Leighton Holdings Ltd. Chairman Stephen Johns resigned along with two non-executive directors at Australia’s largest construction company, citing a dispute with its controlling shareholder Hochtief AG.
The departures follow a perceived breakdown in relations and their view that Hochtief no longer supports an independent board, according to a Leighton statement today. The German builder said separately that it supports the management team and will support efforts to “solve this situation quickly.”
Leighton shares fell the most in 10 months and Standard & Poor’s placed the company’s debt on a negative credit watch. Johns’s appointment in August 2011, a day before the company appointed a new chief executive officer, wasn’t driven by Hochtief or its own controlling shareholder, Spain’s ACS Actividades de Construccion y Servicios SA, he said at the time.
“This is pretty extreme action,” Jeremy Hook, who helps manage about A$250 million as investment director of TMS Capital Pty., said by phone from Sydney. “Anyone who’d be appointed hereafter would find it very, very difficult to present a proper, independent approach.”
Hochtief shares dropped 4 percent to 52.14 euros in Frankfurt as of 11:08 a.m. local time.
The resignations signal “a potential breakdown in the governance arrangements” put in place by Hochtief and endorsed by ACS, S&P said in an opinion putting a negative outlook on its BBB- rating.
“The weaker credit quality of the parentage is an important factor and a constraint on our overall rating assessment of Leighton,” the company said.
Hochtief has been a shareholder in Leighton since 1981 and now holds 53 percent of the Sydney-based company’s shares, according to its website. Leighton dropped 6.9 percent to close at A$20.20 in Sydney.
“It is way too early to suggest that Leighton could be subject to a degree of potential capital stripping by the majority shareholder Hochtief/ACS,” Michael Bush, head of credit research at National Australia Bank Ltd. in Sydney, wrote in a note to clients. Still, “that issue will certainly now receive greater attention from investors,” he added.
Leighton’s net debt, at 0.42 times its earnings before interest, tax, depreciation and amortization at the end of December, leaves it with less than half the gearing of Hochtief, at 0.89 times, or ACS, at 1.76 times, according to data compiled by Bloomberg.
Net income of A$450 million last year was more than double the 158 million euros reported by Hochtief, while ACS lost 1.93 billion euros in the 12 months ended December.
Ian Macfarlane, a former governor of the Reserve Bank of Australia, and Wayne Osborn, also stepped down from the 10-person board. Osborn is also chairman of Leighton’s Theiss mining services business and the head of Alcoa Inc.’s Australian unit, according to data compiled by Bloomberg.
The departures “should be taken as a real shock,” Simon Fitzgerald, a Sydney-based analyst at Moelis & Co., said in an e-mailed response to questions. “Time will tell if there is anything more behind this, but given the company’s history investors are going to be nervous.”
Justin Grogan, a Sydney-based spokesman for the company, didn’t immediately reply to a message and e-mail seeking contacts for the directors who resigned.
“There have been a series of events in recent months which are open to interpretation,” Leighton said in a second statement released after the market closed in Sydney today. “The remaining Australian directors have a different view about how to interpret these events to the resigning directors.”
The company’s arrangements over board independence were in place and the remaining Australian directors “are not aware of any specific information that Hochtief no longer supports these arrangements,” the company said.
The board will convene over the weekend to elect a new chairman, according to the statement. Directors of Hochtief and ACS hold three of the eight non-executive director seats on the board.
Leighton has aligned more closely with Hochtief and ACS over the past year. It moved its financial year end to December and added the Spanish company’s construction head Marcelino Fernandez Verdes to its board.
Moody’s in October 2011 dropped Leighton’s credit rating to Baa2 with a stable outlook, referencing the influence of Leighton’s shareholder structure on its credit position.
The interests of Hochtief, and ACS through Hochtief, are not perfectly aligned with the interests of minority shareholders in Leighton, the ratings company had said. The rating would be pressured if there were signs that Leighton was losing its operational independence, particularly around setting dividends, Moody’s said.
Leighton’s business in Australia accounts for just under half of Hochtief’s 25 billion euros in revenue, according to data compiled by Bloomberg, and is home to about 35 percent of its assets.