Asciano's chief executive and chairman should be fired Bryan...

Asciano's chief executive and chairman should be fired

Bryan Frith | June 16, 2009
Article from: The Australian

CONFIRMATION that Asciano plans a $2 billion equity raising to reduce the company's crippling debt only reinforces the fact that the chief executive Mark Rowsthorn should be fired for not heeding advice to take this step 12-15 months ago when the price of the group's stapled securities was much higher.

Instead, he is not only staying but being offered a special deal that will let him average down his 10.9 per cent shareholding at the lower security price, while hapless retail shareholders stand to be savagely diluted.

Rowsthorn is not the only one who should be dumped. There should be other management and board changes. Chairman Tim Poole, who last August peremptorily rejected an approach from the private equity group TPG and the infrastructure fund, Global Infrastructure Partners, for a cash offer of $4.40 per security, is another who should go.

Poole miscalculated that the duo would go higher. Interestingly, it's suggested that Rowsthorn encouraged TPG-GIP to make the offer and the rejection caused a fracturing of relations between the CEO and Poole.

Instead of a board restructure it is simply proposed to appoint additional directors to augment the present four-man team.

Asciano was formed two years ago as a demerger of the ports and rail businesses of Toll Holdings, in the wake of that company's takeover of Patrick Corp.

Asciano was conceived as a high-yield business, using what the GFC has exposed as the flawed infrastructure model of paying distributions greater than earnings. So Asciano was loaded with almost $5bn of debt, leaving Toll virtually debt-free.

It was obvious after the global credit markets seized up near the end of 2007 that Asciano's debt level was unsustainable.

Yet one of the first things that Rowsthorn & Co did was embark on the folly of outlaying $700m for a 4 per cent stake in Brambles, a company three times the size of Asciano.

It looked a foolhardy, if not reckless, escapade and turned out so. Brambles rejected overtures and Asciano was forced to sell its holding, losing about $100m.

In May last year, Asciano's looming debt problems forced the company to start considering its funding options. Soon after, Asciano embarked on an asset-monetisation process, which involved seeking to sell parts of its operating businesses or issuing securities convertible into equity in those businesses. The company ignored advice to instead opt for a sizeable capital raising.

Initially, Asciano was looking to sell a minority stake in its Pacific National rail operation but that didn't prove attractive, so the main effort switched to selling minority interests in the port and coal operations. Future Fund and Queensland Investment Corp showed interest, but it ultimately came to nothing.

In recent times, Asciano has been considering the sale of up to 100 per cent of either its coal or container ports businesses, or proposals for other assets and businesses and proposals that could result in a change of control and/or a recapitalisation.

Asciano needed a solution by June 30 because, after that date, $2.25bn of its debt would be repayable within 12 months and become a current liability.

The company yesterday announced a $2.15bn equity raising, underwritten by UBS and Royal Bank of Scotland. The raising will be in four tranches -- a $749m 1for1 accelerated non-renounce-able entitlement offer, a $231m unconditional placement and a $1bn conditional placement to professional and sophisticated investors, and a $151m conditional placement to Rowsthorn, to enable him to maintain his existing 10.9 per cent shareholding.

All four issues are at $1.10 a stapled security and the two conditional placements are subject to approval of the security holders. Institutions participating in the $1bn placement are ineligible to vote, as is Rowsthorn on the placement to him.

The institutional component of the entitlement offer amounts to $330m and the retail component $439m. That means $1.7bn of the raising will go to institutions and only $439m to retail investors. The bookbuild for the institutional component got under way yesterday. In opting for the equity raising, Asciano eschewed a number of alternatives including proposals from TPG, Carlyle Group and Warburg Pincus a bid from Morgan Stanley and General Infrastructure for the coal haulage assets, and a proposal for NZ businessman Graeme Hart to inject $400m in equity and underwrite additional capital raisings.

It's suggested that some of those proposals may have been for a greater amount than the proposed equity raising, but they did not have the certainty of the underwritten raising.

It's also almost certainly the case that some of those proposals envisaged a change of management for Asciano.

The equity raising enables Asciano to retain its full suite of quality assets and is no doubt a superior outcome than selling assets at a discount price. But the company could almost certainly have done better had it acted earlier to raise equity.

Rowsthorn argued yesterday that the markets had changed during the monetisation process and the equity raising wouldn't have been possible months ago.

But that doesn't stand up to scrutiny. Asicano's security price rose to $4.83 on news of the TPG-GIP approach last August but then went into steep decline, touching a low of 40c in February, and recovering somewhat to close on Friday at $1.83. At that price it's back to the level prevailing at the start of November. From November, Asciano would have been unable until now to contemplate the equity raising.

But in October CBA raised $2bn and GPT $1.3bn, in August CSL raised $1.65bn, Alumina $910m and Leighton $700m and last April Wesfarmers raised $2.5bn. During that entire period Asciano's security price ranged between $5.10 and a low of $1.80, so any raising would have been at a higher, less dilutionary, price than the current raising.

An issue price of $1.10 represents a discount of 40 per cent to Friday's closing price and a discount of 25 per cent to the TERP (theoretical ex-rights price) of $1.465 per security. Had the issue been renounceable, holders who don't take up their entitlement could have sold the rights, which have a theoretical value of 36.5c a right. But by making it non-renounceable it's money for jam for the privileged institutional clients of the underwriters. They not only get in at a substantial discount to market but also get the value left on the table by shareholders who don't take up their entitlement for whatever reasons, including insufficient funds to do so.

And the value is significant. At Friday's close, a holder of 100,000 securities had stock valued at $183,000. If that holder did not follow the rights (take up the entitlement) the value at TERP of $146.5 would be $146,500, a fall in value of $36,500, or 20 per cent. But those (predominantly institutions) who get in at the $1.10 issue price would make a 36 per cent gain at TERP.

What that illustrates is the current trend for non renounceable entitlement offers, rather than the traditional renounceable offerings, is highly dilutionary to existing holders. Another way of looking at the massive dilution is that Asicano's present market capitalisation is $1.278bn. Before the entitlement offering is made, Asciano will raise $1.23bn through placements to institutions and a further $151m from a placement to Rowsthorn. Those placements are all dilutionary to existing security holders.

The security-holder meeting to get approval for the conditional placements is scheduled for July 22, which means the underwriters and the 11 or so sub-underwriters are taking on time and market risk, although that's softened by the fact that, if the $1bn placement is not approved, the institutions allocated securities will receive an arguably generous compensatory commitment of 2 per cent of their allocation.

Nevertheless, given that parties are prepared to take on risk for 5 weeks or so, it's worth noting that a 3 for 1 renounceable rights offer at $1 a share (a 22 per cent discount to TERP) would raise the full $2.1bn, and would not be dilutionary to existing security holders.