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MFS's gruesome hour

Alan Kohler

Published 1:37 PM, 18 Jan 2008


Today was not the day for Michael King of MFS to unveil a rights issue, oh no.

King’s conference call to explain his plan to separate MFS and its hospitality subsidiary Stella, including a $550 million rights issue by Stella, began at 10am, just as the market opened following another 2.5 per cent fall on Wall Street.

Charlie Green, a Queensland broker who has been one of Michael King’s strongest supporters for a long time, set the tone early, and dried out King’s mouth, by calling for his resignation.

By the time the ordeal was over, the founder and CEO of MFS had spent one of the unhappiest 67 minutes of his life being assailed by analysts, investors and journalists, and his share price had fallen by more than half. The rights issue was effectively dead in the water.

It was one of the most gruesome corporate presentations I have ever witnessed, and was undoubtedly a turning point for this company.

In November, in response to questions from analysts because of the credit crisis and Centro Property Group’s problems, King publicly stated that the company would not need to raise new equity.

This morning, that statement was suddenly no longer operative: as part of the King’s plan to demerge MFS and Stella, which he says was in train before City Pacific proposed a demerger and acquisition of MFS on Monday, the Stella side of the business will raise $550 million through a rights issue (not underwritten).

Michael King’s explanation of this switch plainly lacked credibility, and the market was in no mood to be forgiving of such things – today of all days.

“We don’t actually need the equity,” he declared this morning. “We could stay as we are and keep going. Our earnings guidance is unchanged and there is no change to our debt position.”

So why announce such an obviously unpopular, poorly-timed capital raising then?

“Well, I need to understand whether this negative feedback is from shareholders or outsiders.”

At this point the share price had fallen 52 per cent, so it’s a fair bet the feedback was from shareholders.

On cue, the conference call moderator introduced a question from a “private investigator” (he turned out to be a private investor listening in). He wanted to know whether Michael King had sold any shares, or was planning to. The answer was no.

“Are you facing any margin calls on your holding in MFS?”

“I don’t know, and I don’t want to talk about my personal finances.”

“Well, people usually have some idea what their margin loan position is on their personal holdings.”

“Well, I’m telling you I don’t know.”

Back to being hammered over the company.

King’s big problem is that two weeks ago he reported to the market that $150 million worth of debt would have to be refinanced by March, but that “MFS is confident of its ability to repay same on or before the due date”.

But investors are now joining that dot with the dot of today’s equity raising announcement and getting a wobbly line. “It’s all money and goes into the same pot,” one analyst said after the conference call.

Rightly or wrongly, it is now assumed that the equity raising is needed to refinance that debt, plus more, notwithstanding Michael King’s protestations that there is no problem with the company’s debt position.

And his credibility was further undermined by the way he is planning to get the new cash raised by Stella up into MFS, where it is needed.

According to Michael King, the $550 million will be used by Stella to repay part of an internal debt from MFS to Stella, a wholly owned subsidiary. The total internal debt is $750-$900 million (apparently they don’t know the exact figure, for some reason), and it was used to finance acquisitions by Stella during the past year.

So what about the rest of it? Well, according to King it is simply an internal facility between two parts of the same company, so it can just be extinguished.

Huh? Why not extinguish the entire debt? Alternatively, why not repay it all in cash? The idea of partly satisfying an in-house debt with cash and then simply cancelling the rest makes no sense.

“It seems this proposal today has not been well received,” a clearly rattled Michael King said at one point. “I’m obviously going to have a long weekend considering what you are all saying.”




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