I’ve been brooding in a few of my past Profit Confidential articles about Canada’s corporate drainage to foreign money. But, as evidenced on just a few Australian examples show, there could be a way to at least retain a portion of our quality companies within our borders.
The first example is coming from Australian airline, Qantas Airways Limited, which was subject to a takeover this spring by Onex Corporation, the largest Canadian private equity firm. The takeover was for $10 billion, but it sunk after Qantas’s largest shareholder, UBS, refused to support the deal. Interestingly enough, UBS was also an investment banker on the deal, which meant that voting in the best interest of shareholders cost the firm millions of dollars in fees.
The second example is Kohlberg Kravis Roberts & Company, a U.S. private equity firm which also failed a takeover… in this case, a takeover of Coles Group Limited, the Australian gigantic operator of a chain of supermarket and department stores. After KKR withdrew from the scene, Coles was trading about 16% above KKR’s original bid.
How come Australians are so bent on protecting their corporate assets from foreign money, particularly considering that for the past decade, the World Bank has ranked Australia among the top 10 countries in which it is the easiest to do business? What has changed? Apparently, it is not the “what,” rather the “who:” Australia’s shareholders, and a number of money managers.
But what exactly did they realize? Like Canada, Australia’s stock exchange is heavily laced with bank and resource stocks. To illustrate, Canada’s S&P/TSX composite consists of 75% commodity and financial listings. That ratio is at about 70% on the S&P/ASX 200 composite. So in Australia, shareholders and money managers have finally figured out that if they let companies outside these two dominant groups be taken over by foreign players, there would be virtually nothing left of interest locally.
Even better, corporate and money managers down under understand that realizing something and doing something about it are two very different things. Unlike Canadians, Australian shareholders and investors are not interested in investing only in boring bank and predictable commodity stocks. So they have come up with some rather creative solutions.
One such solution is a partial takeover. I know, it sounds like I’m saying a woman can be only a little bit pregnant. But it is possible… the partial takeover, that is! An example is Flight Centre Limited, the Australian travel agency, which is very active in Canada as well.
Since Flight Centre went public over a decade ago, it generated substantial returns for its shareholders. It was hardly a surprise that investors and management were less than amused when a private equity fund proposed taking the company private at a substantial premium to its market price.
The offer was met with the proverbial middle finger; that is, until the buyers found the middle ground by offering 30% of the business to go private, and 70% to remain public. That way, Flight Centre shareholders still kept their stakes in the company and even got a little cash for the bit that went private.
Obviously, there are a number of similarities between Canada’s and Australia’s corporate landscape. There is also one glaring difference: Australians have found a way to say no when it matters. Canadians should learn from their example and stop giving away our best companies to foreigners for next to nothing. And I don’t mean corporations and investment bankers, who usually stand to profit the most if the takeover deals are successful. I am talking about Canadian shareholders who have been given extensive rights; who should be knowledgeable; and most importantly, who should exercise those rights when the situation calls for it.