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Deal to save Australia’s greatest steelmaker bleeds out

EDITORIAL UPDATE >>

BUSINESS ACUMEN magazine has long lamented the fact that too many iconic Australian companies have fallen, and national wealth has been lost, because of this country’s inadequate approach to voluntary administration.

Up until now, the Cubby Station voluntary administration – now owned by a joint China-Japan-Australia venture – and, perhaps, the Ansett Australia collapse – with that operating space now dominated by majority Air New Zealand, Etihad, Singapore Airlines, and Virgin Group owned Virgin Australia – have been stand-outs. 

Now it looks like one of the most severe examples in Australia’s voluntary administration history is about to play out: Arrium. 

We fear that one of Australia’s manufacturing and mining giants, the 94 companies of Arrium (in the distant past known as BHP Steel and today its best-known brand is OneSteel) could wither away in aimless administration until its most prized companies are exhaustingly sold off to foreign interests. One of the jewels in the Arrium crown, Moly-Corp, was recently sold by KordaMentha with the assistance of Morgan Stanley to American Industrial Partners for more than $1.6 billion.

Arrium's smaller interdependent companies could either be stripped away in a series of desperate ‘trade sales’ or fall into liquidation of their own accord. 

Given such a prospect and the thousands of jobs at stake – which apparently alarms no-one in the (Jobs and Growth!) Government – you would think someone in the Federal or South Australian Governments might be interested to hear from someone with a plan to save the entire company … at no cost to any government or the tax payer.

The Australian representative company of this international infrastructure financial trading platform, who has put forward this proposal to the administrators, the major creditor banks, the creditor Australian Workers Union, the Australian Government and the South Australian Government, only wants a meeting to explain the system and gather more information.

If someone is seriously interested in raising more than A$4 billion to save Arrium – and not as a loan – but reasonably needs more information to frame the deal and work out the schedule for recovery of the entire Arrium Group, you would think he would at least receive the courtesy of being seen and heard.

He cannot get a meeting.

Not with KordaMentha, to whom he first proposed this rescue package in June 2016 and who only answered his request for a meeting in December (with a ‘no’) after various government Ministers referred the now more widespread request back to the administrator.

Not with the South Australian Government – the government with surely the most to lose from a broken up Arrium and foreign-owned Whyalla plant … whose initial response from the Treasurer Tom Koutsantonis (on behalf of the Premier and other Ministers written to) fobbed him off by saying KordaMentha was well advanced in the sale process and “it is at the administrator’s discretion how they assess and act on proposals they receive”.

(To his credit, though, Mr Koutsantonis has since responded to the platform's Australian representative with an assurance that the South Australian Government was insisting on Arrium not being broken up and a $50 million loan to support the group maintained that condition. He encouraged the continuance of the move to rescue Arrium in its entirety.)

Not with the Federal Government, either. However, former Industry Innovation and Science Minister Greg Hunt did reply fairly promptly and did suggest the platform should take its concerns about not getting a hearing from the administrator to the Australian Securities and Investment Commission (ASIC), which has since happened.

(And ASIC, it is understood, were not prepared to investigate the matter further nor play a role in having the administrators respond to the request for a meeting on the recovery plan).

And neither could he get a meeting with the four major creditor banks, who would apparently need to participate in the infrastructure trading platform for just two years to get all their money back.

Or, at least, the banks have not agreed to meet so far – yet they are showing belated interest as the quantum of their potential losses on Arrium going the way it is going hits home. Banks, after all, have a duty of care to their shareholders too.

Apparently it has recently been pointed out that by not alerting Arrium’s Committee of Creditors, which includes the banks and the Australian Workers Union, to the financial recovery proposal, it may not meet the provision in the Corporations Act 2001 Section 439A Paragraph 4 (v) to provide “such other information known to the administrator would enable the creditors to make an informed decision about each matter”.

It is, perhaps, ironic that paragraphs 3 and 4 of that section of the Act have actually been removed by the Parliament, as of March 1, 2017. Something to do with, we surmize, red tape reduction.

