Proxy power play
Babcock & Brown Capital (BCM) chairman Kerry Roxburgh and CEO Andrew Day tell Business Spectator's Tony Boyd:
Tony Boyd: You've had a pretty major defeat on the incentive plan for Andrew, Kerry. Could you just talk about whether you think this has any ramifications more broadly for publicly listed companies?
Kerry Roxburgh: Well, it’s not for me to say whether it has wider implications. It is not unexpected in today’s climate that shareholders vote against the remuneration arrangements for senior executives, but as I looked around the floor on each of those two resolutions, it was a resounding yes vote from the floor and had I not taken into account the proxies, then each of those resolutions would’ve passed.
Then you go to the proxies and say 'well, why were they so solidly against the two resolutions' and the answer to that is that those proxies are coming in principally from institutional investors who are required to under their mandates to follow the recommendations of services such as RiskMetrics or Aussie Super and in our case BCM is in a special circumstance of a company that is potentially winding down.
So the chief executive is asked to, if you like, work himself out of a job over the duration of his contract which is two years. So, the recommendations that were going into the market about these two resolutions drew attention to the fact that BCM was in special circumstances and that shareholders may elect not to follow the recommendation, but that luxury, if you like, is not available to most institutions under their mandates and the institutions that have told me they were voting against those two resolutions told me they were bound to do so because of the recommendation from the advisory groups.
TB: So that tends to suggest that people like RiskMetrics have got tremendous amount of power now or being able to recommend against board recommendations where the board has expert advice. I believe you had Spencer Stuart advising you. Are they too powerful?
KR: Well, again, that’s not for me to opine on, but there’s no doubt that in the hands of the institutions their recommendations are very important.
TB: But what institutions have told you they can’t vote in any other way than what RiskMetrics tells them?
KR: That’s the message I’m getting.
TB: Well, we’ll have to follow that up. But, Andrew, I gather this has not affected in any way your determination to make this company perform better and make eircom perform better?
Andrew Day: That’s exactly right. As I said at the meeting, my focus hasn’t changed and 100 per cent of my focus is on improving eircom and BCM and therefore improving the shareholder value to the shareholders of BCM and today doesn’t change that in any way.
TB: How tough is it operating a phone company or a mobile and broadband company in an economy like Ireland?
AD: Well, certainly the Irish economy makes more of a challenge than normal, but at the same time eircom has a range of opportunities in it which are somewhat peculiar to eircom. There are significant opportunities to reduce the costs in the company and improve therefore its competitiveness and there are also significant opportunities in wireless and fixed broadband as well as the extension into new areas, new customer segments for their basic mobile services as well. So, the economy always makes it difficult, but I think eircom’s got a good operational plan and the right strategic initiatives in place to make it successful which of course would as I said before improve the value to the shareholders of BCM.
TB: You’ve really got to do two things. One is manage the company and maintain its capital investment while at the same time getting it ready for sale.
AD: To make it clear, eircom is run by its own CEO and its own board and its chairman. As the CEO of BCM, I’m a director of eircom and obviously as the major shareholder we provide advice, direction and input on the business and how it’s going, how it’s structured and the key strategic and investment initiatives that it might follow.
TB: So the 1200 jobs they’re cutting there and other initiatives that they’re undertaking are collective decision by that board, not something BCM decided.
AD: That’s exactly right. The eircom management and the eircom board are basically encouraging management to reduce the cost structure of the company both in their pay-related costs as well as their non-pay costs which is not unsurprising in this particular economic environment. The advantage of that is that not only does it improve the financial performance of the company, but it also improves the competitiveness of eircom against its major competitors in Ireland because it lowers its cost structure and therefore it helps the retail pricing for some of its products.
TB: So could you just talk about how much debt is eircom carrying and how vulnerable is it to either a downgrade by the ratings agencies or just deterioration in the Irish economy?
