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Plundering the ASX: Is private equity a problem? · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast.
0:13
Speaker 2: I'm James Kirkby. Welcome aboard everybody.
0:15
Speaker 1: As a private investor in shares, you're probably already realized
0:19
Speaker 1: that you're at the back of the queue when things
0:21
Speaker 1: go wrong, and I think we almost expect to be
0:24
Speaker 1: dotted out of the best deals.
0:26
Speaker 2: In some ways. It's often been like that.
0:28
Speaker 1: It's infuriating as well to watch really good stocks being
0:31
Speaker 1: cherry picked, you know, by overseas takeover merchants as time
0:36
Speaker 1: goes by. But something on a whole other level has
0:39
Speaker 1: been happening on the share market this year. It's what
0:41
Speaker 1: I would call the plundering of the ASX by private
0:44
Speaker 1: equity groups and it's come to a head with this week.
0:48
Speaker 2: There was a.
0:48
Speaker 1: Stock folks called health Scope, which was an extraordinary story,
0:52
Speaker 1: a small company that literally became a five million dollar
0:55
Speaker 1: company and then it was taken over by private equity
0:59
Speaker 1: and this week it went into receivership. But thirty seven
1:01
Speaker 1: hospitals might I add attached to that. Joining me on
1:04
Speaker 1: the show today is Eric Johnson. He's Associate editor Business
1:08
Speaker 1: on The Australian. He's been on the show before and
1:10
Speaker 1: he's been following this from the very beginning.
1:12
Speaker 3: Hawai, Eric, gooday, James, thanks for having me on.
1:16
Speaker 2: Good to have you on.
1:17
Speaker 1: We might briefly explain the importance of this story to
1:21
Speaker 1: all our listeners because it's the backdrop here is about
1:25
Speaker 1: the share market we know in which we expect to
1:27
Speaker 1: invest getting hollowed out right, and we mentioned a few
1:30
Speaker 1: things there. Takeovers is one and great company has been
1:33
Speaker 1: taken over. But could you explain to everyone just briefly
1:37
Speaker 1: about health Scope, what's happened, where are we at there?
1:43
Speaker 3: So the name Healthscope is probably not that widely known,
1:47
Speaker 3: but people would know the local hospitals like a Knox
1:51
Speaker 3: private hospital. There's a Sydney clinic and people would know that.
1:55
Speaker 3: So it's a pretty important part of the health sector
1:59
Speaker 3: in terms of it's the second largest private hospital operator
2:03
Speaker 3: and it also operates the Northern Beaches Hospital that's relatively
2:08
Speaker 3: new one up in Sydney as well. And it's a
2:12
Speaker 3: really important part because it's a lot of the well
2:15
Speaker 3: the elective surgery, so non critical stuff but still really important.
2:19
Speaker 3: So James, you'll get your hip operation done there or
2:23
Speaker 3: your knee operation done there and other things that non
2:28
Speaker 3: life you know, threatening but still pretty important for your
2:31
Speaker 3: lifestyle now that it was listed on the AX. Previously
2:36
Speaker 3: listed back in twenty nineteen, it was subject of a
2:40
Speaker 3: pretty aggressive takeover battle. Initially, Australian Super was part of
2:44
Speaker 3: a consortium looking to buy it out. So Ossie Super
2:47
Speaker 3: wanted to buy it and park it just seeing the
2:49
Speaker 3: long term potential of this operator. However, they were edged
2:53
Speaker 3: out by a Canadian company and we've heard of this
2:55
Speaker 3: company before, called Brookfield, a huge asset manager in terms
3:01
Speaker 3: of funds under management. Yes, so yes under management. Brookfield
3:05
Speaker 3: were the ones making the chase for Origin Energy about
3:09
Speaker 3: two or three years ago ago to and that was
3:11
Speaker 3: ultimately unsuccessful. Ironically, it was Ozzie Super that blocked that
3:15
Speaker 3: deal from going out here.
3:16
Speaker 2: They blocked them. Yeah, so they often work in tandem.
3:18
Speaker 2: But so this company, like.
3:20
Speaker 1: Health Scope, it was a big six billion dollar company.
3:24
Speaker 1: It owned hospitals and obviously these guys bolted because they
3:27
Speaker 1: thought they could make more money out of it. Listeners
3:30
Speaker 1: would know, like listed on the stock market still something
3:32
Speaker 1: like Ramsey Health, nothing like the company it was a
3:35
Speaker 1: few years ago, but still a big company, multi billion
3:37
Speaker 1: dollar company making you know, half a billion dollar profits.
3:39
Speaker 1: Those profits are arising, it can be done. So you
3:43
Speaker 1: were onto this fairly early, and I remember reading, I
3:46
Speaker 1: don't know, maybe ten days ago you did a piece
3:48
Speaker 1: and you called the Brookfield people barbarians, and then you
3:53
Speaker 1: said there was two sort of scenarios that were possible,
3:55
Speaker 1: and then you know one was receivership, and you said
3:58
Speaker 1: that was the most likely, and I remember thinking.
4:00
Speaker 2: That's a bit strong, But it's come to passer.
