The Taking of Vocus - Chapter 5

Boardroom Coups and New Directors

“You can fool all the people some of the time, and some of the people all of the time, but you cannot fool all the people all the time.”??Abraham Lincoln

History has shown that “some people can fool all of the people all of the time, at least those they need to fool. The others are inconsequential.”??

On the 27th September 2016 the board meeting was held and James Spenceley and Tony Grist presented their views and indicated that if they were not enacted upon they would be considering their position on the board.?

I was horrified. If James did end up resigning, the share price would spiral downwards and James was the one person who did have the ability to help fix the M2 issues. I??spent the next few weeks calling??all the board members individually about the situation.??We couldn’t let James resign??and I came to the belief that everyone agreed??some changes needed to be made and it was more about the timing rather than if.?

On 11 Oct 16,??a special board meeting was held in Melbourne?

At the beginning of the meeting, I realised that the M2 board members and David Spence had been meeting and conducting discussions about the James and Tony proposal without me??as I??was perceived to be too close to James. It?was clear to me that a decision had been made and the M2 board members??with David, had the majority.

To my??surprise, and that of James and Tony, when the board meeting started David Spence handed James and Tony resignation letters commenting that ‘We’ve listened to all you have to say, we’re not interested in your proposed changes, thank you for offering to resign, here’s your letters.’

I spent half-an-hour or so engaging the board members in an effort to work through the key concerns raised by James and Tony and reverse the ultimatum for them to resign. I??reiterated that in the event James and Tony did resign the Vocus share price would take a hit and confidence in the company would be significantly impacted.?

The announcement put out by Vocus on 12 October 2016 stated

“the resignations follow a difference of opinion between the departing directors and the board following the future leadership of the company".?

It went on to state that Mr Grist had confidentially proposed to the Board and alternative leadership framework whereby the CEO would change in early 2017 which was supported by Mr Spenceley.

The announcement also went on to state that “the Board is strongly of the view that Vocus is effectively managed??as evidenced by the strong operational and integration results being achieved since the merger with M2, and the proposal would needlessly stabilise the company”.

This made every newspaper in the country.

12 Oct 16 The AFR reported

James Spenceley and Tony Grist leave Vocus following failed leadership spill

"Vocus Communications directors James Spenceley and Tony Grist will leave the telecommunications company after a failed proposal to oust chief executive Geoff Horth and shake-up the board".

I have thought a lot about that meeting and what went on and I came to the following conclusions:

At the AGM on 29 Nov 2016 Vocus reaffirmed its profit guidance with earnings expected to be in the region of $430m to $450m. So David had been convinced by M2 that the earnings would be strong. If this was to occur, then everything was okay. After all, the profit guidance was given by the Geoff and Geoff should be aware of the company’s ability to meet this guidance.

And then from having 4 out of the 8 directors there were now 2 Vocus directors out of 6.

At the AGM, I together with Vaughan Bowen, Craig Farrow, Rhoda Phillipo and Mick Simmonds all stood for re-election, a 2 year appointment according to the Constitution.??I received 358m votes for, with the rest receiving around 370m votes for.??I had 16.6m votes against (4.62%). The proxy advisors were suggesting I had been on the board for too long. They had added all the years, I had been on the board but for many of??those years company Vocus had been in the wine industry and the??company had not actually been Vocus. Had we used another vehicle, say M2, they would have not said anything about me, but raised the same points about Vaughan and Craig.?

On 6 December 2016, Vocus signed an agreement to build the Australian Singapore Cable (see chapter 4), a 4,600 submarine cable system linking Australia to Singapore and Indonesia and to??provide a minimum of 40 terra bits per second of capacity with an approximate 19 months time to build at cost of $170m, to be funded by debt, cash flow and prepayments for right to use.

Around this time, I received a call from Vaughan. Vaughan wanted to appoint Bob Mansfield to the Vocus board. Apparently Bob was on the board of one of Vaughan’s charitable trusts and they had formed a close relationship.

On 16 Dec Vocus announced that Bob Mansfield would join the Vocus board. I knew Bob from my early Investec Bank days. Investec had built a suite of offices and invited certain people to use those offices, as it was thought that these people had the ability to help Investec, with their connections,??grow in Australia. Bob had also been a board member of Investec Bank Australia Limited.

Bob was the founding CEO of Optus and was served as Chair of Telstra from 1999 for 4 years. In those days I lived in St Ives, on the upper north shore of Sydney.