It is a frustrating situation for the man making the offer on behalf of his Europe-based infrastructure financial trading platform colleagues … who are more used to being welcomed. Welcomed by Japan, for instance, to help develop its national fast rail system. Or successfully helping medical researchers to develop a vaccine for ebola. Yes, this platform helped provide funding in both cases.

Apparently the reason the European infrastructure financial group is interested in recovering Arrium is that they see a bright future for the mining and steel production giant in developing much-needed infrastructure – rail, tunnels, bridges, airports, energy systems – well into the future.

And Australia is a safe place to develop infrastructure, which is their main game. 

Once they have successfully funded a major project in Australia – and Arrium would certainly prove their system to Australia, should they be successful – they believe a huge demand for their infrastructure funding system would follow here.

As we now know, a report by Korda Mentha on December 20, 2016, that a sale of the Arrium’s prized Moly-Corp operation was likely to go ahead in early 2017 to American Industrial Partners came to pass. Despite international offers for various other prized parts of the Arrium empire, the desire to see the rest of the group sold as a single entity still seems a long way off.

While not specific about the sale of Arrium’s other entities, apart from saying it would prefer the business to be sold “as one line” and as a going concern, Korda Mentha said it expected to have the sale completed by March 31, 2017. That clearly has not happened. Most media reports have tipped strongest interest from South Korean private equity firm Newlake Investments joined by it Australian steelmaker Posco, competing with UK-based Liberty House, and tipped a result in April.

Without hearing out this new infrastructure finance offer, the Australian Government has shown it is not serious about its calls for more financial innovation in this country.

A trading platform that can develop new infrastructure without taxpayer funding, in most cases is operated for 30-35 years by the developer and then is handed back to the government that ‘owns’ it?

Listen, surely it’s not too innovative for Australia?

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We lost Cubby Station, can we keep the 94 companies of Arrium?

THE MAGIC word of the prevailing business age seems to be innovation – but are we desperately guilty in Australia of chasing innovation rainbows, believing in ever-more elusive pots of gold?

A very successful media sales manager who once worked for Business Acumen was fond of saying “a bird in the hand is worth much more than two in the bush”. It was his way of saying that an existing client is more valuable than an apparently attractive and apparently more lucrative potential client on the horizon. 

In other words, look after the clients and assets you have – do what you can to secure them with you – before you expend energy chasing rainbows.

In his practical manner, Business Acumen’s long lost sale manager – he left the industry, with regret, for he wanted to pursue his lifestyle dreams – put solid numbers to his ‘bird in the hand’ ethos.

If the cost of sales is about 20 percent of income, which it so often works out to be, then an existing client is already a 20 percent better bet than acquiring the next client. By our sales manager’s reckoning, practically, you could afford to discount up to 20 percent to keep an existing client.

The reality is, rarely do you have to discount – if you are treating your clients well and keeping their best interests at heart.

BEST INTERESTS AT HEART: The Cases of Arrium and Cubby Station

The same business philosophy should apply to Australia’s major business assets – but there is a problem.
Perhaps Australia’s liquidation and administration provisions under the Corporations Act have the right intentions. Perhaps, though, they have also been watered down by precedents and more recent business practices.

Cubby Station is a case in point. Moved into voluntary administration owing about $300 million when it ran into cashflow difficulties – any wonder as Cubby, with Australia’s largest private water holdings, was constructed during the longest drought in Queensland history. The vast potential cotton fields were parched.

Three weeks after Cubby moved into administration, it rained. And rained. The largest water holding in the country was a wet dream come true.

The directors of the Australian founding company asked to take Cubby Station back, seeing that it was now clear there would be many years of profitable growth and harvests ahead. The administrators, McGrathNicol (and banks) respectfully refused …

The administrators decided the best course of action – and the directors would question, for whom? – was to sell to a combined China-Japan-Australian group, at a knock-down price of $240 million, far less than its establishment costs, funded from offshore.

There can never be another Cubby Station created in Australia, because its location and the deals for water and land that created it were unique.