4:04
Speaker 1: First of all, when you say barbarians, would you explain
4:06
Speaker 1: for people who aren't familiar, what is the's the game
4:09
Speaker 1: of these people in Brookfield?
4:10
Speaker 2: What do they do?
4:11
Speaker 1: Why do they buy the companies in the first place.
4:13
Speaker 1: If it's ended up in receivership, something's gone terribly wrong.
4:17
Speaker 1: What was their plan and what went wrong?
4:22
Speaker 3: To be fair to the barbarians, they didn't plan for
4:25
Speaker 3: it to blow up to the extent it did. But
4:29
Speaker 3: remember these are meant to be the smartest people in
4:31
Speaker 3: the room, and they enjoy telling everybody that they are.
4:35
Speaker 3: They badly misread what was happening, but also they undermined
4:41
Speaker 3: their own business models. So they came in twenty nineteen,
4:44
Speaker 3: overpaid for it, borrowed heavily, so leveraged up the business
4:49
Speaker 3: borrowed heavily. Initially, they broke their business, the operating business
4:54
Speaker 3: up from all the hospitals they're actually operated, So they
4:57
Speaker 3: sold off the physical hospitals, so the building. So what
5:01
Speaker 3: was left was a fairly asset like business with a
5:03
Speaker 3: lot of debt. So that sale or the hospital was
5:07
Speaker 3: partly used to fund the acquisition, so some of that
5:10
Speaker 3: distribution went well, that went back to shareholders that previously
5:13
Speaker 3: owned it. However, as you know, it's always good to
5:16
Speaker 3: have a strong balance sheet for unexpected and in health care.
5:20
Speaker 3: Health care is a really complicated industry, and any happened
5:23
Speaker 3: what happened a couple of months later, COVID hit and
5:27
Speaker 3: all the private hospital sector shut down. Elective surgery effectively
5:33
Speaker 3: stopped that starved off the funding the revenue stream, so
5:37
Speaker 3: that was a crisis. Yet these hospitals still had to
5:39
Speaker 3: pay rent for their overheads and so on.
5:42
Speaker 1: Because these guys had leveraged it up right before the
5:45
Speaker 1: sort of calamity of COVID, they had no balance sheet
5:49
Speaker 1: strength when things went wrong.
5:52
Speaker 3: Well, look and just to sort of finish that thought
5:54
Speaker 3: as well, so they're also paying off debt, but then
5:57
Speaker 3: coming out of COVID was another crist It says, we
6:00
Speaker 3: all know for the health sectors, so staff shortages, wage inflation,
6:05
Speaker 3: and then also input costs, so spiraling costs for that. Sorry,
6:10
Speaker 3: you know, there were people falling out of the system,
6:12
Speaker 3: so you know, people paying more for wages. So there
6:15
Speaker 3: was just huge pressure on their cost side. Yet the
6:19
Speaker 3: revenue about getting from like if surgeries just wasn't covering
6:23
Speaker 3: this new sort of real world.
6:26
Speaker 1: So everything went wrong and it's now in receivership. And
6:29
Speaker 1: I suppose to the people on the street are people
6:31
Speaker 1: who use the hospitals. It's pretty scary. So there's thirty
6:34
Speaker 1: seven hospitals and anyone listening to the show will know
6:37
Speaker 1: one of them for sure. When I looked at the
6:39
Speaker 1: listener and I had been in two of them, and
6:41
Speaker 1: they're major hospitals in the cities. But the question it begs,
6:44
Speaker 1: I suppose, is to one extent, the wider market is
6:47
Speaker 1: vulnerable to this sort of thing. You mentioned how Brookfields
6:50
Speaker 1: when they came in, they geared up. They leveraged up
6:52
Speaker 1: the balance sheet pretty fast. In some ways they used
6:55
Speaker 1: the asset they bought to finance the purchase that they did,
6:58
Speaker 1: and that rings a bell for me, that reminds me
7:01
Speaker 1: of the buccaneers of yesterday, Alan Bond, Christophersquise, etc. It's
7:06
Speaker 1: not exactly the same, but there's parallels, is there.
7:12
Speaker 3: And we spoke about it at the top about the barbarians.
7:15
Speaker 3: So that's not my term. It's not our term. It's
7:18
Speaker 3: made famous by a book. A couple of former Wall
7:20
Speaker 3: Street Journal reporters wrote the book about Barbarians of the Gate.
7:25
Speaker 3: That was the US company KKR acquiring it's been to
7:31
Speaker 3: acquire US food company conglomerate at a time called an
7:35
Speaker 3: Abisco and tracking that coming in, stripping the assets, selling
7:40
Speaker 3: it off and leaving a very capital light business.
7:44
Speaker 2: Yeah.
7:44
Speaker 1: So this was the benchmark if you like this, when
7:47
Speaker 1: everyone's realized what the game was.
7:49
Speaker 2: And KKR they're still around.
7:51
Speaker 1: In fact, they have funds listed on our share market,
7:54
Speaker 1: and that might be listeners on the show that even
7:56
Speaker 1: have investments in them. So it's a two sided thing.
7:58
Speaker 1: But I don't want to go to that just now.
8:00
Speaker 1: I just want to capture a few other things about this.