I lived in a gorgeous street with no overhead cables. ADSL was the new faster way to get internet, a vast improvement from dial up.??I requested Telstra install ADSL at my premises and received a letter telling me it was technically impossible to get ADSL in my street.??I penned a reply stating that the house behind mine had ADSL, the street in front of mine had ADSL, the Street at the T-junction about 200 metres from my home had ADSL, I am sure there is a way for me to have ADSL. I went to ask Bob if there was anything he??could do to help me. That afternoon, Telstra installed ADSL at my home in under an hour, It didn’t even seem to be big??deal for the Telstra crew to do.?

My internet speed was the top speed that ADSL normal users could get and was stable for the next decade.?

The following day, I got a response to my latest letter to Telstra with a detailed explanation of why it was absolutely technically impossible to get ADSL at my house. I took that letter to work and Bob came to ask me if I had really tried to get ADSL from Telstra of had I just used him because he was the chair of Telstra. I showed him the letter I had just received and he took the letter to Ziggy Switkowski, the then CEO of Telstra to show him what had occurred. I was impressed with Bob.?

It was this Telstra’s can’t??do attitude and James’ can do attitude that enable James to build Vocus in the early day.?

Bob’s stint at Telstra came to an abrupt end, shortly thereafter.??According to the Sydney Morning Herald, in an article published on April 15, 2004, the headlines read “ Mansfield goes in Telstra mutiny”.

To quote from the article:

“Telstra chairman Bob Mansfield last night was forced to quit Australia's chief telecommunications company after facing a mutiny from fellow directors at a board meeting earlier yesterday.

His removal, which was welcomed by the Federal Opposition, could place chief executive Ziggy Switkowski in an untenable position after the pair in February proposed to the Government a $3.5 billion takeover of John Fairfax Holdings - a deal rejected by the board six months earlier.”

Telstra directors were furious that Mr Mansfield had taken it upon himself to discuss the matter with the Prime Minister, John Howard, before consulting them and after it was clear that the majority was against the proposal.

It is believed a number of directors had spent the past few months marshalling forces to oust Mr Mansfield and were planning to demand his resignation at yesterday's meeting.

Another interesting article was published by the Sydney Morning Herald on??16 April 2004 to further explain Bob’s resignation from Telstra.

Interestingly on Sept 11,1999 the AFR headlined an article “How did Mansfield get this job anyway:??

“When Bob Mansfield was appointed non-executive chairman of Telstra, most of the negative sentiments circulating in the stunned business community had to do with his connections. "Too close to Kerry Packer," said some. "Too close to the Government," muttered others.?

In fact, Bob Mansfield seems to be "close" to all the right people, in a professional way. He's the supreme networker, a man with the knack of being in the right place at the right time, and for moving on fast when he finds himself in the wrong place. It's something he's not at all shy to concede.?

John Howard, Richard Alston and John Fahey wanted Mansfield. They were aware that some in the business community might raise eyebrows at the decision, largely because Mansfield had been asked for his resignation as chief executive of Fairfax in 1996 after only five months in the job.

Mansfield was also a long standing director of Allco Finance Group ending up as Chairman.

Allco collapsed in November 2008 with debts of $1.1bn and was one of the first high profile casualties in the GFC

According to the Sydney Morning Herald, on 29 March 2010, the headlines of the article read?

“Allco hearings reveal failure at every level”.

The article goes on to state that “No lesser senior people than David Coe, the group's executive chairman (who was largely responsible for putting Allco together), the deputy chairman, Bob Mansfield, and the chief executive, David Clarke, all testified or agreed to the view that the group was far too complicated and too opaque to understand well before its corporate life expired.

But Bob has also had many achievements. He sits on many charitable trusts and has been recognised for his work in academia and for the government.

Also during Dec (21 December) Vocus appointed Mark Wratten as CFO following Richard Correll 's resignation. Mark was great. Hard working, no-nonsense down to earth and technically competent?

On 24th December 2016 Matt Hollis resigned as Head of Corporate and Wholesale division, with Mick Simmons, one of the non-executive directors??stepping into this role in Jan 2017

Around about this time, another problem was emerging in the M2 business. The NBN!

M2 had to migrate many of its customers over to the NBN and the margins were lower and there was a cost to migrate each customer.?

In late 2016 Geoff Horth and his team were trying to sell some fibre deals to try and get the sales and earning targets.??One of the deals was to sell??a 15 year right to certain of Vocus’ international, intercapital, regional ethernet access and metropolitan fibre capacity to Superloop in a deal valued in excess of $20m.

Superloop was fast becoming a serious competitor to Vocus and the deal did not make sense on many levels. Chris Deere , was described by Nick McNaughton as “ proven to be a fantastic operator. Having built his own successful business over many years and??knows the business intimately. This insight and experience has brought (and is still bringing) incredible value to Vocus as it continues to grow”.?

