Celebrated investor and corporate raider Sir Ron Brierley’s vehicle, Mercantile Investment Company (MVT) has just made its first activist investment play. Though Mercantile is small in size with assets of around AU$21 million as of June 2012, Sir Ron’s investment savviness is legendary in stature.
Sir Ron stood down as the chairman of Guinness Peat Group (GPG) in late 2010, under pressure from a group of fund managers and investors who had very “short term” aspirations for Guinness Peat Group (forgive the sarcasm but your author was not impressed by this show of misguided investor activism!). Sir Ron is making sure the same situation does not repeat itself at Mercantile Investment Company, where he has taken a controlling 54% shareholding in Mercantile through his private company, Siblow.
Sir Ron’s latest play, Murchison Metals Ltd. (MMX, Financial), is a Brierley classic – a company with a sizeable cash chest, no clear corporate direction, a depressed share price and a group of overpaid directors*. This is exactly the sort of company that Sir Ron has targeted consistently throughout his successful career at Brierley Investments and Guinness Peat Group.
Sir Ron’s company Mercantile filed notice Tuesday afternoon with Australian Stock Exchange that it raised its shareholding in Murchison Metals to 76.4 million shares, raising its shareholding from 11.7% to 17% of the outstanding float.
Sir Ron lodged a requisition yesterday for a general meeting at Murchison Metals to be held for the purpose of removing the managing directors Greg Martin and chairman, Ken Scott-MacKenzie and replacing them with two new directors put forward by Sir Ron. Sir Ron has indicated that this was “a direct response to the discovery of the excessive level of expenses being incurred by MMX” and his new directors' first priority will be "to stem the cash outflow.”
Murchison Metals Ltd. was a co-developer of the $6 billion Oakajee port and rail infrastructure project in Western Australia but was unable to come up with the financing. As a result,it sold its stake to its joint venture partner Mitsubishi in February 2012 for AU$325 million, which left the company with $223 million in net funds. A large portion of these net funds amounting to $207 million have been returned to shareholders this year.
But Murchison’s remaining cash is being eaten up through operating costs that Murchison estimated in its October quarterly report will run at a hefty $500,000 a month for the October to December 2012 quarter. These are excessive for a company with no active business operations. Further, additional advisory and operating costs will be incurred if Murchison shareholders vote to wind up the business in early 2013, hence, the reason Sir Ron wants to step in and stop these excessive cash outflows by ousting the current board and potentially stopping the winding up process.
So what is in this move for Sir Ron? A cash arbitrage and a sizeable tax asset!
As of Sept. 30, Murchison had AU$26.9 million in cash. Subtracting out recent legal settlements with Premar Capital and O’Sullivan Partners for $3.39 million, that falls to $23.51 million. Subtracting Murchison’s expected operating cash outflows for the December 2012 quarter of $1.5 million, will leave $22 million as of Dec. 31 or 4.87 cents per share, which is 22% higher than the current share price. The current directors of Murchison have proposed winding up the business and returning just $15.8 million to $18.09 million or 3.5 to 4 cents per share via a final capital distribution in February 2013 after closure and operating costs. Sir Ron is trying to move quickly, oust the incumbent directors and capture this cash arbitrage.
As of June 30, Murchison Metals was sitting on a deferred tax asset of $19.5 million which is not shown in Murchison’s balance sheet but is available to be offset against future taxable income subject to statutory tests being met. This tax asset will be lost if Murchison is wound up and could be a potential big bonus for Sir Ron!
*By way of a side note, according to Murchison’s Annual Report for 2012, key executives and directors at Murchison pocketed just under AU$13 million in remuneration benefits for the 2012 financial year – not bad for a company that has no active business operations, which reported just $7.2 million in revenue. In 2012, Mr. Martin, Murchison’s managing director, received $5,000 a day plus leave entitlements and worked just a three-day week!
Disclosure: No positions held in MMX,MVT. Hold long position in GPG through an investment account I manage.
Disclaimer: The opinions expressed by the author in this article are not intended as investment advice and should not be relied upon as investment advice by the reader.