Of course, Cubby Station is still here and it’s great for Australia that it is now thriving. But where are those thriving profits going today? Largely offshore.

One thing is for certain, the liquidators – who can charge upwards of $500 an hour per executive for certain types of work – had a very profitable time.

ARRIUM, UM?

We can only hope that a similar fate does not befall the multi-faceted steel manufacturing conglomerate, Arrium.

The 94 companies that make up Arrium – whose best known brand is probably OneSteel – are currently in the voluntary administration hands of KordaMentha.

Arrium’s board was obliged to take this move early this year when cashflow was badly hit by a set of unfortunate circumstances – the most highlighted of which was the fall in resources prices, affecting mines the company had acquired in an earlier era of high prices.

But the rest of the group was trading reasonably well and there seemed to be good prospects for recovery.

However, one of the factors that can play havoc with a company in administration in Australia is the sheer costs of being in administration.

Business Acumen has reported on one case of a Queensland mining equipment company which came out of administration to find that in less than a month the administrators’ fees had run to almost $400,000, extracted from the company’s bank accounts. The loss of this cash soon forced the directors to liquidate the company.

KordaMentha’s early information for shareholders on Arrium is heartening, however. In its initial information release, KordaMentha stated:

“The role of the voluntary administrator is to maximise the chances of a company, or as much as possible of its business, continuing in existence. In addition, the voluntary administrator will investigate the company’s affairs, prepare and issue a report to creditors and provide a recommendation to creditors as to whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.”

As promising as that sounds, the longer it goes on, the final option of returning the company to directors seems more unlikely. The Cubby Station case is an example, where it took four years of administration before a loss-making sale was made.

With the South Australian Government having thrown Arrium a lifeline in terms of a lucrative long-term rail production contract, and with the Federal Government having ‘donated’ $40 million to assist Arrium already, it would seem there is an increasingly likely option of a break-up of the company into profitable saleable components – with losses to shareholders on the rest.

Again, a major Australian asset would go and jobs would undoubtedly vanish.

There may not be a pot of gold at the end of this rainbow, but surely there should at least be a pot of Australian steel?

Until Australia gets something like the self-administration benefits that the US has in its Chapter 11 bankruptcy provisions – which have been used to great national benefit by General Motors and most American airlines – our major business assets will continue to hang by a precious and precarious thread. 

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Why Business Acumen supports the digital Manufacturing Toolbox

BUSINESS ACUMEN is getting right behind the Manufacturing Toolbox (see special report in the #86 print edition) because we understand that this platform can turn the tide in favour of an Australian manufacturing renaissance.

That’s a big call, but it is – amazingly – evidence-based.

Indeed, the digital Toolbox platform itself has evolved out of probably the most comprehensive research ever conducted on Australian business and its adoption of technology.

The evidential statistics: more than 50,000 deep surveys of businesses of all shapes and sizes across Australia over a 15-year period – all charting the specific technologies and services those businesses have utilised and how they rate them over time – combined with more than 300 detailed business case studies. Geoff Grantham.

From all this a digital platform has been developed by a small Brisbane-based company, Digital Business insights (DBi), whose leaders John Sheridan and Geoff Grantham firmly believe the Manufacturing Toolbox can be the catalyst for Australian industry development and growth in ways that have only become available with the digital revolution. 

Mr Sheridan is a former advertising industry creative director who has devoted the past 15 years of his life to researching and understanding the digital revolution with a view to ‘creating something’ which will help Australian businesses creatively build capability and resilience.

These digital platforms, starting with the Manufacturing Toolbox and planned to extend into other industries and specific regions – are all joined up.

Mr Grantham is a web sage and online learning systems expert who has been involved in computing hardware, software and web development for more than 35 years. His career has ranged from early PC and IBM clone development to developing global online multi-lingual training for the motor industry.

They are the antitheses of how industry support has occurred in the past ... mainly top-down government-driven financial incentive-based structures.

This Toolbox – and the many to come – have developed from the grass roots. Every step forward has been tested and augmented by key partnerships. 

