Terry McCrann: How Elliott turned 1c into millions

A little known share scheme used by 80s entrepreneur John Elliot made both him and his top executives dazzling rich.

Businessman John Elliott in Melbourne.

At the core of everything John Elliott did was his discovery of the almost magical wealth-creating power – more accurately, wealth-bestowing power – of the 1c-paid share issued to himself as CEO and to his key group of executive insider mates.

They were so dazzlingly effective, when I discovered what he was doing and analysed how it worked, borrowing from American author Tom Wolfe, I described them as “the marvellous technicolour Kool-Aid 1c paids”.

These were shares issued at the Elliott company’s market price – starting with Henry Jones, the company he seized control of in the 1970s when he was in his 30s and which launched him on his path – but on which the executive only had to pay 1c a share upfront.

So if the share price was, say, $4 and he got 1m shares, he would theoretically be up for $4m – but, would only have to part with $10,000 upfront.

He would have to pay the outstanding $3.99m to make them fully-paid, if he wanted to sell them on the market; so if he then sold them at the $4 share price, he would only break-even.

So, where’s the benefit?

Sir Ian McLennan, left, former BHP executive and company director with Elders IXL executive John Elliott in October 1986.

The first benefit is one of simple leverage. If the share price went to, say, $5, he could hand over the required $3.99m and immediately sell them for $5m.

In effect, he would have turned the $10,000 – the only money he’ actually had to part with – into $1m.

And remember, all this was before Paul Keating introduced the capital gains tax. The $1m profit would have be tax-free, provided only that he’d held those 1c paids for at least a year.

But the real money came from what were called “bonus shares”. Back in those days most companies would regularly make issues of free shares. They were made to all shareholders, including in this case to the executives holding those 1c paid.

Say the company had 100m shares on issue. It might make a one-for-two bonus – free – issue boosting its total number of shares on issue to 150m.

In my example, at the $4 share price the company was worth $400m (100m shares multiplied by $4 a share).

As it’s still worth only $400m – nothing has changed; it didn’t actually get any money into it from the issue – the share price should theoretically fall to $2.67.

That’s $2.67 multiplied by 150m to equal the same $400m figure.

From 2021 it seems utterly pointless, so why did companies do it? The answer is complicated and beyond the scope of this column – how they worked so brilliantly with Elliott.

That’s because he (and his team) got the bonus shares on their 1c paids. So for that $10,000 upfront, he would get 500,000 free shares, each worth that $2.67 and so a total of $1.34m.

He could sell them and pocket the $1.34m tax-free!

See why I dubbed them the way I did?

Except that while it’s free money upfront, there’s a long-term sting. He’s still up for that $3.99m and when and if he pays it to make the 1m shares fully-paid, they’ll then only be worth $2.67m.

It would all balance out to zero profit – unless the share price has risen. And that’s where the 1c paids really worked their magic.

Imagine ‘someone’ came along and made a takeover bid for the company at, say, $5 a normal share. ‘They’ would also bid $1.01 for the 1c paids. That’s the $5 less the $3.99 owing on those shares.

So Elliott could sell his 500,000 bonus shares at the $5, pocketing $2.5m. And sell his 1m 1c-paids for $1.01m.

He would pocket a total of $3.51m – all of it (until 1986) tax-free and having outlaid just $10,000 in the first place!

Do it once, he and his team got rich; do it twice, thrice and they got seriously rich.

The absolute key was to have some other company – but a company that they controlled or could control – make the bid for their company which had issued the 1c paids. To get rid of the liabilities on those 1c paids.

And that was the saga of all the deals he did through the 1980s – so-called reverse takeovers. his company bidding for another wouldn’t work – it would still leave them holding their 1c paids and the money owed on them.

Except it all blew up when he “ran out of takeovers”; when he launched his failed bid to buy BHP via his private company Harlin Holdings.

It was Harlin that had the liabilities on all those 1c-paid shares issued to him; and when it all blew up Harlin still owed something like $55m. Money, plus, that Elliott had long-since personally pocketed.

Over a 20-year time-span from 1975 to 1995 the magical 1c-paids made Elliott and mates rich. They also ultimately helped sealed his fate.

Originally published as Terry McCrann: How Elliott turned 1c into millions