Car dealer conflict bad for investors
$10m market plunge for NZ Automotive Investments
Smaller investors appear to have been caught in the middle of a spat this week between two major shareholders at NZ Automotive Investments.
The company, which owns the nationwide car dealership 2 Cheap Cars, has had nearly $10 million wiped off its market capitalisation after four of its directors resigned citing “irreconcilable differences” between them and remaining director and major shareholder David Sena.
One of those who resigned was Eugene Williams, who owns 34 per cent of the company.
Oliver Mander, chief executive of the Shareholders’ Association, said retail investors had been caught in the crossfire between two majority shareholders, highlighting the importance of having a majority of independent directors on publicly listed company boards.
Last year the association raised concerns with the company about director independence as part of its annual assessment report.
“We did talk to them around that director independence issue because it is something we get quite concerned about — particularly when you have got majority owners,” said Mander.
One of the issues raised was a lack of a relationship description for director Tracy Rowsell — one of those who resigned this week.
“We were slightly critical of that with them because we felt that her very close relationship with David Sena at that time should have been disclosed.”
At the time Rowsell was a trustee on Sena’s family trust. That should have been disclosed, said Mander.
Mander said the company had taken on its concerns and had been keen to bring more independent directors onto the board.
But a quick look at the company’s sharemarket notices shows the challenges involved in doing that and the tension building on the board.
In early April, two independent directors tendered their resignations. Michele Kernahan’s resignation was effective immediately while Karl Smith resigned from the chair’s role but said he would stay on the board until another independent director could be found.
Tim Cook was appointed an independent director in late
April, freeing Smith to depart.
Then chief executive David Page resigned on July 1, but will serve out his notice until September 30.
Now Cook, Rowsell, Williams and acting chair Charles Bolt have all resigned.
On Wednesday remaining director and shareholder Sena nominated three new directors to be appointed at the company’s annual shareholder meeting on August 25, but already one has withdrawn.
Mander said NZX listing rules required three directors on a board. The code of corporate governance recommends the majority of directors be independent but there is no requirement for that in order to be compliant.
Mander said the association had made a submission on the code, calling for elements of it to be moved into the listing rules. “That’s exactly for situations like this.”
He said the NZSA often heard from companies that their boards reflected the make-up of their ownership but that was not good enough.
“NZA has provided the perfect example as to why. There is an issue with those founders. What we are seeing is that retail shareholders are caught in the crossfire in the fallout between two founders who own a significant stake.”
Shareholders have sold up this week, resulting in the share price falling from 65c to 44.5c.
Mander said investors
should be wary of buying into any company with major shareholders which did not have an independent board.
Investors in the company now have the option of selling or sticking with it to see how the new directors pan out.
But investors will no doubt be wanting information on how independent the nominated directors are.
Mander said he wanted to see details of the proposed directors’ qualifications in the notice of meeting and a clear statement about why they were independent.
As to how the issue between the major shareholders is resolved, that could require one to sell out, and with the share price having been dramatically reduced, that will no doubt be less attractive.
Infratil action
In an unusual situation, Infratil was a seller and a buyer this week when it came to the sale
of Vodafone’s cell tower assets.
Infratil owns 49.95 per cent of Vodafone NZ, which sold its cell tower network for
$1.7 billion.
But it was also part of the consortium buying a 20 per cent stake.
While the sale price is seen as fair and on par with Spark’s recent sale of its towers, some Infratil investors have been left scratching their heads over why Infratil would want to be a direct investor in the tower assets.
In a note this week, Jarden analyst Neville Gluyas pointed to the high multiple achieved in the sale price but said investors may be less convinced by Infratil’s direct purchase of the 20 per cent stake for about 340m.
“A high 33.8x multiple can perhaps be rationalised by assuming an ultra-low cost of capital plus future growth from shared tenancy and more towers, but Infratil is not typically regarded as targeting ultra-low returns.”
The NZSA’S Mander said there was no doubt the sale of the tower business was good for Infratil investors, but he was curious about the 20 per cent direct stake in the company that had bought the towers.
“They are both seller and buyer essentially.
“But the fact that the value of the deal is at a similar level to the Spark sale late last week. I’ve got no doubt it’s an appropriate price.”
An Infratil spokeswoman said buying the 20 per cent stake was not a condition of the sale.
“Infratil chose to retain a position in the Towerco business which it already owns through Vodafone NZ.
“Part of the reason we liked Vodafone as an investment was its exposure to this embedded infrastructure, so retaining some of that exposure is consistent with our original investment thesis.”