How John Elliott got rich by inventing the greatest trick in Australian finance
At the core of everything John Elliott did was his discovery of the almost magical wealth-creating power – more accurately, wealth- bestowing power – of the 1c-paid share issued to himself as CEO and to his key executive insider mates.
They were so effective that when I discovered what he was doing and analysed how it worked, borrowing from American author Tom Wolfe, I described them as “the marvellous technicolour KoolAid 1c paids”.
These were shares issued at the Elliott company’s market price – starting with Henry Jones, the company he seized control of in the 1970s when he was in his 30s and which launched him on his path – but on which the executive only had to pay 1c a share upfront.
So if the share price was, say, $4 and he got 1m shares, he would theoretically be up for $4m but would only have to part with $10,000 upfront.
He would have to pay the outstanding $3.99m to make them fully paid if he wanted to sell them on the market. So if he sold them at the $4 share price he would only break even. So, where’s the benefit?
The first benefit is one of simple leverage.
If the share price went to, say, $5, he could hand over the required $3.99m and immediately sell them for $5m.
He would have turned the $10,000 – the only money he actually had to part with — into $1m.
And remember, all this was before Paul Keating introduced the capital gains tax. The $1m profit would have been tax-free, provided only that he had held those 1c paids for at least a year.
But the real money came from what were called “bonus shares”. Back in those days most companies would regularly make issues of free shares. They were made to all shareholders, including in this case to the executives holding those 1c paid.
Say the company had 100m shares on issue. It might make a one-for-two bonus free issue boosting its total number of shares on issue to 150 million.
In my example, at the $4
share price the company was worth $400m (100 million shares at $4 a share).
As it didn’t actually get any money into it from the issue, it would still only be worth $400m, so in theory the share price should fall to $2.67.
That’s $2.67 multiplied by 150 million to equal the same $400m figure.
From 2021 it seems utterly pointless, so why did companies do it? The answer is complicated and beyond the scope of this column, which is about how they worked so brilliantly with Elliott.
Elliot (and his team) got the bonus shares on their 1c paids. So for that $10,000 upfront, he would get 500,000 free shares, each worth that $2.67 and so a total of $1.34m.
He could sell them and pocket the $1.34m 4m tax-free!
See why I dubbed them the way I did?
Except that while it was free money upfront, there’s a long-term sting. He’s still up for that $3.99m, and when and if he pays it to make the 1m shares fully paid, they’ll then only be worth $2.67m.
It would all balance out to zero profit – unless the share price has risen. And that’s where the 1c paids really worked their magic.
Imagine someone made a takeover bid for the company at, say, $5 a normal share. They would also bid $1.01 for the 1c paids. That’s the $5 less the $3.99 owing on those shares.
So Elliott could sell his 500,000 bonus shares at the $5, pocketing $2.5m. And sell his million 1c-paids for $1.01m.
He would pocket a total of $3.51m – all of it (until 1986) tax-free and having outlaid just $10,000 in the first place!
Doing it once made him and his team rich; doing it twice and thrice made them seriously rich.
The key was to have another company – one they controlled or could control – make the bid for their company, which had issued the 1c paids, to get rid of the liabilities on those 1c paids.
And that was the saga of all the deals he did through the 1980s – so-called reverse takeovers. His company bidding for another wouldn’t work – it would still leave them holding their 1c paids and the money owed on them.
Except it all blew up when he ran out of takeovers, when he launched his failed bid to buy BHP via his private company Harlin Holdings.
It was Harlin that had the liabilities on all those 1c-paid shares issued to him; and when it all blew up Harlin still owed something like $55m.
Money that Elliott had long-since personally pocketed.
Over 20 years from 1975 to 1995 the magical 1c-paids made Elliott and mates rich.
They also ultimately helped sealed his fate.