The Taking of Vocus - Chapter 9
Class actions, the takeover and privatisation of Vocus
On 19th Feb 2019, Vocus produced its half year results and reiterated its 2019 guidance.
Kevin Russel stated that that the core opportunity was in the Australian Infrastructure Business, Vocus Networks. ?Vocus retail (M2) now became a turnaround opportunity.
As The Motely Fool wrote in February 2019:
‘Ever since the original Vocus dark fibre business-to-business fibre optic ??? internet and cloud services (data centre) business merged with M2 Group’s NBN-facing home internet business its been downhill faster than an Austrian skier thanks to its debt load and the overvaluation of the M2 assets as part of the merger.
‘I expect the chances of a deal to sell its Dodo and iPrimus businesses for a decent multiple are low, but it would be good news for long-suffering Vocus investors as it would allow the telco to pay down debt and retain its high-quality assets.’
On 29th April, in an ASX media release, Vocus acknowledged that the class action was proceeding.
This class action was mooted during my time on the board. The Statement of Claim includes allegations of contraventions of the Corporations Act 2001 in relation to misleading or deceptive conduct and continuous disclosure obligations in respect of Vocus FY17 earnings guidance.
Even after acknowledging that the class action was proceeding, and within a space of three weeks, Vocus received 2 more takeover proposals, with each being withdrawn shortly thereafter.
The first was on 27 May from EQT Infrastructure at a price of $5.25 per share which was withdrawn on 4 June.
The second came on 11 June from AGL Energy at $4.85 per share and was terminated on 17 June, barely a week later.?
On 23rd December 2019 ?- Sydney Morning Herald reported
Vocus Group has agreed to a $35 million settlement to soothe shareholders who were burned after a shock earnings downgrade in 2017 shaved hundreds of millions of dollars off the telecommunications company's market cap.
The hefty figure comes after a long-running fight between the Dodo and iPrimus owner and disgruntled investors that culminated?in a class action in April, after two years of turbulent financial results and a major reshuffle of the company's executive ranks.
Vocus will now pay $3.5 million of the total settlement, with the rest covered by the company's insurance. The settlement does not include an admission of liability and requires Federal Court approval.
A statement posted by the telco to the ASX on Monday said the agreement "was a commercial decision made in the best interests of the company and its shareholders".
The issues for shareholders kicked off in November 2016 when Vocus told the market it expected revenues would be $1.9 billion for 2017, with earnings (before interest, depreciation, taxation and amortisation) from $430 million to $450 million and net profit after tax between $205 million and $215 million. Vocus had reiterated this guidance during its first-half results in February 2017.
However, Vocus downgraded its expectations in May 2017 to $1.8 billion in revenue, earnings from $365 million to $375 million and net profit between $160 million and $165 million.
This was the?second downgrade in seven months?for the telco and saw $600 million wiped from its market cap.
Slater and Gordon Lawyers revealed in June that the class action's applicants alleged the company had misled the market when providing guidance for the expected financial performance in the 2017 financial year.
The class action, claimed the company misled shareholders about the potential net profit after tax, earnings and synergies available without reasonable grounds. The group argued Vocus had breached its continuous disclosure requirements, including that the guidance would not be achieved, and said shareholders had suffered a loss as a result.
The turbulent performance was followed by a management shakeup, with?former chief executive Geoff Horth stepping down?in February 2018 after a?major restructure?of the company's divisions.
The business has had a rollercoaster year in 2019 after two takeover bids, from energy company AGL and private equity firm EQT, were ditched during due diligence.
Vocus chief executive?Kevin Russell said in August?the business was trying to build credibility with shareholders and to make sure the market was fully informed.
In looking at this settlement, and accepting that the settlement was more for expediency, than an admission of guilt, I can’t help, but analyse the claim.
It stated the company had misled shareholders about its potential earnings ?without reasonable grounds.
There are two dates mentioned:
?Nov 2016 and when the first half results were published in Feb 2017.
In Nov 2016, David Spence (Vocus) was Chair. The other directors were Vaughan Bowen (M2), Rhoda Phillippo (M2), Mick Simmons (M2) and Craig Farrow (M2) and me (Vocus) , with Geoff Horth (M2) as CEO.
Subsequent changes meant that in Feb 2017 Bob Mansfield was now a director and Mick Simmons an executive director.
Mick Simmons, (M2 and Chair of their Audit committee pre merger)? whom I rate highly, helped prepare the November guidance. ?At that time, I couldn’t understand why a non-exec, like Mick Simmons, ?was offering to help with this, in what clearly should be an executive responsibility.
The only people who could? know the results were misleading to the market were M2 ?and certainly not the Vocus directors who still lived in hope, albeit this was very short lived.
On 28 Oct 2020, ?in the Chairman’s address Bob stated “since he became Chairman he consistently stated that Vocus would require three years to turn”.
