the more things change........

Plus ca change: Conflicts continue at Octaviar
Adam Schwab writes:

Struggling fund manager Octaviar (MFS) sold off another piece of its business recently, with the company granting a call-option in its Octaviar Investment Management business to Wellington Capital, a company closely linked to Octaviar executive director, Chris Scott.

Octaviar Investment Management is the manager of several funds, including Octaviar’s Premium Investment Fund (PIF), Cash Enhanced Fund and Maximum Yield fund. It earns revenue by charging management fees to investors in the funds. Under the agreement, Octaviar has sold Wellington an option on the business which can be exercised at a cost of four times profit plus NTA.

The relationship between PIF and Octaviar is a very messy one. PIF is owed a collection of debits by Octaviar and other related businesses. PIF lent Octaviar $50 million last year which is outstanding. PIF also lent the Octaviar satellite, Living & Leisure (owner of ski resorts, aquariums and a bunch of other over-priced, hard-to-sell assets), around $62 million. The Financial Review also noted last week that that PIF lent $50 million to another MFS subsidiary, a boutique fund manager called Causeway.

While PIF is in all sorts of strife and its sale should be a good thing for Octaviar shareholders, it appears that the sale may not represent an arm’s length transaction.

That is because of the close relationship between Wellington Capital founder and chief, Jenny Hutson, and Octaviar executive director, Chris Scott (who is believed to be calling the shots at Octaviar). The AFR reported that Hutson “rejected claims that acquiring the management rights was a related-party transaction”, claiming that “the deal had full approval from all board members, led by Chairman, Andrew Peacock.”

Hutson’s dismissal of any ‘related-party’ allegations do appear to be somewhat wishful, given the close links between herself, Wellington Capital and Scott, namely the fact that:

Hutson has been Chris Scott’s leading adviser for a number of years. In March, Hutson regularly appeared in the media acting as Scott’s mouthpiece during his battle with Andrew Peacock. Hutson was a key figure in the extraordinary general meeting which led to Scott’s forces storming the MFS board (Hutson issued the notice for the EGM) and in conducting the cease-fire negotiations which led to Scott’s appointment;
Scott was until last year, a part owner of Wellington Capital;
Prior to the EGM, Hutson confirmed her close relationship with Scott and her role in Octaviar/MFS going forward, noting that “Chris has a lot of personal reasons to come back and help out [and that] if Chris Scott and I don’t do something, no one else can”;
The new PIF board includes not only Hutson, but also Robert Pitt and Craig Wallace. Wallace was a member of Chris Scott’s ‘ticket’ for the MFS board. In the space of less than two months, Wallace has gone from potential co-director of Scott, to a director of a supposedly independent company which was allegedly sold on an arm’s length basis; and
Prior to it being taken over by MFS, Hutson was chair of Chris Scott’s travel company, S8.
For Hutson to claim that the deal had full approval of the board as some sort of excuse is bemusing, especially given that at time the deal was negotiated, three of Octaviar’s then five remaining directors were associated with Scott.

“Related party” deals request shareholder approval under the Corporate Act and ASX Listing Rules. However, the Act has a very limited definition of who is a “related party”, mainly including directors of the entity and their family members. As Hutson is not a director of Octaviar, even though she is closely associated with Scott, the deal may escape the application of the Act and not require approval. However, technicalities aside, it certainly doesn’t look good to see a company to be quickly selling off a major asset to a company which is closely associated with its major shareholder and executive director.

Hutson also told the AFR that “no one got anywhere near doing due diligence [and that] the majority of the [Octaviar] board at the time this decision was made has the benefit of considering each of the alternatives that were put forward.” The fact that no other parties completed due diligence doesn’t exactly shore up the governance aspect. Octaviar shareholders may legitimately question why no other parties conducted due diligence: Was it because Octaviar’s fund managements business is such a mess that no one else would touch it, or did no one else get a look in?

Meanwhile, only days after taking control of PIF, the fund announced the sale of its 9.4% stake in the GEO Property Group (which was until recently known as MFS Diversified). The stake was sold to listed investment company Trojan Equity for 25 cents per share (a significant discount to the market price). Coincidentally, Trojan Equity just happens to be chaired by Andrew Kemp. Mr Kemp previously served on the board of Chris Scott’s travel company, S8. News Limited reported that other bids on the GEO stake were believed to be worth between 35 and 40 cents per security.

In short – Chris Scott takes control of MFS/Octaviar and a few weeks in, has sold the management rights to one of its most critical assets (PIF) to a key ally. A few days after that, PIF decides to sell one of its assets to another ally of Scott for what appears to be a below-market price.

Bad governance, selling assets to associates -- it appears the more things change at MFS/Octaviar, the more things stay the same.