Chris Deere thought the Superloop deal was a terrible idea. He thought the product was worth around $50m and Vocus was giving a competitor the ability to compete with us using our own network.

Chris called me and I immediately set about calling some of the directors to stop this deal. I was told that Superloop could build this themselves. Horth appeared desperate for the earnings and most of the board??seemed uninterested in stopping this deal. In addition they were paying the amount upfront, something Horth was anxious to include in the earnings. Chris had explained to Geoff that Vocus could not include these earnings, something which proved true shortly thereafter. There were other issues with this deal and the deal was vague, so it appeared to Chris that the income was certain but with an unlimited expense. Fortunately Geoff decided to flick the whole thing to Mick Simmons and Mick listened to Chris and adjusted the contract.?

On 9 Jan 2017, Mick Simmonds, who up until that time was a non-executive director, was appointed as an Executive director in charge of Corporate and Wholesale, in effect the Vocus business.

At the end of January /beginning of Feb,??the board went to Manilla to review the M2 call centre. The call centre was owned by Acquire BPO which was co founded by Larry Kestelman. The call centre was a significant expense for M2 and its job was to deliver new customers for the M2 business,??The operation was very impressive and to all intents and purposes and even though it was an outsourced operation, it was regarded by the staff there?as being part of vocus.

The call centre was a very in demand place to work. The wages were higher than that paid in Manilla??and it was felt by the staff there that this was a prestigious place to work.?

A large dinner was held with the M2 mass markets senior team and all the directors, around 20 people in total. Geoff went around the table asking each person their impressions of the call centre.?

I was called on first.??One of the issues at M2 was the large amount of customer churn. I cannot remember the exact number but M2 was losing a substantial number of customers a month and getting a substantial amount of new customers a month.?

But the net result of those gained less??those lost was fairly small, making the cost of the getting those extra net customers prohibitive. At that time I didn't fully realise that most of the costs were not being written off immediately but being written over a period of time.

My answer to Geoff was “it’s a very professional place and I am impressed, but I would liked to have been given a presentation on how they handle churn”.

Geoff stood and said "how dare you raise this, can’t you see what we are doing about churn?".??I could not understand Geoff’s reaction.??Churn had not been mentioned, in any presentation. Kelly Hibbons, Vocus Corporate PR Person, was also at the dinner. Kelly was very competent and a pleasure to work with and??very professional.?

Everyone??sat there for what seemed an eternity in complete silence,??a little shocked. Kelly was the first to speak. “Geoff you have to understand that the analysts are totally myopic about churn”. Bob Mansfield agreed with Kelly.

The next morning Craig Farrow asked to talk with me. He said, I see there is an issue with you and Geoff and would like you to apologise.??I said, “there was no issue with me, I was a board director entitled to ask any question I wanted or suggest anything, that was my job! In addition I think it's Geoff you need to have this discussion with. If Geoff loses it with me as a board director, what is happening at the staff level??”

On 17 Feb??2017 Vocus released its half year result, showing earnings of $187.2m. These “strong” earnings were attributed to “strong demand for Vocus’ products, the acquisition of Amcom??and Nextgen Networks.

I was??finding it increasing difficult to understand the results. They were reviewed by the Auditors. I was well known in the boardroom for asking a lot of questions and trying to understand the numbers coming from the M2 business.??I was becoming increasingly frustrated. The new CFO was just getting his feet wet and this was very early on from his appointment.?

David Spence and I started to get very uneasy, with the M2??numbers We shared this uneasiness at board meetings and started to share it with Bob the only other director not from M2.

On the same day, the deal done with Superloop was announced to the market, Mick Simmons resigned?from the Vocus board and was appointed to the permanent role of CEO of the Vocus’ business.?

Board meetings now started taking a different turn. David Spence and I were very keen to understand the M2 numbers as an understanding was crucial to fixing any issues.??

We needed to??understand exactly we bought. How robust were the earnings in the first place and what, if anything had gone on prior to us acquiring the business. We needed complete transparency of each of the M2 businesses and how they were currently performing.

We also needed to know what M2 expenses were being allocated to corporate overheads and what was the cost of the Vocus infrastructure that M2 was using at no cost.

Without the co-operation of the board, we had no ability to get all the information we were requesting.??Overall the results were correct, after all the CEO and CFO attest to this in writing and the results are audited, but there were issues which needed to get fixed.??On most occasions I did not get the answers I required.?

To be continued