Village Roadshow's controlling shareholders - the Kirby family - have been forced into damage control after three days of a backlash by investors savaged the cinema and theme park operator.
Having seen 35 per cent of the company's sharemarket value wiped off after it announced a shock suspension of dividends on ordinary shares on Friday, Village Roadshow said it was restructuring its executive remuneration to accurately reflect performance and share price.
Although Village Roadshow performed poorly last year when profits fell 27 per cent and the company booked writedowns on non-core operations, the Kirbys and their management team were among the highest paid in the nation, sharing a total of more than $13 million.
Chief executive Graham Burke yesterday told The Australian Financial Review the company had been "startled by the massive overreaction by the market and the media. We were totally shocked by the ferocity of the response.
"I called Robert and John Kirby on the Saturday and we all said, well, at least that's over, but then it happened again on Tuesday and then Wednesday. We couldn't understand it. We thought, 'What planet are we on?'" he said.
A strategy that internally had been tagged "growth and prudence" had wiped nearly $80 million from the Kirbys' personal fortune, which is based on controlling 47 per cent of Village Roadshow.
John Kirby was executive chairman last year and was paid $2.4million, including a bonus of $363,547, while Mr Burke received $2.26million. John is now deputy chairman and his brother Robert is chairman under a rotating system.
Now, after surviving a "media frenzy", Mr Burke wants to set the record straight: there is no cash crisis, no major acquisitions coming and the Kirby family is not driving the share price down in order to take over the company, as some analysts have speculated.
JB Were says the Kirbys would have to buy the remaining ordinary shares and all the preference stock - about 75 per cent of the equity base, costing about $500 million.
Mr Burke did confirm that executive salaries would be coming down after an external review.
After three years of toughing out criticism on salaries, executives will now face a salary cut and their remuneration will be linked to performance and share price, a challenging idea for a stock trading friendless at $1.18 yesterday.
Mr Burke also said that following market reaction the decision to review the remaining dividend on preference shares would itself be reviewed.
He conceded the announcement might have been "cryptic", but "we said it all".
"Could it have been longer? Probably a good point," he said.
Analysts were still second-guessing the company's motives yesterday. One analyst, who did not wish to be named, said: "They're not innocent. They have some sort of plan. This is move one on the chess board and they have worked out the next 25 moves. You just don't know what it is from the outside looking in."
But Mr Burke insists he's playing chequers, not chess. There were simple, transparent reasons for the decision, he said.
He said that Village Roadshow needed to strengthen the balance sheet because credit rating agencies such as Standard & Poor's treated contingent liabilities such as Village's leases on cinema sites as debt.
This had blown total debt out by $1.2 billion, and made a nonsense of the group's claims to have 15 per cent gearing and net total debt of only $170 million.
S&P had recently placed Village Roadshow on negative watch after cutting its rating to BB-, which had made financing its films more difficult internationally, he said. However, Mr Burke regards those contingent liabilities as a strength of the business.
"Those leases are in prime locations that are generating huge cash flow. I don't see them as a threat to our business in my lifetime. We see them as an asset," he said.
Village had guaranteed a further $160 million in debt off balance sheet in its various joint ventures, Mr Burke said. The joint ventures had a further $40 million debt for which there was no recourse to Village Roadshow.
Village Roadshow sees itself as unique in Australian terms, with its mix of cinema exhibition, production, distribution, theme parks and radio. The board had felt the dividend was inconsistent with its mission of emulating AOL Time Warner, MGM or Viacom, all diversified entertainment groups with similar profiles that don't pay dividends.
"We thought the more sophisticated investors would see it in that context. I think there is a disadvantage to dare to do something terrific as an Australian in Australia," Mr Burke said.
He was amazed at comments by Credit Suisse First Boston analyst Moira Daw, who wrote: "If the company had tried to cause maximum damage to shareholders in the shortest possible time, we cannot think of a better way to do so."
"It's an ill-informed comment, a parochial comment and we are genuinely shocked and surprised," Mr Burke said.
He also noted confusion among market analysts on Village's cash contribution to the production of Matrix 2 and 3 under its joint venture with Warner Bros.
Some analysts have put the cost to Village of the sequels as high as $300 million. While Mr Burke would not comment on the size of the budget, he said Village Roadshow was in the final stages on completing a deal with external financiers. Therefore there would be no call on Village Roadshow's balance sheet. There was no cash crunch coming, as Village Roadshow had cash at bank of $160 million and net shareholders' funds of $1.1 billion.
Mr Burke said Village Roadshow was trading well this year with cinema exhibition up by 18 per cent, while its radio offshoot, Austereo, was trading close to prospectus forecast despite a slump in advertising.
VRL Price at posting:
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