Public

Vocus Communications (VOC) 2016 AGM Voting Intentions

Company/ASX Code : Vocus Group Limited (VOC)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
11am Grace Hotel
77 York Street
Sydney, New South Wales
Monitor : Mrs Elizabeth Fish
AGM Details / NoM : Tuesday 29th November, 2016

Acquisitions and more acquisitions

This company is monitored by Elizabeth Fish, assisted by Joyce Yong. The company monitors had a pre-AGM meeting with Chairman David Spence and Investor Relations & Communications Kelly Hibbins.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

On the acquisition trail

Vocus has been very much on the acquisition trail in 2016. In July 2015, Vocus Ltd, through its subsidiary Vocus Group Ltd, acquired 100% of shares in Amcom Telecommunications Ltd, for a total consideration of $686,662,000 arising from the issue of 124,482,876 shares and 364,511 performance rights in the company. The issue of Vocus shares was at share price of $5.50. As a result of this purchase an additional $542,752,000 was posted to goodwill. 

Then, on the 22 February 2016, Vocus acquired 100% of the share capital of M2 Group Ltd for a total consideration of $2,258,628.00. The acquisition was settled by issue of 300,083,420 ordinary shares, 135,418 options and 784,428 performance rights in the company. The issue of Vocus shares was at a price of $7.53. There is still more.

On 29 June, Vocus announced the acquisition of Nextgen Networks and NWCS Development Project for consideration of $807m to be funded by a capital raising by way of an institutional placement to raise approximately $200m and a pro-rata accelerated renounceable entitlement offer with retail trading rights of about $452m in new ordinary shares in Vocus on a 1 for 8.9 basis to eligible shareholders at a cost of $7.55 per new share. The record date was 4 July 2016. Results of the capital raising were announced on 22 July 2016. 

Goodwill

The two significant FY 2016 purchases added an additional $2.9bn to goodwill in the consolidated accounts ie 68% of total non-current assets. At the pre-AGM meeting, the ASA asked Chairman David Spence what length of time it would take to get a return the sums invested in the two new acquisitions. He said he thought it was a long term investment and may take up to 25 years.

Key Board and Senior Management changes

2016 was a year in which Vocus underwent transformational changes, in particular its combination with Amcom in July 15 and with M2 in February 2016. Of the seven executive KMP who held office in June 2016 only three held office at Vocus at June 2015. The remaining four executives took office during the year, the majority after February 2016. 

There are three new NEDs standing for election, all ex-directors of M2, including an Executive Director. Five of the NEDs at June 2015 have resigned during the year. Another NED, Tony Grist, resigned suddenly in mid-October, as did James Spenceley, an Executive Director, who founded Vocus in 2008 – it is understood this was due to a conflict of personalities on the board. 

The board currently has six directors and we understand it intends to appoint an additional two directors. It is also noted that the CEO Geoff Horth is not on the Board which is somewhat unusual.  We will be seeking the comments from the Board on this decision not to have the CEO on the Board.

Summary


ASA Position
Against
Item 2: Adoption of the Remuneration Report

ASA found the Remuneration Report to be somewhat untidy and difficult to analyse. We do realise that having combined three companies in the past year there are a number of legacy issues to take into account. The monitor has contacted the company regarding some of the issues involved and has not had a response. The Remuneration Committee also say that they had Egan Associates in to give assistance with formulating an ongoing remuneration plan.

STI

It is worth noting that all STIs are paid in cash as it is proposed by the company that this is due to fixed remuneration being below the benchmarked median in most instances, when compared to ASX peers. They may have a point here as the “amount expensed in the company’s financial statements” for 7 KMP in FY 2016 is $7,530,094 and CEO James Spenceley, was paid $2,813,004. They do not have at table showing actual remuneration. Not all KMP stayed for the full year.

50% of the CEO’s KPIs for STI is based on financial results, and for the other KMP “the CEO’s KPI’s are cascaded throughout the company”. So it is assumed that 50% of all KMP’s KPIs are financial.

The total % of remuneration at risk in the STIs range from 18 to 30%, apart from M Hollis where it is 60%.

The total % of remuneration at risk in the LTIs range from 5 to 8%, except for S Carter, M Callander and J Spenceley who risk 21%, 26% and 37% respectively.

The total % of fixed remuneration ranges from 27 to 76%. 

LTI

The LTIs are equity based. There are a number of different plans currently in place as a result of the combination of businesses in FY 2016. The period of the LTI has not been defined for 2016. However, going forward in 2017 the period looks to be a mix between one and three years. – see further commentary under items 4 and 5.

