It’s flight or fright as equity raising slashes owners’ stakes

Flight Centre boss Graham Turner. Cartoon: John Tiedemann

Last September, Flight Centre boss Graham Turner’s stake in the company was worth $735m, today just $115m: an 84 per cent fall due solely to the coronavirus.

Monday’s equity raising had the air of desperation about it.

Inevitably the doomsayers said the fact three company founders who two weeks ago owned 42 per cent of the stock will now own just 23 per cent after the $800m placement tells you all you need to know.

Turner’s net worth, according to The List last month, was some $855m, co-founder Geoff Harris some $914m and Bill James $771m, but together they are putting up just $25m to support an $800m equity raising for the company they founded 38 years ago.

The fact is like us all, these rich listers have other commitments, but now is not the time to bury Flight Centre, one of the top five corporate travel houses in the world. There are some who say its corporate model is outdated but they were saying that last September when the stock was trading at $49 a share before the crisis hit.

Turner has already unveiled plans to slash costs to bring monthly operational expenses, including marketing, down from $227m to $65m.

With money in its pockets the hope is it will be primed for the rebound when it comes.

Certainly it is in a different class than say Cochlear, which last week raised money at $140 a share and is now trading at $191.37 after handing one shareholder, Veritas, 5 per cent of the company or 35 per cent of the $880m equity raising.

That deal will go down in history as the day Cochlear and ASX chair Rick Holliday-Smith paid $20m to JPMorgan to bury retail shareholders.

Cochlear suffered because the virus has delayed elective surgery, which means it was selling less hearing devices, but everyone expects demand to bounce.

That same confidence doesn’t stand with Flight Centre, in part because the founders only took up a portion of their available rights and the crisis has revived doubts about its business model.

Buoyant Bassat

Seek’s Andrew Bassat is also one who expects business to bounce back when employment starts to pick up post-crisis.

Just when that will be is the other question and he hopes it may follow his China operation, which gave a “glimmer of optimism that it may recover sooner and stronger than we might have expected”.

In Australia employment listings fell 60 per cent in the last week of March. Bassat says “the falls we have seen are unprecedented certainly in the speed with which they occurred. They will obviously remain low until the countries we are operating in return to work and companies can start hiring again.”

Bassat does acknowledge his aspirational target of $5bn revenue in 2025 “is looking a bit harder now but assuming that markets have fully recovered we will still go after it”.

His confidence is based on the fact “employment and education will be critical services once the health crisis passes and we will make sure we are ready to play a central role in the recovery in all of our markets”.

Bassat says the company has faced hits in the dotcom crash and GFC but notes that “our company was much weaker going into both those periods”. UBS analyst Eric Choi said in a note: “Any equity raise would be a last resort”.

The unknown is how long the crisis lasts.

Choi says the next hurdle for Seek will be in the 12 months ended December “where senior debt could lift above three times earnings”.

The company has made some concessions like relaxing minimum spending obligations for the next two months in an attempt to boost business.

Retail code

State and federal governments are mulling the latest suggested principles to help guide negotiations between small businesses and shopping centres over rent reductions.

A code of conduct has been prepared which would be administered by peak retail representatives like the ARA, the Pharmacy Guild and the Shoppers Council representing the big malls.

The code would cover only small businesses with turnover below $50m.

Most retail leases are written in terms of CPI-plus-something-else but some bigger retailers want a switch to a percentage of turnover.

The so-called landlords code went to government last Friday, but it was sent back for more changes and then resubmitted on Sunday afternoon.

It is now awaiting clearance.

One presumes any deal would negate the present interim authorisation before the Australian Competition & Consumer Commission, which is between the Shoppers Council, Scentre and other landlords. Just why the mall owners need to talk to each other about lease deals is unknown but the ACCC gave interim authorisation to such a proposal.

It is one of a string of authorisation applications which has turned the ACCC’s workload upside down.

ACCC chief Rod Sims has said he will put all other issues to one side while he deals with the crisis and one way of doing that is to process the interim authorisations.

These can be revoked, but once accepted after four months of review are subject to formal notifications.

With the exception of the retail deal, some others make eminent sense.

Most exclude any talking about price. Sims himself sits in on the supermarket council meetings just as telecoms boss Michael Cosgrave sits in on the NBN and telco talks.

The interventions are designed more to help guide the parties than act as a copper to make sure they don’t err in talking about prices.

One example being the NBN agreement to expand capacity by 40 per cent without lifting price, which has helped ensure the network works well in the shift to home offices.

In other jurisdictions, New Zealand’s Commerce Commission had to issue blanket clearances to talks to ensure that “New Zealand continues to be supplied with essential goods and services.”

NZ Commerce Commission chef Anna Rawlings added she “would not tolerate unscrupulous businesses”.

The switch in work at the ACCC comes as it is also changing personnel with chief operating officer Rayne de Gruchy retiring.

She will be replaced by the highly regarded Scott Gregson with Suzie Copley taking his job in charge of the mergers and authorisations division.

Other interim authorisations have included medical equipment supplies and fuel, in what has amounted to a sea change in competition law administration.