Wesfarmers’ pick James Graham as Coles chair raises questions

The issue with James Graham is not his independence on the Coles board — just his links with the mothership, Wesfarmers.

Incoming Coles chairman James Graham. Illustration: Sturt Krygsman

The issue with James Graham is not his independence on the Coles board — it’s his appearance as a Wesfarmers stooge on the board along with its nominated representative, David Cheeseman.

Cheeseman is the new Wesfarmers retail adviser, marking a change from the man he is replacing, Archie Norman, who due to his commitments in Britain has shied away from Australian board seats. He is chair of Marks & Spencer and Lazard’s and in any case is more involved with management than non-executive directors in Australia.

While debate about his position intensified yesterday, Graham was at Coles headquarters in the Melbourne suburb of Tooronga addressing staff, along with present boss John Durkan, on the new company.

There are no questions about his ability or his retail non-executive director experience — just his links with the mothership.

Wesfarmers yesterday confirmed the report here a month ago about Graham’s appointment as chair of a demerged Coles, and disclosed former Walmart International and Asda executive Cheeseman would be its representative on the board.

The other director nominees in former Fonterra executive Jaqueline Chow and former Foxtel boss Richard Freudenstein are first rate.

The demerger continues the rapid scaling down of Wesfarmers since Rob “the dog catcher” Scott took the reins in November last year.

Scott has sold the Curragh coal business for $700 million, or two times earnings, given away the failed UK Bunnings after a $2 billion writedown, and has now put in place plans for the demerger of Coles, which accounts for roughly 30 per cent of group earnings and 61 per cent of capital. The aim is to focus on higher returning businesses and all eyes are on what these will be.

There is no doubt Wesfarmers’ return on capital will be stunning after these changes, but no company has shrunk to greatness, even if those executives remunerated on returns will do well as the capital-heavy assets leave the room.

Graham — a 25 per cent-plus owner of Gresham, the advisory house which has collected $88.6m in fees from Wesfarmers over the last decade, and is also the owner of 791,000 Wesfarmers shares worth over $39m — stepped down yesterday after 20 years on the Wesfarmers board.

Wesfarmers owns 50 per cent of Gresham and its staff the rest, with Graham being the majority owner. He will collect more fees from Gresham’s role as the adviser to Wesfarmers on the Coles demerger along with Macquarie, Goldman Sachs and Herbert Smith Freehills.

Archie Norman’s advisory fee is not specifically disclosed by Wesfarmers in contrast to board fees which by law are stated. His new role makes sense given it was his idea that Steven Cain be the new boss of Coles; the two used to work together when Cain was at Norman-led Asda. Norman was also instrumental in getting Ian McLeod and John Durkan to lead Coles but is said to be very close to Cain, who has spent the last few years at Metcash, having served for 14 months as Coles boss under previous owners.

A review of Cain’s time at Coles, according to one insider, was that he was, “a lone wolf who didn’t share ideas or consult with his team before taking decisions”, “someone with big and good ideas but who couldn’t get traction because he was unwilling/unable to engage his team on the journey”, and “probably better suited as a consultant (which he has been). Did not have the leadership skills necessary to introduce change to a large complex company while maintaining the strength of the core business”.

Over the last three years Metcash supermarkets have not only lost market share but the absolute sales are lower today than what they were in 2015. EBIT margins have been flat.

Cain left Metcash in March 2018 and was replaced by Scott Marshall, who was the head of Metcash’s liquor operation.

When asked, Wesfarmers boss Scott, who used to work at Coles, indicated full support for Cain and said he was “far more inclusive” than he had been. As expected, the spun-off Coles business will have just $2bn in debt. Its lease commitments will be $9.5bn compared to $20bn at Woolworths, so it is financially well placed.

But with earnings this year expected to be around $1.5bn plus $650m in depreciation and amortisation, there are questions over its ability to pay out 85 to 90 per cent of earnings as dividends when it is in the midst of a capex upturn.

Scott noted that when Wesfarmers acquired the business back in 2008, the average age of the stores was 17 years, in between refurbishments. That has now fallen to eight years, and to five years among its top 25 stores. The point is, the store network is in good shape. Let’s hope so because Scott’s remuneration is based partly on how well Coles performs. Coles was returning 9 per cent last year against 47 per cent by Bunnings, which uses just $3bn in capital.

BT simplifies fee

Throughout his royal commission Ken Hayne has wondered how the industry gets away with charging more for people on platforms based on funds under management when the effort required to run them is the same.

Full marks to BT’s Brad Cooper for getting out and making some sense of it all with simplified fees for his Panorama platform.

A new flat account fee of $180 plus 15 basis points will mean someone with $20,000 on the platform will pay $540 and the fees will be capped at $1500 for those lucky enough have over $1m on the platform.

The average punter with $400,000 can save $1000 in fees or 43 per cent under a new simplified choice on offer. Cooper has introduced some much needed rationality into the game and as his relationship tends to be through the planner networks it’s now up the planners to ensure the savings are made.

BT has 18 per cent of the $880bn platform market and its Panorama platform has grown funds under advice from $2.7bn in September 2016 to $10.8bn in June this year with members up from 4274 to 20,413.

Battle for toll roads

The fact Transurban owns seven out of the nine of NSW’s toll roads should not be read as meaning it is the only one that understands the game in Australia.

Competing bidder IFM owns $17bn worth of toll roads globally including in Indiana.

The old Borealis, now known as OMERS, manages money for the Ontario municipal employees and owns among others assets the Chicago Skyway. IFM’s other consortium member, Dutch pension fund APG, is also no slouch when it comes to infrastructure.

If the bids between Transurban and IFM are close there are some signs the NSW government will wait until September 6 to wait for ACCC clearance of the Transurban bid.

Without knowing the bids in the circa $5bn race to buy 51 per cent of the WestConnex project the reality is the state government owns the rest and is not short of knowledge itself.

WestConnex is important for other reasons including that whoever wins control will in 2027 also control the M5 motorway. IFM and Transurban just happen to be equity owners in that.

What the government needs to think about is just what impact handing assets to the incumbent does for competing bids, and with the West Harbour Tunnel project and F6 toll road to come, the state needs competing bids to maximise the proceeds and benefits.

That is what the ACCC argued in its negative statement of issues about the Transurban bid before delaying a final decision.