When Kerry Stokes agreed to cancel 15 million Seven Group shares if the WesTrac Caterpillar dealership operation he was selling to Seven Group did not meet its profit forecast for the 2011 financial year, he set out three force majeure events that could nullify the offer.
The first related to strikes; the second was an interruption in Caterpillar supply and the third covered earthquakes tsunamis, floods and ‘other acts of God’. He did not add a fourth – Canberra stupidity. But no one in their wildest dreams could have conceived that an Australian government would take actions that caused $300 billion worth of mining projects to be mothballed or delayed.
No one could have conceived that an Australian government actions would halve the value of a vast number of coal and other mines and jeopardise the very existence of towns like Whyalla. I still believe that there must be someone in the government that understands what they have done and that there will be an enormous back down. But common sense in Canberra is in short supply.
The NSW and WA Caterpillar franchises that Kerry Stokes sold to Seven to lift his stake in the company to just on 68% had enormous growth prospects because of the unprecedented mining expansion ahead. Now the WA iron ore projects are to be suspended and NSW coal mines facing huge write downs. The outlook for the longer term is totally different than anything that could have been conceived a month ago.
At this stage, it is way too early to determine how the mining tax will affect the $231 million forecast of WesTrac earnings before interest tax, depreciation and amortisation (EBITDA) for 2011 on which the Kerry Stokes ‘give back’ was calculated.
Seven shares are now down to $6.26, which is way below any values placed on them when the acquisition of the Caterpillar WA and NSW franchise from Seven’s largest shareholder (Kerry Stokes) was being evaluated by the independent experts. If the government holds to its guns Seven and a whole series of mining companies will need to look hard at the values in their books and substantial write downs may be required.
I must confess that I have always thought that it made a lot of sense for Seven to buy the WesTrac business. Given the enormity of mining projects in the 15 to 20 year pipeline, WesTrac’s forward revenue estimates looked conservative. Seven’s acquisition of WesTrac made its cash structure much more efficient and was acquiring growth assets for Seven shares that were being valued at around $8. The existing television assets did not have anywhere near WesTrac’s growth prospects and at the time were much higher in risk given what is happening in the television space.
We are now learning from Ken Henry’s evidence to the Senate estimates committee that under the treasury model, even if the mining tax was raised to 90 per cent, it would not affect investment because of the underwriting of losses.
It is clear that Ken Henry knows very little about how business decisions are made. The argument might have a theoretical logic to it but it is totally wrong when applied to the business community. Unfortunately, Kevin Rudd and Wayne Swan did not have the business knowledge to see through the flaws in the treasury logic. As a result, Rudd and Swan are doing great harm to the short and long term interests of the nation.
Unless common sense can be re introduced to Canberra the market fears there is a lot of bad news not just in the Seven pipeline but a vast number of other companies as well. The wording of force majeure in contracts may need to be changed to cover the unpredictability of Canberra. It’s called sovereign risk.
This article first appeared on Business Spectator.
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