8:03
Speaker 1: So for most people when they look at the share market,
8:06
Speaker 1: most of the intention and most of the action is
8:08
Speaker 1: in a small number of companies. The top fifty and
8:11
Speaker 1: one of the things we've seen is how private acuity
8:14
Speaker 1: will come in. I think in our country or in
8:17
Speaker 1: our market, the benchmark, the NJO and the.
8:19
Speaker 2: BISCO of our area was Meyer.
8:21
Speaker 1: Once upon a time, I think it was TPG if
8:23
Speaker 1: I've got that right, who came in and did an
8:26
Speaker 1: amazing deal for themselves, and there was all sorts of
8:29
Speaker 1: controversy later as to what they did and how they
8:31
Speaker 1: did it. More recently, had Sydney Airport a beautiful stock,
8:35
Speaker 1: a fabulous asset that investors loved, long term infrastructure play
8:40
Speaker 1: again that was shipped off the market and that was
8:43
Speaker 1: big super funds playing with private equity again, correct me
8:47
Speaker 1: if I'm wrong on this.
8:48
Speaker 2: And then this most recent one, this.
8:50
Speaker 1: Health scope, which is when everything went wrong, is private
8:53
Speaker 1: equity getting it wrong themselves, But it seems to be
8:56
Speaker 1: a process that's accelerating now. Is the ASEX particularly vulnerable
8:59
Speaker 1: to this? And as ordinary shareholders, how do we deal
9:03
Speaker 1: with this fact that these marauding you know, global companies
9:09
Speaker 1: just cherry pick like this.
9:11
Speaker 3: Well, I was just thinking, well, look there's phrase my
9:14
Speaker 3: old economics teachers to drum into me. He said that
9:18
Speaker 3: in order for someone to buy something. Someone has to
9:20
Speaker 3: sell something. So if somebody is paying over the odds
9:26
Speaker 3: for an asset, well you know that's they've got to
9:29
Speaker 3: wear the risk. But it does come back to some
9:32
Speaker 3: of the issues. I mean, can you know this is
9:35
Speaker 3: a broader question. Can someone come in by a hospital
9:38
Speaker 3: and sell off all the furniture and cut all the
9:40
Speaker 3: stuff and then there's a lot of consequences around that too,
9:44
Speaker 3: because that ultimately puts pressure back onto the public system.
9:47
Speaker 3: And we don't have time to talk about all that
9:50
Speaker 3: what's going on in there. But your earlier point about
9:55
Speaker 3: these quality companies, I was just checking out a list,
9:58
Speaker 3: so you're right. Sydney Airport Minerals. These are companies that
10:01
Speaker 3: have left the AX in the last few years. City Airport,
10:04
Speaker 3: Odds Minerals. There were Spark Infrastructure, so that was a
10:07
Speaker 3: pretty boring company that no one had ever heard about.
10:10
Speaker 3: Boring but nice, nice sort of yield stock. We've seen
10:14
Speaker 3: a whole bunch of holding out of industrials and through
10:17
Speaker 3: other companies. This is not all private equity acquisitions. Borrel
10:21
Speaker 3: CSR James Hardy. There's a drama about it.
10:24
Speaker 1: Relocated builders, isn't it, Eric, That's the entire building materials sector.
10:29
Speaker 2: Yeah, and of what was the a SX, which were.
10:31
Speaker 1: All Greek companies and popular with private investors up to
10:34
Speaker 1: the time they were taken US.
10:36
Speaker 3: So look, you know that happens, and as long as
10:38
Speaker 3: there's stock markets, there's always acquisitions. Nothing wrong with acquisitions.
10:42
Speaker 3: But what's the structural sort of issue that's been happening
10:45
Speaker 3: is that Australia or the ASEX hasn't been able to
10:48
Speaker 3: replenish the companies that are leaving the AX and that's
10:53
Speaker 3: starting to become an issue. And that's why you're started
10:56
Speaker 3: to see companies like CBA, you know, you know trading
10:59
Speaker 3: at your that are wise sky high because it's just
11:02
Speaker 3: not the man is just not the avenues to pack
11:05
Speaker 3: your money.
11:06
Speaker 1: Really interesting, Yes, that is an interesting explanation of what's
11:09
Speaker 1: going on. Look, take a short break because I want
11:11
Speaker 1: to come back, and what I want to do is
11:13
Speaker 1: try and guide our listeners to how to deal with
11:15
Speaker 1: this and particularly what's going to happen next in terms
11:19
Speaker 1: of private equity and takeover merchants on the ASEX and
11:22
Speaker 1: how you play this. Hello, welcome back to The Australian's
11:34
Speaker 1: Money Puzzle podcast. I'm James Kirby talking to Eric Johnson,
11:37
Speaker 1: my colleague on The Australian.
11:39
Speaker 2: He's been on the show before.
11:40
Speaker 1: He's been covering this really interesting area of large Australian,
11:45
Speaker 1: famous Australian shares basically disappearing.
11:49
Speaker 2: Off the market for one reason or another.