Tarn P. Crowe
Director, Crowe Finance Pty. Ltd. (private investment company)
Sir Ron stood down as the chairman of Guinness Peat Group (GPG) in late 2010, under pressure from a group of fund managers and investors who had very “short term” aspirations for Guinness Peat Group (forgive the sarcasm but your author was not impressed by this show of misguided investor activism!). Sir Ron is making sure the same situation does not repeat itself at Mercantile Investment Company, where he has taken a controlling 54% shareholding in Mercantile through his private company, Siblow.
Sir Ron’s latest play, Murchison Metals Ltd. (MMX, Financial), is a Brierley classic – a company with a sizeable cash chest, no clear corporate direction, a depressed share price and a group of overpaid directors*. This is exactly the sort of company that Sir Ron has targeted consistently throughout his successful career at Brierley Investments and Guinness Peat Group.
Sir Ron’s company Mercantile filed notice Tuesday afternoon with Australian Stock Exchange that it raised its shareholding in Murchison Metals to 76.4 million shares, raising its shareholding from 11.7% to 17% of the outstanding float.
Sir Ron lodged a requisition yesterday for a general meeting at Murchison Metals to be held for the purpose of removing the managing directors Greg Martin and chairman, Ken Scott-MacKenzie and replacing them with two new directors put forward by Sir Ron. Sir Ron has indicated that this was “a direct response to the discovery of the excessive level of expenses being incurred by MMX” and his new directors' first priority will be "to stem the cash outflow.”
Murchison Metals Ltd. was a co-developer of the $6 billion Oakajee port and rail infrastructure project in Western Australia but was unable to come up with the financing. As a result,it sold its stake to its joint venture partner Mitsubishi in February 2012 for AU$325 million, which left the company with $223 million in net funds. A large portion of these net funds amounting to $207 million have been returned to shareholders this year.
But Murchison’s remaining cash is being eaten up through operating costs that Murchison estimated in its October quarterly report will run at a hefty $500,000 a month for the October to December 2012 quarter. These are excessive for a company with no active business operations. Further, additional advisory and operating costs will be incurred if Murchison shareholders vote to wind up the business in early 2013, hence, the reason Sir Ron wants to step in and stop these excessive cash outflows by ousting the current board and potentially stopping the winding up process.
So what is in this move for Sir Ron? A cash arbitrage and a sizeable tax asset!
As of Sept. 30, Murchison had AU$26.9 million in cash. Subtracting out recent legal settlements with Premar Capital and O’Sullivan Partners for $3.39 million, that falls to $23.51 million. Subtracting Murchison’s expected operating cash outflows for the December 2012 quarter of $1.5 million, will leave $22 million as of Dec. 31 or 4.87 cents per share, which is 22% higher than the current share price. The current directors of Murchison have proposed winding up the business and returning just $15.8 million to $18.09 million or 3.5 to 4 cents per share via a final capital distribution in February 2013 after closure and operating costs. Sir Ron is trying to move quickly, oust the incumbent directors and capture this cash arbitrage.
As of June 30, Murchison Metals was sitting on a deferred tax asset of $19.5 million which is not shown in Murchison’s balance sheet but is available to be offset against future taxable income subject to statutory tests being met. This tax asset will be lost if Murchison is wound up and could be a potential big bonus for Sir Ron!
*By way of a side note, according to Murchison’s Annual Report for 2012, key executives and directors at Murchison pocketed just under AU$13 million in remuneration benefits for the 2012 financial year – not bad for a company that has no active business operations, which reported just $7.2 million in revenue. In 2012, Mr. Martin, Murchison’s managing director, received $5,000 a day plus leave entitlements and worked just a three-day week!
Disclosure: No positions held in MMX,MVT. Hold long position in GPG through an investment account I manage.
Disclaimer: The opinions expressed by the author in this article are not intended as investment advice and should not be relied upon as investment advice by the reader.
Tarn P. Crowe
Director, Crowe Finance Pty. Ltd. (private investment company)