AD: There’s no doubt that eircom’s got significant debt, but at the same time this is a very solid, very cash generative company. It has no liquidity issues. It’s got strong cash reserves. And it does not have a looming default issue as has been claimed. So, the rating agencies will look at the performance of the company and the Irish economy and make their own judgements, but we have no doubt that eircom is a very strong company with very strong fundamentals and we expect it to continue to be successful, we expect it to improve and we also think that it can play a strong role in the broader Irish agenda as Ireland also seeks to recover from its current economic situation.
TB: There’s a potential buyer taking advantage of your data room. What are the chances of a transaction occurring?
AD: Well, there’s not just a single buyer. We have interest from several potential buyers. Not just anybody is allowed to enter the data room. We’ve talked to them. We had to make sure they were fully-funded in any proposal they may have, that they have a realistic understanding of what the company’s situation is, and obviously in particular we were only interested in proposals that actually assign a value to the eircom equity, therefore, above the actual dollar five cash back that would exist within BCM today.
So, that’s the current situation as far as those particular bids go. And obviously it depends on what those people think of the company as they go through due diligence, as they refine their proposals as to the value they’ll put on it and therefore the acceptability to the shareholders of BCM. It’s very hard to put a percentage on that until we know a lot more information obviously.
TB: Kerry, I just want to ask you a couple of questions about corporate governance. You’ve been on the board of BCM for I think about three or four years now. Obviously the external management model totally failed – when did it dawn on you that it wasn’t really working?
KR: The questions about the model started to arise in November 2007 and it was around that time that we had to consider the capital management program, because the share price was trading well below the net asset backing and so that was the time when the market was sending messages, very clear messages, through that this listed private equity model was being challenged.
TB: And it’s taken a long time to get to this point of self-winding up. Is that because of the complexity of the whole structure that was created by Babcock & Brown?
KR: Well, the process of negotiating to internalised management took quite a long time. I think we really started talking about this in June or July last year, but as market conditions deteriorated in the second half of last year and particularly the Irish economy, the looming prospect of an impairment and a major impairment particularly at eircom became a reality around about November 2008 and therefore the impact that it would have on the management fee payable to the manager and you’ve seen the consequences of that in what’s happened today.
So having come up with a proposal – I think it was in August we first put forward an announcement that we were moving towards internalisation – but then quite quickly we realised that the proposal that we had put forward in August was not going to be in the best interests of shareholders and we wanted to, both of us in fact, the manager and BCM, wanted to wait to see what the impairment was going to be and indeed KPMG were not coming out with an opinion because they could see the impairment looming as well. And the result of all of that is that the arrangements have been terminated now for $5 million.
TB: One of your former colleagues, former BCM director Robert Topfer, has come up with an offer. Did you regard that as pretty brazen, that he would propose to use the cash in the company to buy it?
KR: No. It’s not brazen. We welcome all proposals that will enhance shareholder value and Robert understanding the company better than most in terms of the way it was structured was the logical person to come forward, so we welcome his approach and it’s certainly not regarded as brazen.
TB: But you thought the terms that he put forward were unacceptable?
KR: Yes. There were terms that we found unacceptable and we needed clarification on quite a number of points, but our principle concern was the lending of the cash that was in BCM to the company that was part of the proposed scheme.
TB: Just finally, a shareholder at the meeting said to me that none of the directors ever bought any shares in the company and that was an indication that it wasn’t going to do very well. Is that correct and do you think all directors should own shares in the companies they’re directors of?
KR: Well, there have been directors in the past who have held shares, so that statement is incorrect. We’ve also had a very long period when our trading window has been closed because of sensitive negotiations or returns of capital that have been under consideration, so in terms of trading in the company shares, the only directors who’ve held shares were those who took them up at the IPO at $5. I don’t know of any non-executive directors who have bought shares other than at the IPO, principally because the nature of the company was that it was always working on deals either to acquire or in fact to sell, so that it’s a company that is if you like full of inside information that is price sensitive.
TB: Thanks Kerry and Andrew, for your time.
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