11:51
Speaker 1: And this share markt is actually shrinking, that is, the
11:54
Speaker 1: asex is shrinking. Now, if you are an investor to
11:58
Speaker 1: some extent your interest here, as Eric said, do you
12:00
Speaker 1: take the money and run? Why wouldn't you if someone
12:01
Speaker 1: offers you, you know, forty percent more than they did
12:04
Speaker 1: the day before for a stock and why wouldn't you
12:07
Speaker 1: take that cash? Each deal in and of itself is
12:10
Speaker 1: logical at the time. I just wonder, Eric, particularly about
12:14
Speaker 1: health Scope. You wonder, without getting into social or cultural conversation,
12:20
Speaker 1: just strictly as an investment question, whether the troubles you know,
12:25
Speaker 1: in age care stocks which have been severe, health care
12:31
Speaker 1: stocks which are exceptionally severe now with the receivership of
12:34
Speaker 1: a company that was once worth six billion dollars, You wonder,
12:39
Speaker 1: as an investor, is this area just too much trouble
12:43
Speaker 1: as long term investment.
12:46
Speaker 3: It's a really difficult one because one of the big
12:49
Speaker 3: themes that you speak to the likes of, you know,
12:52
Speaker 3: the global asset managers, you know, your black Rocks, your
12:55
Speaker 3: black styles, saving macquaries and so on. The big several themes.
13:00
Speaker 3: They talk about digitization, they talk about technology and AI.
13:06
Speaker 3: Health and aging always comes up as a big theme
13:10
Speaker 3: as an area to invest in. Yet the names that
13:13
Speaker 3: you've sort of pointed out, and the sectors you pointed out,
13:15
Speaker 3: they're really difficult. They're really difficult. They like it as
13:18
Speaker 3: a theme because we're all getting older.
13:21
Speaker 1: Yeah, it's top down, a top down thematic sounds good
13:25
Speaker 1: right bottom.
13:26
Speaker 3: Up, it sounds really good. But we are getting older
13:29
Speaker 3: and we're demanding more services. However, we're not seeing private
13:34
Speaker 3: organizations aren't seeing that. It's again, I think it's a
13:37
Speaker 3: complicated because we're also confusing heavily regulated sector with you know,
13:44
Speaker 3: we're coming against regulation right rightly. So there should be regulation,
13:48
Speaker 3: there should be minimum staffing in age care, there should
13:51
Speaker 3: be certain standards and so on. That's a given. However,
13:55
Speaker 3: where those themes are coming in, they're not sort of
13:58
Speaker 3: compatible with that heavy re agent. So that's where it's going.
14:02
Speaker 3: I think health scope and this is all private hospitals too,
14:07
Speaker 3: facing another challenge in that when even back in twenty
14:12
Speaker 3: nineteen or twenty seventeen, or you know last decade, when
14:15
Speaker 3: you went in for your knee repair, James, so you
14:19
Speaker 3: could play football on the weekend, you were in usually
14:22
Speaker 3: for about four or five days. You're in, you stayed
14:25
Speaker 3: in and your health insurer, because you have the Gold coverage,
14:29
Speaker 3: was paying it all. However, today you go in the
14:32
Speaker 3: morning and you're out by three pm in the afternoon.
14:36
Speaker 3: You're playing footy on the weekend too, And that's the
14:38
Speaker 3: advance of changes in technology.
14:42
Speaker 1: Right, productivity inside healthcare has had the surprise I'll come
14:47
Speaker 1: that it's just explaining for my that's a problem financially.
14:51
Speaker 3: Well because then me as health Scope, I own this heavy,
14:55
Speaker 3: huge hospital that is no longer in full demand all
14:59
Speaker 3: the time. So there's another area like also, surgeons are
15:05
Speaker 3: not tied to specific hospitals. As you know, you went
15:08
Speaker 3: to your surgeon to get your knee fixed, he referred
15:12
Speaker 3: you to this day to a day care clinic down
15:15
Speaker 3: the road, so that you're not even going to the
15:19
Speaker 3: health hospital. So they're sitting there with empty rooms and
15:21
Speaker 3: empty beds, still paying their debt and their bills.
15:24
Speaker 1: That also happened, So that came on the back of
15:27
Speaker 1: post COVID almost or at least the same time.
15:29
Speaker 2: So you have those two things working against them.
15:31
Speaker 1: I suppos a big question then, Eric is from again
15:34
Speaker 1: from an investment perspective, Maybe an investor can simply choose
15:41
Speaker 1: to play the other side. You mentioned KK or you
15:44
Speaker 1: can now invest in they all have, all the big
15:47
Speaker 1: players have ASX listed funds. And in recent times by
15:53
Speaker 1: that I mean the last two years, there's been a
15:55
Speaker 1: really big push by private equity funds to the average
15:59
Speaker 1: retail investor, to mom and dad, and to say, look,
16:01
Speaker 1: your super fund has always been in here, They've done
16:04
Speaker 1: really wear private equity come and join us, and you
16:06
Speaker 1: can just simply buy, you know whatever, a thousand dollars
16:09
Speaker 1: both of private equity fund number one, two or three.
16:12
Speaker 1: They're very common. They health scope crisis facing brook Field
16:20
Speaker 1: is that What does that tell us about private equity
16:22
Speaker 1: funds and the risks that they might put in front
16:25
Speaker 1: of the average investor that aren't so obvious.
16:28
Speaker 3: Yeah, Look for the average investor, the punter, the retail investor.