KMP holding options may have benefited from the announcement on 28 July 2016, where Vocus announced a reduction in the exercise prices of its unlisted options in accordance with the formula set out in the rules of the Vocus Options and Performance Share Plan, consistent with ASX Listing Rule 6.22.2. The changes to the exercise prices of Vocus’ unlisted options follows the completion of Vocus’ fully underwritten 1 for 8.9 rights issue concluded in July 2016.

Loan Funded Share Plan (LFSP)

The ASA monitor has some concerns regarding the transparency of the LFSP, which is presently valued at $10.8m (page 37 of Annual Report). Shares were issued to Vocus Blue, a wholly-owned subsidiary of Vocus Communications Ltd, as part of Vocus’ Loan Funded Share Plan remuneration scheme to attract and retain key employees. Vocus Blue’s sole purpose is to hold shares as trustee for its beneficiaries. Participants are granted a loan by Vocus to purchase the beneficial interest in Vocus shares. The loans are limited recourse to participants and any dividends received in respect of the plan are used to reduce the loan balance net of tax payable. Participants are required to meet service requirements and performance conditions before being entitled to acquire full title to these shares and are required to repay the loan in order to do so. The shares will progressively become unrestricted over a period determined by each employee’s loan agreement, subject to continuous employment with Vocus. These shares are shown on the Balance Sheet as Treasury Shares. As it is intended that no new options or shares will be issued under the existing Employee Share Option Plan or the Loan Funded Share Plan and despite requests to the company, the ASA is unable to establish the period of the loan agreements and how soon the debt is to be extinguished. 

Termination payments

The termination payments paid and payable as termination payments appear to be overly generous and not aligned with shareholders’ interests. 

At last year’s AGM, the resolution relating to proposed changes to then CEO James Spenceley’s termination payments attracted a 23.22% against vote. This year’s remuneration report discloses that following Mr Spenceley ceasing to be the Vocus CEO, he received a lump sum termination payment of $855,000, pro-rata STIs of $227,260 and accelerated vesting of all unvested LTIs for which a share based payment expense of over $1 million has been recognised. 

The remuneration report also notes that the current CEO Geoff Horth receives a termination payment equal to 9 months’ fixed remuneration if termination occurs as a result of fundamental change – this payment is in addition to payments in lieu of notice, accelerated vesting of LTIs on a pro-rated basis, at the board’s discretion. KMP other than the executive directors appear to have similar additional payments ranging from 3 months to 6 months’ fixed remuneration, with additional notice periods/payments applicable for some KMP in certain change of control scenarios.

NED shareholdings

There is some conflicting information in the 2016 Annual Report regarding shareholdings of NEDs.

Summary

As a result of our concerns expressed above, we will vote against the remuneration report. 


ASA Position
For
Item 3a: Election of Mr Jonathan Brett as a Non-Executive Director

Mr Brett was originally appointed to the Board of Vocus in August 1998. The notice of meeting contends that it would be appropriate to regard Mr Brett as having effectively been appointed to the Board in June 2010 as prior to that time, the operations and business of Vocus were formerly known as First Wine Fund Limited, then as First Opportunity Fund Limited. Both businesses involved the provision of capital to companies. Regardless of that point 18 years on the board is well above the period of service where a NED could be considered to be independent. 

Mr Brett is academically well qualified. He chairs the Audit Committee and is on the Risk Committee. He has no other listed company directorships, having resigned as a director of Godfreys in July 2016 and Pas Group on 14 November 2016.  It is noted that Mr Brett was a director of Godfreys since prior the company’s IPO and resigned recently shortly after the CEO resigned suddenly after only five months in the role. We will enquire at the AGM about Mr Brett’s involvement with Godfreys given its disappointing performance since its IPO. 

Further, while ASA has some concern regarding Mr Brett’s extensive period of service on the Board, as the majority of NEDs can be considered independent and some are relatively new to the Board, ASA will support Mr Brett’s nomination.

Mr Brett holds 400,000 shares.


ASA Position
For
Item 3b: Election of Mr Vaughan Bowen as an Executive Director

Mr Bowen co-founded M2 in late 1999, later transitioning to NED in October 2011 and Executive Director at Vocus in February 2016.  He is also Chairman of the Telco Together Foundation, a charity he formed himself, focused on the telecommunications industry. 

ASA will support Mr Bowen’s nomination. 

Mr Bowen holds 8.2m Vocus shares. 


ASA Position
For
Item 3c: Election of Mr Craig Farrow as a Non-Executive Director

Mr Farrow has been a NED and Deputy Chairman of Vocus since February 2016. Previously he was a NED and Chairman of M2 Group. Mr Farrow is Chairman/Partner of SA, Chartered Accountants and former National Chairman of the National Affiliation of Accounting Firms. 