Vocus Retail, (the old M2 business) earnings amounted to a paltry $80.1m, ?down 22% for the year before. A far cry from the earnings of $210m M2 claimed to have had on the merger with Vocus.
The turnaround started late. ?Bob Mansfield wanted to leave Geoff Horth in place.
Until ?John Ho was appointed to the board, the M2 directors’ mantra was to defend the M2 business at all costs and the best way to do that was to attack the Vocus business. Defending the M2 business to all stakeholders included moving expenses? such as its CVC charges, part of its cost of sales,? to group charges, to obfuscate the earnings from M2.
But how does one then fix the core issues in the M2 business when any problems are ignored, with certain directors leading that charge, with Bob Mansfield doing nothing to stop that charge, despite Christine Holman and I raising the issues.
On 19 November 2020 Vocus announced plans to IPO Vocus New Zealand.
On 8 Feb 2021 Vocus announced another indicative and non-binding offer from ?Macquarie Infrastructureat $5.50 pe shares
On 9 March, ?Vocus agreed to the proposal of $5.50 which valued Vocus at $3.5 billion and an enterprise Value of $4.6 billion. Enterprise value includes the debt in Vocus of $1.1bn.
On 22nd July 2021, the Australia Financial Review reported
For all the bluster about private equity and private capital hunting down ASX-listed targets, there’s not been a lot of completed deals at the big end of town.
In fact, when Macquarie’s MIRA and Aware Super took the keys to Vocus Group this week, they completed one of the biggest ever take privates by financial sponsors ever in Australia.
At $4.69 billion, Vocus was the third biggest take private,.
To me, that was the end of my era as far as Vocus was concerned. My remaining holding in Vocus which was for me, quite large, was now realised in cash. What began as the most remarkable journey with James Spenceley , watching and helping him put together? a wonderful business, ?ended with me ?watching ?the value almost evaporate with the M2 merger.
I have learnt a lot about non-executive directors who act as executives, and others who are not remotely independent.? Trying to do my best as one of the very few independent directors, I have learnt what goes wrong and why a merger of equals went so wrong. There is really no such thing. One party somehow always becomes dominant. ‘Creative’ accounting pre-merger’ ?can be a huge issue especially for the party that has done the right thing.
To protect their own self interests, ?there are board members who do their utmost ?to prevent you doing your job as a director. Right is not might and too many directors take the line of least resistance, arrive at board meetings, tell management what a great job they are doing, have tea and go home.?This would be the ideal situation, but a company is a fluid living and breathing entity. Problems do arise and need to be solved.
The only changes can come from institutions but ?institutions and fund managers are only told what they want to hear and sometimes for some unknown reason, throw their support behind ?certain directors, when everything screams the opposite.
Boards need directors of integrity. ?Directors who are not afraid to challenge management when things are going wrong and are trying to do the right thing for all stakeholders, be they staff, customers or investors. In my opinion there is no place for directors who are only out for themselves or a select group of staff or other directors.
Or maybe there is, ?and Christine Holman and ?I are in the minority.
Maybe I have this all wrong? ?Bob Mansfield has managed to get award after award, despite the litany of failed companies and the Fairfax and Telstra debacles.
If not for John Ho who knows where Vocus would be today!
So what went wrong in the M2 Merger.? This is something I have analysed many times over.? Should Vocus have done better due diligence and not relied on published accounts and information supplied by? M2? ?Geoff Horth presented M2 earnings ?of $180.7m with strong momentum in consumer, business and wholesale and a revenue growth of 24 -26% and? after tax profit growth of 30-35%. This together with the full year earnings of Call Plus, ?the $180m, without much real stretch would be $210m.
Barely 18 Months later the combined group downgraded its earnings.? How did such strong earnings and expected cash flow dissipate in such a short period.? According to the settled class action, the company misled the market when providing guidance in Nov 2016 barely a year after Geoff’s 2015 presentation. ?An Internal Audit Report, which was not allowed to be externally examined went some way to explain this. And then there was the Board. There is no point in reiterating any of this.
Over the last couple of years there have been some very interesting changes in Corporate Australia. Environmental, Social and Corporate Governance is an approach to investing that recommends taking environmental issues, social issues and governance issues into account when deciding which companies to invest in.
ESG is the acronym. Companies are adopting the disclosure of their practices in ever increasing numbers and this will become mandatory.? Institutions are also becoming aware of their ESG responsibilities and they have investors who want? to know that these??institutions are fulfilling their ESG responsibilities and the companies these institutions invest in are in turn fulfilling their ESG responsibilities. Putting out an ESG statement with incorrect information is called green washing and although that relates to the environment it can relate to any statement in the ESG document.
The environment today is less tolerant of bad behaviour in boardrooms and even less with institutions. That is not to say it doesn’t happen and ?we all know the public furore that goes on when bad behaviours are made public.
And so ends my story of the foundation, rise and almost demise of Vocus and like the fabled Phoenix, its rebirth.
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