate their displeasure.

It could simply add to concerns that MFS will keep selling assets, in an effective orderly liquidation, while denying shareholders any say in the process, and that the ASX, by its inaction, will co-operate in such an outcome.

The ASX has a couple of listing rules relating to "significant" transactions. Prior shareholder approval is required if a company intends to dispose of its "main undertaking". Prior shareholder approval is also required if a company proposes to make a significant change, either directly or indirectly, to the nature or scale of its activities.

In the latter case, the company must provide information on the change and its effect on earnings, or any other information that the ASX specifies. The ASX can also grant a waiver to the need for shareholder approval.

However, in the case of MFS, the ASX has decided that the listing rules don't apply - that is, the disposal of 65 per cent of Stella is neither a sale of the main undertaking or a significant change in the nature or scale of its activities. It is difficult to see how the ASX could arrive at that conclusion as the Stella Group accounted for 55 per cent - that is, the majority - of MFS's 2007 "recurrent earnings".

Chris Scott, who owns 8.4 per cent of MFS (a legacy of the S8 takeover, of which he was managing director) is one of those who wants the proposed Stella transaction to require shareholder approval. Scott, advised by Jenny Hutson's boutique investment bank, Wellington Capital, has been working on putting together a proposal for MFS that would involve a recapitalisation - he has investors lined up to enable repayment of the company's $150 million short-term debt to Fortress - and board changes.

MFS went into meltdown late last month after it announced plans to demerge Stella (which would have required shareholder approval) and at the same time raise a hefty $500 million of equity. The skittish share market assumed that MFS's debt position was much worse than it had indicated, and the company's share price was trashed - falling almost 70 per cent in a single day. Not surprisingly, the demerger plan fell over.

Last week, MFS announced that it had agreed to sell 65 per cent of Stella for $409 million cash, which would enable the company to repay its short-term debt and "provide it with the flexibility to manage its commitments into the future". The sale would also mean that MFS would no longer consolidate $900 million of Stella debt.

MFS had for some time been seeking to sell, or IPO, Stella and recently came close to offloading it to CVC but the two parties could not agree on the price.

Late last year, MFS gave a presentation on Stella in which it upgraded its forecast 2008 EBITDA to $220 million. It indicated an expected sale price of $2.5 billion - $1.59 billion equity and $930 million of debt - which assumed an EBITDA multiple of 12 times.

However, Stella has $102 million of cash, which means its net debt is $803 million. On that basis an EBITDA multiple of 12 times would produce an equity value of $1.8 billion ($1.2 billion for MFS), at 10 times it would be $1.4 billion ($900 million for MFS) and at eight times it would be $960 million ($625 million for MFS).

But the sale price agreed to by MFS equates to an EBITDA multiple of only 6.5 times.

Expressed on a per-share basis, a 12-times multiple puts an equity value on Stella of $3.84 an MFS share. At 10 times it's $2.92 a share, and at eight times it's $2 a share. The price agreed by MFS equates to only $1.31 a share.

It's not surprising that many shareholders may feel that MFS is leaving much of Stella's value on the table, and it may reinforce concerns that the company's liquidity position is more parlous than it admits to. It's difficult to avoid the conclusion that it's expedient for MFS not to be required to seek shareholder approval, and to have to justify the sale at such a low price. It's also possible shareholders wouldn't approve the proposed transaction.

ASX chief supervision officer Eric Mayne wrote to Hutson to explain the ASX position. He said the ASX view was that the proposed Stella transaction did not constitute a change to nature and scale of the company's activities. Actually, the listing requirement concerns a change to nature or scale of activities.

Mayne says that while the transaction would result in MFS disposing of the major part of its investment in Stella, "this does not of itself change the nature of the company's business activity". Maybe not, but it would clearly change the scale, a point on which Mayne is silent. As to the disposal of the main undertaking, Mayne claims that "undertaking" is generally interpreted as meaning a company's business or enterprise undertaken by the company.

He says that while the Stella transaction could be interpreted as disposing of a significant asset, it would not be disposing of the main undertaking, as the company would still carry on a significant business in diversified financial services and have significant assets other than cash.

That's not what the ASX's guidance note says. It says the issue is relatively straightforward where a company has a clearly identifiable main undertaking, but is more complex where it has several business operations and none of them are clearly the predominant business.

In such cases, the ASX says it may apply the listing rule (require shareholder approval) to the disposal of a significant individual business, or to the disposal of several businesses if collectively they are more significant than the business to be retained. As pointed out, Stella contributes just over half of the earnings of MFS, so it's clearly a significant individual business and it's hard to see how the ASX could logically conclude that the listing rules on significant transactions does not apply in this case.

It's not the only instance of recent times of the ASX failing to apply this rule. Seven Network and PBL Media were not required to obtain shareholder approval to sale of half of their TV, magazine and internet businesses to separate joint ventures with private equity groups - again because the ASX inexplicably concluded that the listing rule didn't apply.

Its MFS decision comes as the ASX is under scrutiny on whether it should be allowed to continue to supervise the regulation of companies, or transfer it to ASIC.

This commentator favours the retention of self-regulation, but investors are entitled to expect the ASX will consistently enforce the letter and spirit of listing rules and not accommodate companies, for whatever reason, including that they may be in difficulties.