He sits on the Vocus Communications, Nominations, Remuneration and Corporate Activity Committees and also acts as director and adviser to several private consulting and trading enterprises. He has recently been appointed NED at Bulletproof Group Ltd. 

ASA will support Mr Farrow’s nomination.

Mr Farrow holds 658,125 Vocus shares.


ASA Position
For
Item 3d: Election of Mrs Rhoda Phillippo as a Non-Executive Director

Mrs Phillippo has been a NED of Vocus since February 2016. Previously she was a NED of M2 Group. She has extensive executive experience in the communications, energy and IT industries. Currently, she is Executive Chairman of Vix Technology, NED at Vix Investments and Chairman of Snapper Services Ltd (a wholly owned subsidiary of NZ listed Infratil Limited). She also sits on the board of private companies Kiwibank (a wholly owned subsidiary of NZ Post) and IT start up Linq. She is also an Alternate Director for the Future Fund’s Investment in Perth Airport. Mrs Phillippo also sits on the Vocus Communications Ltd Remuneration and Risk Committees.

Mrs Phillippo does not currently hold any Vocus shares. 

ASA will support Mrs Phillippo’s nomination.


ASA Position
For
Item 3e: Election of Mr Michael Simmons as a Non-Executive Director

Mr Simmons has been a NED of Vocus since February 2016. Previously he was a NED of M2 Group. He has significant telecommunications experience having held Executive positions with the SPT Group, now known as TPG Telecom Ltd. He is a member of both the Vocus Audit and Risk committees. 

He holds 19,481 shares in Vocus Ltd. 

ASA will support Mr Simmons’s nomination.


ASA Position
Against
Item 4: Approval of Long Term Incentive Plan

Vocus has a number of equity-based compensation plans currently in operation. This is the result of combining two other businesses over the past financial year. It is intended that no new options or shares will be issued under the existing Employee Share Option Plan or the Loan Funded Share Plan.  The significant features of the proposed LTI plan are:

Performance rights to be issued at no cost, number of rights granted is calculated on a fair value basis. Granted in September, the performance period is over 3 years for the Executive Director, 3 years for members of the executive team and 2 years for other participants.  Performance measures are, a mixture of EPS,TSR, ROI and WACC measures. Actual measures have not been disclosed as it is proposed that they will be determined by the Board at the relevant time of the grant. There is no mention of holding locks.

ASA does not favour anything less than a four year period of measurement, nor does it accept fair value as a calculation to arrive at the number of rights issued. Neither is there any indication of the performance level to be reached before an LTI award is paid. The ASA has long maintained that LTI awards should not commence unless performance is above the 50th percentile of the peer group over a 4 year period.   

The ASA did seek to clarify how “fair value” is arrived at with the company but has not had a response. ASA will not support this resolution.


ASA Position
Against
Item 5: Grant of performance rights to Executive Director Vaughan Bowen

Mr Bowen is an Executive Director of Vocus. In the last three years he was an Executive Director of M2 Group. The grant of 100,000 performance rights is proposed in recognition of Mr Bowen’s ongoing engagement as an Executive Director. It appears that the only vesting condition that applies is continued employment with Vocus. The performance rights will vest over three years in equal proportions. There is no holding lock on the shares issued once the grant vests.

The ASA is generally not in favour of short term LTI plans with no performance conditions. LTIs should only available for growing the business year after year and are designed to align executive pay with the long term increase in shareholder value. However, this grant is really a part of Mr Bowen’s fixed pay. The ASA believes any incentive grants should be subject to clearly disclosed performance hurdles. 

ASA does not support this resolution.


ASA Position
For
Item 6: Change of company name from Vocus Communications Limited to Vocus Group Limited

The rationale for the name change is that as the company’s business has expanded to include electricity, gas and an insurance business the Board considers the name Vocus Communications no longer reflects the nature of the business and that there is more to Vocus than just communications. The ticker code will not change from VOC. 

ASA will support this resolution.


ASA Position
For
Item 7: Increase to non-executive directors’ fee pool

This resolution seeks to increase the fee pool available to NEDs by $600,000 to $1.7 million. The fee pool was last increased in 2015.The Board considers the increase in the pool limit will provide the company with greater flexibility to maintain market competitiveness, in attracting the best NEDs to the Board. We look forward to the appointment of new independent non-executive directors to the Board.


ASA Position
For
Item 8: Contingent Item: Financial assistance

The ASA was advised at the pre AGM meeting with David Spence that this contingent item will depend on what stage the acquisition of Nextgen has reached at the time of the meeting. He thought it possible that it would not be necessary to raise more capital.



The individual involved in the preparation of this voting intention has a shareholding in this company. 


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