Public to private push as ESG pressure mounts

Running a public listed company in Australia is getting harder.

Running a public listed company in Australia is getting harder. Private equity and big super are flush with cash. The signs point to some very big businesses being pulled off the boards in the near term.

Action on mergers, demergers and acquisitions is in overdrive in 2021. Friday’s $22bn bid for Sydney Airport by an IFM Australia consortium follows Blackstone’s rebuffed $8.4bn bid for Crown Casino in May, the announced demergers of Endeavour Drinks from Woolworths and Accel Energy from AGL and the demerger of Tabcorp’s lotto and wagering businesses.

Listed companies all face a much higher bar around the social licence to operate. Shareholders, customers, employees and community all need pleasing; there is a tsunami of ESG pressure coming from activist shareholders; there are new cyber and extortion threats; and remuneration reports are now a preoccupation of board directors.

Most fundamental is the question of how to deliver long-term performance in the spotlight of compliance and quarterly reporting requirements.

Peter Yates, the new chair of AIA Australia and former chief executive of Kerry Packer’s PBL, pulled away from public markets a decade ago and now chairs or is a director of unlisted businesses and not-for-profits.

“Sitting on the board of Linfox, we focus entirely on strategy and on business. At AIA Australia, obviously compliance is huge but the board is focused entirely on strategy. That is the challenge for the public listed sector and I know from my public listed colleagues, they will share with you that there is not enough time for strategy. They have spent too much time being distracted by the issue of managing the public shareholder.”

On the buy side, the modus operandi of industry super makes for compelling viewing. Take the latest bid for Sydney Airport by a consortium of IFM Investors (which invests industry super money), QSuper and US-based Global Infrastructure Partners.

Crucial to the bid is a fellow industry super fund UniSuper, which holds 15 per cent.

There is a striking similarity to two earlier bids for listed companies by industry super’s biggest player, AustralianSuper. Teaming up with private equity firm BGH, AussieSuper made an unsuccessful tilt for Healthscope and then succeeded in taking over Navitas in 2019.

On both occasions it was already sitting as a “passive” investor on the target’s register. The attraction for both was that in private hands, the assets could be made to work harder away from the pesky short-term public spotlight and deliver great returns over a period short enough for PE but long enough for industry super.

This week AusSuper’s chief investment guru Mark Delaney admitted that the Navitas model had its limits.

“On-market takeovers are very hard to execute. You have to pay up. People want a premium,” he said.

Well yes – control premiums for long-suffering shareholders are hard to avoid (unless you are as canny as Seven Group in its creep over Boral).

In the Sydney Airport bid, however, it is not a bidder on the target register, but UniSuper that will get the deal over the line. A media statement noted: “UniSuper does, however, in principle, see merit in Sydney Airport being converted from a publicly listed company to an unlisted company. UniSuper also has a favourable view of the consortium partners.” Like AusSuper in Healthscope and Navitas, UniSuper sees higher returns under private ownership.

It’s no secret that ASX top 100 boardrooms can be a bit incestuous, but the boards of trustees and directors in the superannuation sector and industry super in particular form their own highly connected web.

In just one observation, UniSuper chair Ian Martin took over the chairmanship of QIC from Don Luke who is now chairman of QSuper, part of the bidding consortium for Sydney Airport.

Notably, AusSuper, which is expecting $20bn in fund inflows this coming year alone, has been on the Tabcorp register.

Tabcorp chair Steven Gregg this week snubbed private bids for the wagering side of the business with an demerger from the lotto and Keno side, but arguably that just delays proceedings.

More and more, those companies considered the unacceptable face of responsible business are pressured to go private – notwithstanding that the public seems keener than ever to participate in the goods and services on offer. Indeed, that consumer support attracts private money looking for returns, be it a Crown, an Endeavour Drinks or a Tabcorp asset. Exhibit A is the fossil fuel industry. In a demerged AGL, the new Accel Energy still provides coal-fired generation for 70 per cent of the east coast’s electricity. AGL chairman Peter Botten agrees that private equity will play a significant role in owning and operating energy utilities in future. “This is a transition not just in the energy market but also the investment community,” Botten says. “I do believe that a number of these assets are potentially best held in private hands. Whether we like it or not, the pressure of the investment community on a public listed company drives the behaviour and does potentially shackle investments which are essential to provide what is an essential service.”

Perhaps we should question whether big investors and companies blink too willingly under ESG pressure. After BHP sold some of its thermal coal assets to Glencore last month, outgoing chief Ivan Glasenberg pointedly remarked: “Disposing of fossil fuel assets and making them someone else’s issue is not the solution and it won’t reduce absolute emissions.” Here we have publicly listed Glencore with its own ESG hecklers contesting the moral high ground.

Whether the ESG-conscious industry super sector will play much of part in these increasingly controversial sectors that deliver high returns is unclear. They remain “member interests first”.