By Paul Rickard

Engineering and professional services company WorleyParsons rarely gets much media focus. It operates in 42 countries in the unfashionable resources and energy industries, employs 23,200 people globally and earns more than 75% of its revenue outside Australia. 

It has also reported falling earnings in every financial period since 2013. First half underlying NPAT in FY17 was just $57.1m, compared with $155.1m back in 2013. 

 

But all this is about to change, following WorleyParsons Board's extraordinary decision not to disclose to the market a potential takeover bid made last November. Shareholders will be baying for blood.

Dar’s takeover bid 

The Dar Group, a privately owned professional services firm based in Dubai, which employs 18,000 people and has a footprint in 58 countries, lobbed an all cash bid on 14 November to acquire all of the shares in WorleyParsons at $11.80 per share. The takeover was to be executed via a scheme of arrangement, which requires 75% of shareholders to vote in favour and hence needs the explicit support of the Board to get up.

WorleyParsons said nothing at the time. In their statement to the ASX almost four months later on 27 February, they describe the bid as a “highly conditional, indicative proposal”. They did, however, conduct a ”thorough assessment of the proposal” and went to the effort of engaging both Merrill Lynch and UBS as financial advisers and Herbert Smith Freehills as legal adviser. They concluded that “the proposal materially undervalued the company”.

Fast forward to Monday February 20. WorleyParsons announces its first half financial results, which show underlying net profit after tax down by 22.7% to $57.1m following a fall in revenue of 30.3% to $2,166m. The report is weaker than expected, leading both Macquarie and Credit Suisse to downgrade their ratings (Deutsche goes the other way, upgrading from sell to neutral). The market caned WorleyParsons stock, closing on the day at $8.60, down some 12.8% on the previous session’s close.

Over the next few days, the stock touches a low of $7.75. It closes on Monday at $8.07.

WorleyParsons (WOR) - 28 Aug to 28 Feb (source: ASX)

 

On Monday evening, Dar Group announces that it has acquired from the institutional market 13.35% of WorleyParsons shares. It doesn’t disclose a price, but market talk is that it paid $10.35 per share. Dar also confirms that it submitted a proposal back in November to acquire all the shares. It goes on to say that it “looks forward to being a supportive shareholder” and that it “has no present intention of initiating discussion with Worley Parsons (for) a change of control transaction”.

The market soars when WorleyParsons shares open for trade on Tuesday, before closing at $10.65 - up some 32% on the previous day. Yesterday, WorleyParsons eased back to close at $10.22.

Continuous disclosure

Under the law, public companies are required to meet disclosure obligations. Listed companies, such as WorleyParsons are subject to further requirements under ASX Listing Rule 3.1, which says that:

“once an entity becomes aware of any information that a reasonable person would expect to have a material effect on the price of their securities, it must immediately tell the ASX that information”.

There is a carve out if the information is in one of five categories, including “an incomplete proposal or negotiation”, provided that it is confidential and a reasonable person would not expect that information to be disclosed.  

While the “reasonable person” test for disclosure is intended to be judged from the perspective of an independent and judicious bystander, the ASX interprets this very narrowly to say that if the information is in one of these five categories, it won’t usually need to be disclosed.

This is no doubt the defence that the Board is relying on. The proposal hadn’t won the endorsement of the Board, so was therefore incomplete. No disclosure required.

However, other listed companies have chosen to disclose incomplete proposals. For example, Tatts Group chose to disclose that it had received an offer from Pacific Consortium, saying that “it has received an unsolicited, confidential, non-binding, indicative and conditional proposal from four financial investors to acquire 100% of Tatts for a combination of cash and scrip consideration”. Asciano disclosed on 1 July 2015 that it had received on 26 June a “confidential, indicative, non-binding and conditional proposal from Brookfield Infrastructure Group (Brookfield) to acquire Asciano”.

And what’s the harm in disclosure? Can’t the market be left to judge how material it is?

Sure, there has to be some threshold as to whether to disclose, but by the appointment of two financial advisers and lawyers, the Board or WorleyParsons certainly thought that Dar was bona fide with their offer. 

Those poor shareholders who sold out around $8.00 following WorleyParsons less than impressive financial result, only to see Dar pay $10.35 a few days later, would surely have liked to have known that Dar had attempted to buy the whole company a few months earlier. A class action against looms.

Baying for blood

It is hard not to get the sense that the Board of WorleyParsons is a little long in the tooth. The Chairman, John Grill, who was CEO until 2012, has been a director of WorleyParsons and its predecessors since 1971. The Deputy Chairman and Lead Independent Director, Ron McNeilly, has been there since 2002. Another Non- Executive Director, Erich Fraunschiel, has served since 2003.

If WorleyParsons had been a star performer, like for example Ramsay Health Care, then the tenure of the directors might be seen as a plus. But it hasn’t. It has been a dog (WorleyParsons hit $50 in late 2007!). And to that, you add the decision not to disclose.

And like many Boards before them, they decided that “the proposal was not in the best interests of shareholders”, citing all the marvelous things the company is doing to create shareholder value, like the cost reduction program.

Let the market decide. Disclose.

And, it’s time for Board renewal. Blood needs to flow.