Link to article here.
Aggressive traffic projections are coming home to roost these days, as
motorists shun the extra toll taxes to get to work. Now toll operators
are turning on the their own industry and suing companies who
overpromise and underdeliver traffic for toll roads. The blood is in
the water...here come the sharks!
Leighton starts lawsuit against ConnectEast
BY MARTIN COLLINS: John Durie | September 09, 2009 Article from: The Australian EVER
since global credit markets shut 12 months ago, the infrastructure
debate has centred on how to attract funding, and now Leighton has
provided one more cause for concern. Its contract
dispute with ConnectEast highlights the fact that while developers and
operators want the government to take on more risk in the aftermath of
the GFC, the private sector operators are masters at minimising their
own risks. Leighton isn't getting as much money as it thought it would because the traffic estimates were too high. Ask
the company whether it would have handed the money back if the
estimates were too low, and the response is laughter: "We had a
contractual right." It would all be a great game if the
consequences were not serious, but at risk is the level of
infrastructure development and who shares the risks and rewards. In
the dispute, Leighton wants to add cream to its considerable booty from
the project and in the process hurt minority shareholders by kicking
$50 million from ConnectEast's market value. You would think Leighton would want ConnectEast to have more, not less, money to pay it. The dispute creates even more doubt over the aggressive traffic claims bidders use to win the multi-billion-dollar projects. Unfortunately the system now rewards bidders for being too aggressive.
Behind
the facade of nation building, financiers and contractors use every bit
of leverage to maximise their take at the risk of hurting the small
shareholders who were mistakenly happy to back the project. After
watching this performance they have another reason to think again and
-- just like last week's decision by Brisbane City Council to go it
alone on the $1.8bn Northern Link Tunnel -- taxpayers will have to pick
up the tab. To be fair to Leighton and its chief operating
officer David Stewart, the ConnectEast dispute is a straight
contractual fight -- which means there will be rights and wrongs on
both sides -- but it's the timing of this stoush and the regularity of
Leighton's use of lawyers to top up its money jars that raises
questions. Leighton handles virtually 100 per cent of the big
road construction in Australia, with most big contracts a battle
between its divisions rather than against another firm. The $2.5bn
ConnectEast's East Link project was no different. The ACCC was happy to wave through mergers among the big developers to leave Leighton in control. Leighton's
John Holland boss Glenn Palin and Thiess's Neville Power were
negotiating with ConnectEast's John Gardiner until last Friday when
talks broke down. As it happens, ConnectEast is in the middle of
a $420m capital raising, with the institutional issue formally closing
yesterday and raising $309m. As part of the spoils for winning
the project, Leighton picked up a $7.5m bonus on completion and 260
million shares in ConnectEast -- of which it still owns 113 million. It
decided against participating in the capital raising and -- as was its
right -- collected $2.3m for selling its rights. That after all
was the virtue of ConnectEast chair Tony Shepherd's offer structure,
which gave every shareholder a right to participate and to collect some
value if he or she decided against taking up the rights. So
Leighton pocketed the money, then dropped the bombshell with news of
the litigation, which helped push ConnectEast below the rights price
for the first time in over a week, with the stock closing yesterday
down 5.4 per cent at 35c. Maybe Leighton didn't plan it that
way, but it just so happens the litigation threat came at the point of
maximum leverage over Shepherd and potentially maximum harm to his
capital raising. The claim itself is over traffic forecasts made by
Hyder Consulting, which was hired by the bid team that included
Leighton, Macquarie Group and ConnectEast. Hyder said by April the road would carry 258,000 cars a day, but so far it has been more like 159,000. The
difference mattered in several respects, but the important things to
know are that Leighton has had a representative on the board the entire
time, so knew all about traffic numbers and was happy to pay Hyder's
costs. One of the problems when governments sell tollroads is
they encourage bidders to overestimate traffic numbers -- the more cars
on the road, the lower the tolls that can be charged and the lower the
costs. In this case, Leighton collected a $7.5m success fee,
$2.5bn in constructions fees, plus equity in the project and, as late
as yesterday, its $2.3m for forgoing its rights. All of this
because the traffic estimates were higher than reality, which meant
Leighton would get a lower bonus for completing the road five months
earlier. The bonus was linked to traffic use and the time of
completion with the risk, of course, that finishing late would have
resulted in millions of dollars in penalties. The big rewards are designed to reflect the risks taken, but the dispute throws into doubt the level of risks. The
published claims of $400m in damages are fairyland stuff because the
actual amount at risk is more like $75m, of which ConnectEast has
already provided for $30m. When projects are delayed, Leighton
sues the government and anyone else to blame them to recover funds, and
when the numbers fall short of projections it attempts to recover its
upside. Downside doesn't seem to be in the equation, which, of course, means risk is not large. Brookes' float pitch ONE
of the problems with high-profile floats is they let insiders air their
claims, as has happened already with some Myer staff complaining about
being forced to work too many weekends, under pressure to sell more and
in the process staff morale is at an all-time low. The retailer
rejects the claims and when Saint Bernard Brookes hits the podium on
Friday, he will talk up cultural change in the company, helped by the
fact that some 18 per cent of full-time staff are on short-term
incentives and 400 are in the equity pool, which owns 7.5 per cent of
the company. Saint Bernard also invested in the $1.4bn buyout, but the size of his stake was not divulged yesterday. Store
managers are encouraged to run the business like its their own, with 10
key criteria for their bonuses including sales, costs, shrinkage
(theft), profits, customer care, sale of house brand products,
maximising sales per transaction, safety and selling warranties with
electrical products. Before TPG acquired the business, it was
earning between $60-$100m a year and now, the 2009 year earnings before
interest and tax will be more like $235m with earnings margins up from
2 per cent to 7 per cent. Debt will be cut further from the float proceeds from $660m to around $450m. With all that profit growth in the past, how much can be expected in the future? There is no doubt TPG and Saint Bernard have fixed a broken company and in the process have also grown profits dramatically. So
if they are selling a business on historical EBIT multiples of 13
times, even with over $400m in capital expenditure, ask yourself how
much in costs have been removed which will have to be replaced? The
good news is TPG's global track record for retail floats is 27 per
cent-plus outperformance against the relevant indexes for the likes of
Petco, J Crew, Burger King and Debenhams. This time, the pitch
will also start with Myer One club members being certain targets for
the float team of Macquarie, Goldman Sachs and Credit Suisse.
|
