07/03/2006 - 21:00

Shareholder sharks are circling FMG

07/03/2006 - 21:00

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On March 16 last year, someone paid $5.50 for a parcel of shares in Fortescue Metals Group. It was the peak price on the day. Nine trading days later, on March 31, someone paid $2.83 for a parcel of FMG shares. It was the low price for the day. But that gap of $2.67 a share, which translates into a decline of 48.5 per cent in less than two weeks, is what Briefcase believes will have attracted the eye of the shareholder sharks.

The sharks are part of a wider bottom-feeder species. They are investors, and their legal advisers, who spot an opportunity for profit from misfortune. In this case the misfortune is the self-inflicted wound suffered by FMG when it promised a lot in 2004, and then retracted.

For readers not up to speed (they must have been dozing off over the past week), FMG is in a spot of bother with ASIC over statements made by its chief executive, Andrew Forrest, in late 2004 about iron ore sales agreements with Chinese customers. These statements were corrected in March last year.

The first statements said “binding” iron ore sales agreements had been struck – binding being a word which the Oxford Dictionary defines as obligatory, and obligatory being defined as compulsory – but Briefcase is sure you get the meaning.

The later statements from FMG went some way in redefining the word binding into something looser, though it seems likely that lawyers for ASIC and FMG will do battle over precisely what binding means, which should make for a riveting day in court.

What interests Briefcase is not so much the rights and wrongs of what FMG said, but the effect it appears to have had on the market, and the fact that someone might have lost a lot of money if they had paid the $5.50 peak and sold at the $2.67 low a couple of weeks later.

In between the share price high and low there might even be a lot of people who will now allege that their share trading actions were influenced by FMG’s statements. And while some of those might be telling outright porkies (English translation: lies) that is a situation not known to stand between a greedy man and a sack of cash.

The FMG position, which has the potential to evolve on a number of levels, seems to be ripe for the shareholder sharks to strike. If this happens it will compound FMG’s problems as it battles ASIC over what, at this stage, are simple civil charges that carry a request for nothing more than a hefty fine.

Everything, however, has the potential to change as the evidence is put in court. And that’s where the danger lies – on several levels for FMG, because even if found innocent of deceit, the seeds will be sown for someone to gather what is said in court and launch a claim for financial loss, effectively prolonging the agony for FMG, which is in the middle of raising debt and equity for its $2.5 billion iron ore project.

The sharks will be all too familiar with FMG’s timetable, and the desire to catch the iron ore price wave, and the desire to eliminate ancillary issues – perfect conditions for a little bit of greenmail with a suggestion that a small cheque now might cause the problem to go away.

If there is any comfort for FMG management in this emerging crisis it lies in the fact that FMG is not alone in this game of ‘shareholder revenge’ being played on companies that disappoint.

Telstra, Aristocrat Leisure, Sons of Gwalia, Media World, ION and Concept Sports, are also targets of shareholder action groups, backed by legal eagles who have spotted a fresh carcass on which they can feast, and funded (in some cases) by specialist litigation funds which stump up the starter money in return for a fat fee, or share of any proceeds.

The difference with FMG is that the ground is being well prepared by ASIC for the shareholder sharks, who now have the luxury of listening to the evidence in the civil case when it opens, and deciding how much they should claim.

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Has anyone else noticed how the chips in the casino (also known as the stock market) are rapidly rising in value? A few years ago, a big deal was measured in the tens, and/or hundreds of millions. Today, you’re a wimp if you don’t talk in billions.

The Alinta/AGL stand-off, which has helped to suddenly make running a pipeline a blood sport, is a case study where no-one seems to be blinking at the suggestion that Alinta write out a cheque for $9 billion or- $10 billion for a full cash bid for AGL using, naturally, a Haulpak full of cash supplied by Macquarie Bank.

Some equity will be mixed with Macquarie’s debt, though it is amusing to calculate that $10 billion of debt alone, at an interest rate of 10 per cent means that someone (presumably Alinta) needs to find $1 billion a year just to service the loan – and that is more than the combined profits of AGL and Alinta in their latest full financial years.

This example, which asks the question of where will the money come from, is open to criticism because it simply looks at AGL’s underlying $386.8 million net profit in the year to June 30 2005, and Alinta’s $239.8 million for the year to December 31.

But, even after boiling down the numbers, and pointing out that servicing debt comes before calculating the net profit, the point remains that utilities which operate gas pipelines and electricity lines are not big profit earners, and certainly not natural growth stocks.

Growth for this breed is being achieved today via ‘financial engineering’, and that makes Briefcase think perhaps it’s been for a run in Marty McFly’s De Lorean as it rockets back-to-the-future, with the date set for, say, mid-1986, a time that led to all the excitement of October 1987. And if you’re asking what that means you’ll get what you deserve.

•••

“I did not attend his funeral, but I wrote a nice letter saying I approved it.” Mark Twain

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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