Myer fight shows in­vestors need to act

Ac­tive share­hold­ers can hold poor per­form­ers to ac­count on both sides of the Tas­man

Weekend Herald - - Business - Brian Gaynor

The bat­tle for con­trol of Myer, the large Aus­tralian depart­ment store op­er­a­tor, is gen­er­at­ing huge me­dia in­ter­est across the Tas­man. It demon­strates that Aus­tralian in­vestors don’t stand idly by when their com­pa­nies un­der­per­form.

We can learn a few lessons from ac­tive in­vestors in other coun­tries, par­tic­u­larly in Aus­tralia.

Myer Hold­ings listed on the ASX in

2009 af­ter is­su­ing shares to the pub­lic at A$ 4.10 each. This val­ued the com­pany at A$ 2.4 bil­lion ($ 2.7b).

The IPO pro­ceeds were used to re­pay debt, pay for the cost of the pub­lic of­fer and pur­chase shares from ex­ist­ing share­hold­ers, mainly pri­vate eq­uity.

The di­rec­tors said that Myer would ex­pand from 65 to 80 stores and had the “po­ten­tial to ex­pand to over 100 stores”.

Myer now has only 63 stores; its share price has plunged to A78c and the com­pany has a share­mar­ket value of just A$ 0.6b, com­pared to the A$ 2.4b IPO is­sue price.

The re­tailer had 48,900 share­hold­ers at the end of Septem­ber com­pared with 59,300 share­hold­ers fol­low­ing the IPO.

Myer share­hold­ers have taken a ham­mer­ing as the value of their in­vest­ment has plunged 76 per cent since the com­pany listed while the ASX bench­mark cap­i­tal in­dex has ap­pre­ci­ated 31 per cent over the same pe­riod. The Myer fig­ure ac­counts for a

2 for 5 rights is­sue, at A94c a share, in Septem­ber 2015.

A com­bat­ive an­nual meet­ing was held in Mel­bourne on Novem­ber 24 with out­go­ing chair­man Paul McClin­tock open­ing with these com­ments: “To­day is your op­por­tu­nity to send a strong mes­sage that you want the board and man­age­ment to get on with the job of de­liv­er­ing New Myer.

“To­day is your op­por­tu­nity to send a mes­sage that you want a co­he­sive and united board”.

These pleas were in re­sponse to sig­nif­i­cant share­holder dis­con­tent and the com­pany’s ex­tremely poor profit per­for­mance.

Myer re­ported a net profit af­ter tax of only A$ 11.9 mil­lion for the July 2017 year com­pared with a 2009 prospec­tus fore­cast of A$ 160m for the July 2010 year.

The com­pany paid a A5c div­i­dend for the 2016/ 17 year com­pared with a

2009 prospec­tus fore­cast in the A20.5c- to- A21.2c range for the July

2010 year.

A ma­jor crit­i­cism of re­tail­ers, in­clud­ing Myer, is their use of sup­plier re­bates to boost earn­ing. These sup­plier re­bates al­low re­tail­ers to take prof­its on the pur­chase of in­ven­tory be­fore prod­ucts are sold.

For ex­am­ple, if a re­tailer pur­chases $ 1000 worth of goods, the pay­ment of $ 1000 is fol­lowed by a cash re­bate of $ 200 from the sup­plier to the re­tailer. This $ 200 can be taken as profit by the re­tailer, even be­fore the goods are sold.

Sup­plier dis­counts were high­lighted by Tesco’s prob­lems in the UK. The col­lapse of Dick Smith in Aus­tralia also drew at­ten­tion to the is­sue of sup­plier re­bates.

Dick Smith’s liq­uida­tor’s re­port in­di­cated that the failed com­pany was heav­ily re­liant on these dis­counts and even­tu­ally “heavy dis­counts were needed to sell the re­bated stock, de­stroy­ing the mar­gin up­lift that the re­bate sought to achieve. And in some cases the stock could not be sold at all and be­came ob­so­lete.”

The Aus­tralian Fi­nan­cial Re­view re­ported that: “Bill Wav­ish, a for­mer chair­man of Myer and for­mer di­rec­tor of Dick Smith, told the liq­uida­tor’s hear­ing that re­tail­ers can­not sur­vive with­out re­bates and, for most re­tail­ers, re­bates ex­ceed profit. ‘ You avoid max­imis­ing re­bates at your peril,’ he told the Supreme Court of NSW.”

Sup­plier re­bates are also com­mon in New Zealand. This cre­ates is­sues for in­vestors and an­a­lysts be­cause of the poor dis­clo­sure and trans­parency re­lat­ing to these dis­counts.

Last week’s Myer an­nual meet­ing was a show­down be­tween Solomon Lew, who owns 10.8 per cent of Myer through ASX- listed Premier In­vest­ments, Lew’s 5000 re­tail share­holder sup­port­ers and the Myer board. Premier, which is 37 per cent owned by Lew, lob­bied share­hold­ers to vote against all res­o­lu­tions, in­clud­ing the re- elec­tion of di­rec­tors.

They were un­suc­cess­ful as far as the di­rec­tor res­o­lu­tions were con­cerned as around 71 per cent of the votes cast were in sup­port of di­rec­tors and 29 per cent against. Thus, the neg­a­tive vot­ing com­prised Premier’s 11 per cent and 18 per cent from other share­hold­ers.

How­ever, spe­cial mo­tions on a pro­posal to hold hy­brid an­nual meet­ings and an­other to in­tro­duce new takeover pro­vi­sions were de­feated be­cause they failed to reach the 75 per cent re­quire­ment.

Both fac­tions claimed vic­tory af­ter the meet­ing. Un­der the head­line “Share­hold­ers give strong en­dorse­ment to Myer board”, new Myer chair­man Garry Houn­sell thanked share­hold­ers for “their strong show of sup­port for elec­tion of three new board mem­bers and the en­dorse­ment of the New Myer Strat­egy”.

But Lew claimed that the size of the protest vote showed that share­hold­ers had lost con­fi­dence in Myer’s di­rec­tors. He said: “This is just round one, we are only get­ting started.” He was en­cour­aged that 29.4 per cent of votes were cast against the re­mu­ner­a­tion re­port as two 25 per cent- plus neg­a­tive votes on the an­nual re­mu­ner­a­tion re­port means that all di­rec­tors would have to stand for re- elec­tion.

Lew is threat­en­ing to call a spe­cial meet­ing next year to vote on the re­moval of all di­rec­tors.

A pos­i­tive fea­ture of the Myer saga — and there aren’t many — is that one large share­holder is pre­pared to go to bat­tle against a poorly per­form­ing board. In ad­di­tion, Myer’s poor per­for­mance has fo­cused at­ten­tion on sup­plier re­bates, hy­brid an­nual meet­ings, re­mu­ner­a­tion re­ports and the poor share­mar­ket per­for­mance of for­mer pri­vately owned com­pa­nies. These is­sues need more air­ing on this side of the Tas­man.

Brian Gaynor is an ex­ec­u­tive

di­rec­tor of Mil­ford As­set Man­age­ment.

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