16:35
Speaker 3: As you always to your listeners, you have a broad mix,
16:38
Speaker 3: you have your low risk, you have your mid risk
16:40
Speaker 3: and maybe just a fraction too of higher risk, and
16:44
Speaker 3: private equity as an asset class is expensive. It's high cost,
16:48
Speaker 3: but it promises higher return.
16:50
Speaker 1: Yeah, right, high risk hy return or at least they're
16:52
Speaker 1: elevated risk elevator return.
16:54
Speaker 3: Yeah, and for every sort of health scope, which is
16:57
Speaker 3: a spectacular disaster, and even Maya and there's a lot
16:59
Speaker 3: of high profile Dick Smith was another that was a
17:03
Speaker 3: disaster for private equity. There's probably about one hundred little
17:07
Speaker 3: no name companies that are actually that are actually that
17:10
Speaker 3: actually works, and these aren't necessarily listed companies. And private
17:14
Speaker 3: equity it does have a role, and we can't say
17:17
Speaker 3: as a rule private equity is all bad. It does
17:20
Speaker 3: provide funding at funding source and alternat funding source and
17:24
Speaker 3: potentially a pathway for a more established and sophisticated sort
17:28
Speaker 3: of investment case. Where it does go bad is when
17:32
Speaker 3: they come in they sell off all the furniture and
17:34
Speaker 3: leave a very light, heavily leveraged business. And look, that's
17:40
Speaker 3: really short term. That's a really short term model. And
17:43
Speaker 3: if you keep doing that, you're going to run out
17:44
Speaker 3: of run away pretty quickly.
17:46
Speaker 2: Which seems to be exactly what happened at the school.
17:49
Speaker 1: Tell me the big super funds, what are they good
17:53
Speaker 1: guys or bad guys here depending on.
17:56
Speaker 2: The day I'd see of the day.
17:59
Speaker 3: Really so like some of that list that we spoke about,
18:01
Speaker 3: so Spark and Sydney Airport, I mean that they were
18:04
Speaker 3: super fun led acquisition, so they're buyouts. Their investment horizon
18:09
Speaker 3: is different, so generally it looks to like three to
18:13
Speaker 3: five year turnaround case. Another one with Virgin Australia at
18:22
Speaker 3: the airline was on the cusp of listings that was
18:25
Speaker 3: brought from administration where no one wanted to touch it by
18:29
Speaker 3: private equity and it's held onto it for now. What
18:33
Speaker 3: is it about five years? Bang on at times times
18:36
Speaker 3: spot on. I don't think that the great guys they've
18:38
Speaker 3: made it. They've made an absolute windfall on the back
18:41
Speaker 3: of this, but they took the risk. They took the
18:43
Speaker 3: risk when no one wanted to.
18:44
Speaker 2: That was an example where it brooks really nicely.
18:47
Speaker 1: I mean we get to retain a second major airline
18:50
Speaker 1: domestically and investors took the risk, as you see, and anyone.
18:54
Speaker 2: Who was in on that did very well well.
18:57
Speaker 1: This is to some extent dependent on the flat what
19:00
Speaker 1: would happen soon enough, you would expect if they got
19:02
Speaker 1: their docks in a role there, haven't they?
19:04
Speaker 3: Yeah? And look, you know, is to the original question
19:07
Speaker 3: about is superis of the bad guys? So their investment
19:10
Speaker 3: horizon that they buy and hold for the long term
19:13
Speaker 3: ten ten to twenty years. So if Ozzie Super came in,
19:19
Speaker 3: they did team up with a private equity fund and
19:23
Speaker 3: in doing that there aim was to be patient capital.
19:25
Speaker 3: We're going to buy this thing and hold on to it.
19:27
Speaker 3: So they probably wouldn't have flogged the assets to the
19:31
Speaker 3: extent it did.
19:33
Speaker 1: They probably mentioned in your piece that they did intervene
19:36
Speaker 1: one time and save what's it origin from?
19:39
Speaker 3: Yeah, so, and that that's a really interesting sceory. And
19:42
Speaker 3: that was a case of where investors, Australia investors, some
19:45
Speaker 3: Australia investors. I was in Super and there was a
19:47
Speaker 3: couple others behind it stood up and said no. Because
19:51
Speaker 3: often when private equity comes in and offers that forty
19:54
Speaker 3: percent premium for something, it's not doing it in our
19:57
Speaker 3: the goodness of its heart and often jumps on companies
20:01
Speaker 3: when they're trading at cyclical lows or you know they've
20:04
Speaker 3: had they've made some bad calls or something. So so
20:06
Speaker 3: there's shares a way off, so footy percent premium looks
20:09
Speaker 3: pretty healthy to to where it is today, but it
20:11
Speaker 3: looks pretty ordinary to where it was five years ago.
