Brian Gaynor: Myer fight shows investors need to act

The battle for control of Myer is generating huge media interest across the Tasman. Photo / 123RF

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.

Passive funds drive trading frenzy

Inside the Fisher & Paykel Healthcare factory in East Tamaki. Photo / File

The frenzied trading activity in Fisher & Paykel Healthcare and Contact Energy shares on Thursday, the last day of the month, clearly demonstrated the impact of the passive funds sector.

This is because Fisher & Paykel Healthcare and Contact Energy moved in and out of the MSCI group of indices respectively at the close of trading on November 30.

Index changes are major sharemarket events and hedge funds have developed sophisticated models to predict when companies will move in and out of the major indices.

These index changes are mainly based on sharemarket capitalisation.

The figures in the accompanying table suggest that these models began to predict the Fisher & Paykel Healthcare and Contact Energy developments around the end of August and beginning of September as trading in these stocks increased dramatically at that time.

There was no corresponding increase in Auckland Airport, Fletcher Building or Spark activity.

F&P Healthcare and Contact Energy activity increased in the August/September period as global hedge funds tried to profit from these index changes.

Strong buying interest in F&P Healthcare shares pushed the price from $11.77 on August 31 to $13.10 on November 30.

This ensured that the company would meet the MSCI Index market capitalisation requirements and purchasers would profit from the move.

Trading reached a peak on Thursday when $709.1 million worth of F&P Healthcare shares and $429.7m worth of Contact Energy shares were transacted, mostly in the last few minutes before the market closed.

These are amazing figures, particularly in contrast to the monthly trading data in the accompanying table.

Consequently, passive funds had to pay more for their F&P Healthcare shares than they would have paid at the end of August. Contact Energy's share price declined from $5.58 at the end of August to $5.40 on November 30.

Ironically, the move to passive funds continues even though global active funds have outperformed passive funds in 2017.

Brian Gaynor is an executive director of Milford Asset Management.