pigs at the trough - extract (bnb, afg, mfs..)

The full story of ABC Learning Centres, Telstra, Babcock & Brown, Allco, MFS, Timbercorp, Great Southern, Asciano, Village Roadshow and more are featured in the book, Pigs at the Trough: Lessons from Australias Decade of Corporate Greed, published by Wylie and available in bookstores now.

Below is an extract from the chapter on Village Roadshow:
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Roc Kirby was a true giant of the Australian screen. Not in the sense of Errol Flynn or Clark Gable, but rather the actual screen. Kirby built Village Roadshow from a single drive-in theatre in regional Victoria into one of the worlds largest cinema groups, with interests in film exhibition, production, radio and theme parks.

Publicly listed on the ASX since 1988, Village has been controlled by Roc Kirbys two sons Robert and John Kirby and Graham Burke, who started with Village as a 14 year old at a Kirby cinema in Ballarat. (Even as CEO of Village, Burke certainly wasnt the typical corporate executive, with long flowing hair and owl-like glasses.) While Villages time as a listed entity has been remarkably turbulent, one constant has remained, especially over the past decade the amount of money the Kirbys and Burke have taken from the business and the appalling returns received by minority shareholders.
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In 2004, the Kirbys and Burke took home remuneration of more than $5 million, as well as related-party transactions valued in excess of $1.8 million. Burke, who still remained on Villages remuneration committee, was the companys highest paid director, although Bruce Berman, the man Burke once called a fking Jew, earned even more total pay, taking home $2.78 million.

Villages 2004 annual report noted that Burkes contract provides for the grant of 6 million options over ordinary shares and a loan of up to $2 million on terms and conditions to be agreed by the Remuneration Committee of the Company. Burke himself made up one-third of Villages remuneration committee. During the year, Village also paid Burke a further $5.1 million to acquire his holding in the Roadshow Unit Trust and half of Burkes stake in New Zealand Management Fee Rights.

Shareholders witnessed a further drop in earnings in 2005, with profit slipping to $40.7 million, down from $75 million five years earlier. It appeared that everything Burke and the Kirbys touched turned out badly for shareholders (it was once claimed that Villages performance in the past decade was akin to putting a lighted match to a big pile of money). With the exception of Austereo, virtually none of Villages investments ever seemed to work.

In their 2006 annual report, Burke and Kirby conceded that Villages botched international expansion proved traumatically disappointing and drove our share price into a slump. Such trauma, however, didnt prevent Villages remuneration committee, led by Burke, paying more than $6 million to the Kirbys and Burke.

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The year 2006 would provide further disappointment, as noncash items once again hurt Villages bottom line. After yet another restructure, Village reported a loss of $35.1 million continuing the trend of the Kirbys apparent poor investment sense leading to substantial shareholder losses. In June 2006, Village paid an unnamed buyer $33.5 million to effectively take its UK cinemas off its hands.

(Village was required to pay a third party to acquire the cinemas due to the significant cost incurred in breaking the long-term leases to which it had previously agreed.) Villages much vaunted overseas expansion, which led to it acquiring cinema assets in more than 20 countries, had been slowly whittled back to only four countries with massive losses incurred along the way.

In 2006, Villages return on equity slumped to only 5.7 per cent, meaning that shareholders in Village received a return barely exceeding the government bond rate, despite the abundance of risk attached to their investment. Villages film production unit, the source of much of recent angst, reported a $32.3 million loss, despite strong box office results from its release of Charlie and the Chocolate Factory.

However, the poor performance did not appear to concern Village directors, who met only seven times during the year. The Kirbys and Burke collected a combined $7 million in remuneration, while Graham Burke fared best, receiving more than $3 million (including a $1 million cash bonus). Also, despite Villages production unit recording a significant loss, its head, Bruce Berman, was paid a cash bonus of $1.1 million.

If youre wondering how Village was able to justify the payment of bonuses in 2006, the answer perhaps lay in the benchmark chosen by Villages remuneration committee; that is, Village paid short term bonuses largely based upon the companys cash flow return on investment (effectively calculated as EBITDA as a percentage of capital employed), as well as one-off transactional bonuses.

In 2006, Village paid Graham Burke and various other senior managers a substantial bonus due after the successful financial restructuring of Villages film production interests with the Crescent Entertainment parties and the effective creation of Village Roadshow Pictures Group. Some may have considered such an accomplishment within the normal confines of an executives role, and that bonuses should have been forgone given the companys lacklustre earnings performance.

The use of cash flow return on investment was convenient for Village executives. That was because Villages businesses tended to generate large amounts of cash (with that cash flow often squandered on ham-fisted investments such as overseas cinemas, internet forays or film production). When an investment is eventually written off , the actual write-down is considered a non-cash event and therefore is not relevant in determining a companys EBITDA and it would not alter the cash flow return on investment.

For example, in 2006 Village wrote off $39 million from its film production business and $17.8 million from cinemas in Austria and the UK; these losses would have been ignored in calculating executive bonuses, even though the loss borne by shareholders was the direct result of poor performance by those very same executives.