20:14
Speaker 3: So so in that case, Brookfield did come up its
20:19
Speaker 3: plan for Origin, big energy company. The plan was to
20:22
Speaker 3: buy it and carve it up and flip it into
20:24
Speaker 3: several funds. Ironically, Canadian Prime Minister Mark Corney was was
20:30
Speaker 3: the face, the friendly face of one of these funds,
20:33
Speaker 3: and he was he was leading the acquisition. So that
20:37
Speaker 3: Bank of England, Bank of England, that's right, I see. However,
20:41
Speaker 3: Australian Super stood up and said, look what you're offering
20:44
Speaker 3: is I was it was around about nine dollars mark
20:46
Speaker 3: what you're offering for Origin. We think over the long
20:51
Speaker 3: term Origin is worth a lot more. It has these
20:53
Speaker 3: key key quality assets, key quality attributes about it. I was.
20:57
Speaker 3: He Super had it it was able to to sort
20:59
Speaker 3: of and asked what's called a blocking the stake just
21:02
Speaker 3: under it, and had a couple other friends. It was determined,
21:06
Speaker 3: we're not interested in negotiating. We think this business is
21:09
Speaker 3: great for we're buying and holding, so see you later.
21:12
Speaker 3: And Brookfield tried everything and tried every trick in the book,
21:16
Speaker 3: but ultimately had to take its bat and ball and
21:18
Speaker 3: go home. It could not buy it.
21:20
Speaker 1: Right, Interesting, So they can the big super funds can
21:24
Speaker 1: exercise enormous power obviously in these situations and the episodes
21:28
Speaker 1: where they were very useful to the local market.
21:31
Speaker 3: And the postcript to that is that Ossie Super was
21:33
Speaker 3: right that the shares ultimately increased over the offer price
21:38
Speaker 3: over time. It didn't happen straight away, but it gradually
21:40
Speaker 3: stopped having that direction.
21:42
Speaker 1: That's the ultimate test, isn't it really? Very interesting? Very interesting? Okay,
21:46
Speaker 1: So Origin is an example. Really, Origin Energy is an example.
21:49
Speaker 1: Folks for private equity might have done awfully well and
21:55
Speaker 1: in some extent plunder the AESX. Again, in that case,
21:57
Speaker 1: Australia Super came in and saved the day. We now
22:01
Speaker 1: know because of the movement and price since that time.
22:03
Speaker 1: So interesting, two says to every story. All right, we'd
22:06
Speaker 1: be back in a moment. We have some really good
22:07
Speaker 1: questions from David and Neil and Trevor. Hello, welcome back
22:20
Speaker 1: to The Australian's Money Puzzled podcast. James Kirby here talking
22:23
Speaker 1: to Eric Johnson. We've been talking about something I think
22:26
Speaker 1: is really was really worth looking.
22:28
Speaker 2: At today, which is what's going on big picture.
22:31
Speaker 1: If you like on the AX, where we depend so
22:33
Speaker 1: much on a couple of dozen companies and they are vulnerable.
22:38
Speaker 1: It's the very open market, and that's all fine, but
22:41
Speaker 1: sometimes we as individual shareholders, we do lose. Right, So
22:45
Speaker 1: Sydney Airport whipped away from under our eyes, and everyone
22:48
Speaker 1: I think regrets that health scope of five billion dollar
22:51
Speaker 1: company was also whipped away from under our eyes, and
22:55
Speaker 1: we might have been better off because it turns out
22:56
Speaker 1: that it's in receivership, so we're are that five billion
22:59
Speaker 1: dollars go?
23:00
Speaker 2: Well, individual shareholders didn't lose it. At least that's useful.
23:04
Speaker 1: Okay, David asks, I was interested in your recent episode
23:07
Speaker 1: on gold. Your guest quoted some interesting figures for returns.
23:11
Speaker 1: Who didn't mention the digital gold bitcoin. I've owned both
23:15
Speaker 1: for years, and bitcoin outperforms gold. And then David says,
23:20
Speaker 1: I asked chat GPT to perform an analysis. I don't
23:24
Speaker 1: know if I completely agree with that term, and it
23:26
Speaker 1: said bitcoin has delivered significantly higher returns over the past
23:30
Speaker 1: decade compared to gold. That is, but gold has been
23:33
Speaker 1: more stable surely this would have been worth a mention,
23:36
Speaker 1: says David, given the assertion that gold is the hot
23:38
Speaker 1: investment product. It's just plain wrong. Okay, David, never advice
23:43
Speaker 1: information only. They're both pretty good, first of all. And
23:46
Speaker 1: if bitcoin at a certain point in time has delivered
23:49
Speaker 1: more on a ten year basis than gold, I don't
23:51
Speaker 1: deny that for a moment, So put that on the table.
23:54
Speaker 1: It's just a question of your choice. Really, I think
23:57
Speaker 1: the more interesting part of the question is using AI
24:00
Speaker 1: to get some steer. Look, I don't think there's anything
24:03
Speaker 1: wrong with it. I just I would just say to
24:05
Speaker 1: David and all the debts out there, it's it's uninterpreted information.
24:08
Speaker 1: It's information. It's uninterpreted. That's why we have short like this,
24:12
Speaker 1: And I'd be careful how far you go with AI.
24:14
Speaker 1: Aren't testing your investment hypothesis in real life?
24:18
Speaker 3: What do you think, Eric, Yeah, I look one hundred
24:21
Speaker 3: percent on that, and it's a it's about garbage in
24:26
Speaker 3: and garbage out in terms of the algorithm, and sometimes
24:30
Speaker 3: it's quality of stuff. But you just don't know what
24:33
Speaker 3: what ingredients been put in there, So so use it
24:36
Speaker 3: for for something, don't rely on it. Becoin. It's really interesting.
