Anz Chief Leads High-powered Charge To Get To The Bottom Of Opes Debacle

The Age

Tuesday April 15, 2008

Malcolm Maiden

Probe amounts to an audit of the bank's legal, risk management and ethical conduct.

THE old media saw is that when somebody tells you they have done everything possible to respond to a crisis, the first question is: yes, but is everything enough? It might apply to ANZ, depending on what comes out of chief executive Mike Smith's elevated investigation into the Opes Prime debacle.

Smith decided on a detailed probe when he was in China last week, and informed the Australian Prudential Regulation Authority. The bank's board signed off on it on Thursday.

He is taking personal charge of the probe, and it will be co-ordinated by a quality independent name - David Crawford, who was a director of Westpac from May 2002 until December, and a corporate insolvency specialist in his executive career.

Two senior ANZ executives who have no present or former connection with the Opes account, Esanda managing director David Hisco and the bank's recently hired head of risk, Asia Pacific, Chris Page, will assist.

The starting point is a just-completed internal report on Opes and other securities industry loan exposure by ANZ's head of institutional banking and former chief risk officer, Peter Hodgson, and the brief is wide, with Smith commenting internally that he intends to "take the drains up".

It will consider how ANZ became involved with the Opes broking outfit in particular and with securities lending generally, whether any ANZ employees breached ANZ policies and standards, and whether all relevant laws were complied with.

ANZ, for example, never disclosed any beneficial interest in the Opes client share portfolios it held as security for $650 million of loans to Opes before the broker collapsed and the bank began selling the shares to reclaim its money. It is also unclear how aware the bank was that many, perhaps most, Opes clients were oblivious to the fact ANZ could sell their shares to cover loans to the broker. Smith says he will report on the key findings of what will, in effect, be an audit of ANZ's legal, risk management and ethical conduct with regard to Opes and other securities lending relationships, and announce whatever remedial programs are needed.

It sounds like everything - but is it enough? Any remedial action is at this stage intended to be restricted to ANZ. There is no apparent change in ANZ's view that it was, and is, legally entitled to sell the Opes client share portfolios. Whether Smith can defend that in a reputational sense at least depends on what the investigation he has commissioned turns up.

TIGHTNESS in debt markets has prompted Incitec Pivot to weight its takeover offer for explosives maker Dyno Nobel towards shares, and the decision is paying off as Incitec's share price surges on the back of booming fertiliser prices.

Short-sellers who attacked Incitec when the bid was announced in mid-March are being squeezed out, and the value of the offer is rising to a point where the deal looks certain to sail through.

Incitec and Dyno announced on March 11 that they intended to marry by scheme of arrangement, with Incitec offering 0.01406 of its highly priced shares plus 70? cash for every Dyno share. Based on Incitec's share price of $149, the offer valued Dyno at $2.80 a share, with three-quarters of the consideration carried by the share component.

The share-cash split would have been more like 50:50 if the debt crisis had not intervened, but by March it was clear debt costs were rising, and Incitec's share price had also soared, from $43.67 a year ago to a high of $174.01 about a week before the bid was launched.

Incitec stated that it would issue more shares if necessary to create a floor bid price of $2.64 a share, but retained the right to withdraw entirely if its share price averaged less than $126.96 in the 10 days before final court approval.

The first clause became immediately relevant when hedge fund selling drove Incitec's shares down by 12.1% on bid announcement day, from $149 to $130.94, and the shares hit a low of $127.80 two days later, valuing the Dyno offer at just $2.50 a share.

But they were back above $130 a share a week later, climbed from $137.90 to $153.07 last week, and in a market that fell by 1.8% yesterday, soared by $6.89, or 4.5%, to $159.96.

Fertiliser prices that are leaping in the face of a global shortage are the force behind the price rise. Diammonium phosphate (DAP), which Incitec's Southern Cross subsidiary produces, was, for example, selling for $US252 a tonne in January last year. This week, buyers in Asia are offering $US1300 a tonne, after an announcement by China that it is introducing a 100% duty penalty on exports of the chemical - a move that could reduce global supplies by 20%.

Last month, Incitec predicted an average price of between $US760 a tonne and $US790 a tonne for DAP in its year to September, and earnings before interest and tax (EBIT) of $700 million to $730 million. Morgan Stanley predicted yesterday that DAP would average $US929 a tonne this year, and $US991 a tonne in 2008-09. The broker estimates Incitec's EBIT will be $883 million this year, and has a share price target of $180.

All great for Incitec, and its bid. The offer is now valued at $2.95 - 15? a share better than when it was launched, and 31? above the $2.64 floor. Scheme documents are with the Australian Securities and Investments Commission, and Dyno's shareholders are likely to vote on the union next month. At these prices, a "yes" vote is a formality.

mmaiden@theage.com.au

© 2008 The Age

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