Those partnerships, as you will read in the special report, involve best-of-breed organisations which have not only the wherewithal to positively influence the industry, they have the passion and desire to see Australian manufacturing succeed and grow like it has never managed in our history.

DBi is the first company Business Acumen has ever reported upon which is approaching the problems facing Australian industry by harnessing the potential of digital technologies and methods in a truly joined-up way.John Sheridan.

There are tools available and being developed now – including 3D printing, robotics and new material and biological sciences – which, if embraced and innovated by a multitude of agile Australian manufacturers will create superb new products and markets.

The key to how successful that drive is relies upon the capability of those businesses to adapt and grow. That is, they have to become better businesses, more agile, with access to appropriate knowledge, networks and – of course – growth capital.

They also have to be able to effectively seek new clients and showcase to potential new markets, both national and international. They have to be able to communicate and collaborate with others in their industry, plus those outside their industry who can help them.

These vital things are what the Manufacturing Toolbox does.

It is probably the most comprehensive and innovative platform for business development ever created.

http://manufacturing.digitaltoolbox.org

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Whistle while you work on ethical problems

EDITORIAL >>

WHISTLEBLOWER protection and legislation is one of the major transformative issues facing Australian business today – and yet it is faint on the radar screens of business leaders.

The business behavioural impacts of recent information passed on by whistleblowers to media outlets have been massive. They have prompted calls for a Royal Commission into Australia’s banks. They have resulted in a Royal Commission into Australia’s union movement. 

Perhaps most spectacularly, the ‘perfect storm’ created by the anonymous whistleblower who released the Mossack Fonseca Panama Papers has rocked banks, governments – witness the resignation of Iceland Prime Minister Sigmundur Davíd Gunnlaugsson – the world’s leading business advisory firms and many of the business world’s high achievers.

And there is a lot more to come.

The Panama Papers are the basis for revelations that will play out for many years – and yet Mossack Fonseca is said to be only the world’s fourth largest organiser of ‘offshore’ low tax jurisdiction companies. Unquestionably, similar organisations, and the banks that have facilitated these transactions, will be shoring up their security (and grip on staff behaviour) to prevent whistleblower action against them.

Questionably, while it makes ‘business’ sense to boost such security, it realistically makes just as much sense for them to examine their own ethics. Right now.

Astute business leaders need to find where their companies are verging on the unethical and change that behaviour. Use this period of time as a catalyst for urgent change.

Business leaders devote so much time and money to building their brands without looking clearly for the simple ethical lapses that can sink those brands.

Change now will be the only possible defence against any revelations of poor company behaviour.

“We have just become aware of the problem and are conducting a review …” or statements of its ilk hold little traction, compared with companies acting on internal whistleblower information early, fixing the problems with staff and customers – and then openly explaining what has been done to solve such problems.

Surely, this is where company websites and social media programs earn their place in company budgets?

AUSTRALIAN ADVANTAGE

Australian business leaders have an opportunity to lead the world in this area, thanks to an Australian Research Council-facilitated project with four national universities (see story page 3).

The Whistling While They Work 2: Improving managerial responses to whistleblowing in public and private sector organisations research project is calling for Australian business leaders to complete two online surveys that will help shape recommendations on both whistleblower protection legislation and the development of strategic programs to assist business in ethical governance areas.

The research team, headquartered at Griffith University, has already said it would use the results to help develop and write the replacement to the Australian Standard on Whistleblower Protection Programs (AS 8004), which was published in 2003 but is currently withdrawn.

Astute business leaders will surely get behind this research project as this is an area in which time really is of the essence.

Just ask leaders at the Commonwealth Bank, Westpac, NAB, ANZ, 7-Eleven, Woolworths, Coles, Volkswagen and a host of others how much impact a small number of errant staff behaviours can cost in brand reputation and recovery.

Early action collaborating with, and addressing the concerns of, whistleblowers would, in every case, have been a far better alternative than the fallout of ignorance or cover-up.

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