24:42
Speaker 3: It's a it's a trying to find a correlation to bigcoin,
24:47
Speaker 3: and that's been the big struggle. So, so is it
24:49
Speaker 3: a global economic trend?
24:52
Speaker 2: Just you might just explain what you mean by that.
24:55
Speaker 3: So, so how does it move? So does it? So?
24:58
Speaker 3: Why does it move? I think that So does it
25:00
Speaker 3: move when the economy is booming, doesn't move when the
25:03
Speaker 3: economy is slow. So we think about gold. So whenever
25:06
Speaker 3: there's inflation explosion, gold goes up. Everyone rushes. Gold is
25:10
Speaker 3: a hedge against inflation. And we've also seen that recently
25:13
Speaker 3: with gold with uncertainty about the US US bonds and
25:17
Speaker 3: the US treasuries as a store of As a store
25:20
Speaker 3: of value, bitcoin struggles a bit. There is a thread
25:25
Speaker 3: that when there's an excess of money in the financial
25:30
Speaker 3: system that actually booms. So you know, I've got to
25:33
Speaker 3: spare whatever I can't invest that and that then that
25:36
Speaker 3: supports it. But again it comes back to demand now
25:40
Speaker 3: and we're increasingly saying obviously when Trump came in, we
25:43
Speaker 3: saw a big jump in bitcoin because Trumps saying we're
25:46
Speaker 3: gonna We're going.
25:47
Speaker 1: To Yeah, more than that, he's very keen, he's very
25:51
Speaker 1: keen altogether.
25:52
Speaker 2: Is he launching his own coins?
25:54
Speaker 3: Yeah? Correct, So so that that's the type of thing,
25:57
Speaker 3: so you know, whatever it is comes to Also, like gold,
26:01
Speaker 3: bitcoin doesn't pay yield and it depends what you It
26:04
Speaker 3: doesn't pay an income, so it's like buying them debartwork
26:07
Speaker 3: and hanging on the wall.
26:08
Speaker 1: So you're saying that gold as what has the history
26:12
Speaker 1: that we know has repeatedly proven itself to be a
26:17
Speaker 1: useful non correlated asset in that when the market's going down,
26:21
Speaker 1: gold should go up. But bitcoin it's unclear whether it's
26:26
Speaker 1: unclear still.
26:27
Speaker 3: Yeah, the trend, like the history isn't there, and the
26:29
Speaker 3: liquidity isn't there, and it will become and it will
26:31
Speaker 3: become a lot clearer over time. And I think it
26:34
Speaker 3: is it's a legitimate asset class today because of the
26:36
Speaker 3: sheep value of it.
26:38
Speaker 2: That's interesting and it's suggesting you say that. Okay, very interesting.
26:41
Speaker 1: I hope that was useful to you, David from Neil,
26:44
Speaker 1: which is my question could be a podcast topic. What
26:48
Speaker 1: is productivity? How is it measured? What does the productivity
26:52
Speaker 1: Commission do? And why does it matter to invest us?
26:55
Speaker 1: It's a great question. Neil always comes up doesn't it,
26:58
Speaker 1: And I think does economic explanation, which is it's not
27:02
Speaker 1: rocket science, yes, would be boy efficiency.
27:05
Speaker 2: But for investors, why does it matter? I think that's
27:08
Speaker 2: the interesting one. Eric.
27:12
Speaker 1: How would it reveal it if a company was productive?
27:16
Speaker 1: How would it reveal itself as a listed stock? Would
27:19
Speaker 1: there be some numbers that would be obvious?
27:21
Speaker 2: Is it just profit? Is it simply more profitable or
27:24
Speaker 2: what we were to play in?
27:27
Speaker 3: Yeah, So when you know what the top of that
27:32
Speaker 3: question about what does it look like and what does
27:34
Speaker 3: it do? It reminds me of a very famous newspaper cartoonist,
27:37
Speaker 3: Bruce Petty based in Melbourne, and he used to draw
27:40
Speaker 3: these amazing images about the economy and what the economy
27:43
Speaker 3: looked like, all these crazy machines that no one really
27:48
Speaker 3: knew what they look like or what they were, but
27:49
Speaker 3: they did something. That's the economy. Productivity is much like this,
27:54
Speaker 3: much the same, but productivity, And it was talked about
27:57
Speaker 3: why does it matter? Because it matters. Everything matters, and
28:02
Speaker 3: it all comes back to productivity. So how what makes
28:07
Speaker 3: a productive company? So there's a couple of measures. Obviously
28:11
Speaker 3: you compare like for like apples for apples. So we're
28:14
Speaker 3: very lucky in Australia that we have the big four banks,
28:17
Speaker 3: we could relatively vanilla, relatively comparable. So cost to income
28:23
Speaker 3: ratio would be one fact.
28:25
Speaker 2: Yeah okay, and then the one that has the what
28:28
Speaker 2: are you looking for, the one with the lowest.
28:30
Speaker 3: Yeah, one lower, And this measure would generally move around
28:33
Speaker 3: if you're so you're the amount of revenue that comes
28:38
Speaker 3: in and compared to the amount of your cost base.
28:41
Speaker 3: So for example, you know, West west Pac runs around
28:46
Speaker 3: about sort of mid forties cost to income ratio, whereas
28:51
Speaker 3: Common Bank runs is sort of like a high thirties.
28:54
Speaker 1: So it's a much better ratio because the lower the better,
28:58
Speaker 1: even though it's a much bigger bank where big.
29:00
Speaker 3: Go Combank is No, but that means Combank is more efficient.
29:05
Speaker 1: So the LA what I said, yeah, come make is
29:08
Speaker 1: more efficient even though it's bigger. So that's your That's
29:11
Speaker 1: how it translates to in a stock how productivity kicks
29:14
Speaker 1: in as a useful measure for a listed.
29:18
Speaker 3: Company, and so retailing and is another area. So you
29:23
Speaker 3: tend to look at profit margin, your net margin or
29:26
Speaker 3: your gross margin, and so that's the amount of profit
29:32
Speaker 3: relative that you're making. And so we're looking at Maya
29:35
Speaker 3: this week, and that's quite interesting. So it's it runs
29:37
Speaker 3: a margin of about two percent, So so from everything
29:41
Speaker 3: it's selling roughly, the profit it's making on that is
29:45
Speaker 3: about two percent. Where whereas it, as you know, recently
29:49
Speaker 3: bought the Solomon lose A Power Brands business and the
29:52
Speaker 3: profit margins that's making is around nine percent. So every
29:56
Speaker 3: pair of genes it sells and just gens is making
29:58
Speaker 3: around nine percent. So my wants to get a bit
30:01
Speaker 3: of that margin, and a little bit of that increase
30:04
Speaker 3: in margin will translate to a big change in headline profit.
30:08
Speaker 3: In fact, my was promising if you can lift its
30:11
Speaker 3: margin by just one percent on that two percent, that
30:14
Speaker 3: translated to a thirty three million dollar EBIT of earnings increase.
30:20
Speaker 1: So a street mathematical. If the margin's improved, the profits improve,
30:24
Speaker 1: the share place of improve.
30:26
Speaker 3: Yeah, but here it goes and look in the big
30:30
Speaker 3: structural thing that's coming around, you can't go. You can't
30:34
Speaker 3: see any company briefing today without a CEO getting up
30:37
Speaker 3: and talking about AI and the prospect. So look, it
30:40
Speaker 3: is coming. It is real. It's not here in a
30:43
Speaker 3: big way yet, but it is here a way, and
30:46
Speaker 3: companies are just flexing it and starting to figure out.
30:48
Speaker 3: And we heard the Teltra boss Vicky Brady this week
30:52
Speaker 3: at a strategy briefing. She was quite open about it.
30:55
Speaker 3: She said, look, by the end of the decade, the
30:57
Speaker 3: way the Telterra looks, it will employ less people from
31:00
Speaker 3: what it does today. And that was the basis that
31:03
Speaker 3: AI will do a lot of work that is done
31:07
Speaker 3: manually today. So that's one aspect that we will start
31:12
Speaker 3: seeing an impact on the cost space.
31:15
Speaker 1: So neil big issue at the moment is AI on
31:18
Speaker 1: the basis that obviously if someone can do what they
31:21
Speaker 1: used to do in six hours in two hours or
31:23
Speaker 1: two minutes, depending on what the promise is for MEI
31:26
Speaker 1: you can see how to cut straight through to profits.
31:28
Speaker 2: Yeah.
31:29
Speaker 3: Yeah, And I think when Neil would be really good
31:31
Speaker 3: exercise for Neil is if he want to get ahead
31:33
Speaker 3: of the pack on it is to have a look
31:36
Speaker 3: at the big companies that are and how they're talking
31:38
Speaker 3: about their use of AI and how they're applying AI
31:40
Speaker 3: today because that may not translate to something today, but
31:44
Speaker 3: in two or three is time, it may translate to
31:46
Speaker 3: something pretty significant. Right.
31:49
Speaker 1: Yes, those who master AI will master the universe. Okay, terrific.
31:53
Speaker 1: We may we've just went out of time, so I
31:54
Speaker 1: think we might just leave it there for today. Great
31:57
Speaker 1: to have you on, Eric Johnson, associated is a bus
32:00
Speaker 1: that's from the Australian.
32:01
Speaker 3: Thanks James, nice to be here.
32:02
Speaker 2: Thanks very much for coming on the show. And let's
32:05
Speaker 2: have some more correspondents. And usually we'll call out this
32:08
Speaker 2: week in that I have lots of emails flowing in,
32:11
Speaker 2: but you know what, folks, some questions.
32:13
Speaker 1: That aren't about the supertax would be particularly welcome because
32:16
Speaker 1: it's a flooding the inbox.
32:18
Speaker 2: And we will cover them. As you know, we've covered
32:20
Speaker 2: them in special shows and there's more to come. I'm
32:22
Speaker 2: sure on that one.
32:23
Speaker 1: But there are other issues too, So let's hear from
32:26
Speaker 1: you the money Puzzle at the Australian dot com dot au.
32:30
Speaker 2: Talk to you soon,