Re: Octaviar MFS Premium Income Fund PIF
http://www.goldcoast.com.au/article/2010/01/17/179445_gold-coast-business.html
Michael King opens up about MFS
Nick Nichols, business editor | January 17th, 2010
Michael King opened up to goldcoast.com.au's business editor Nick Nichols about the collapse of his company, MFS. Pic: Michael Ross.
IT WAS a pleasant spring day in Sydney in November 2006 when MFS founder Michael King received a jolt more life-changing than the demise of his business empire.
Mr King was walking through the city bustle from his Bent Street office to a meeting, alone but for the relentless hum of the corporate machine in his head.
Then he collapsed in an unconscious heap on the street.
It was only thanks to the kindness of a stranger that he soon was in an ambulance and swept away to the nearby Prince Alfred Hospital, where he remained in the cardiac care unit for a week.
Mr King's diagnosis was a potentially life-threatening blood clot -- a legacy of a life consumed by the unnatural pressure of billion-dollar deals.
Details of the incident were never made public, and for good reason.
Mr King, the driving force behind the then $4 billion financial services company MFS, was acutely aware that news of the health scare could have a devastating effect on his company's share price, which at the time was sitting comfortably above $4.
A year later, he would be helpless against the powerful forces that would lay siege to all that he had built.
Late in 2007, short sellers were on the scent of unbridled riches, picking the eyes out of a share market that was full of debt-laden balance sheets and drowning in a rising tide of fear.
The sub-prime crisis in the US was getting serious, sucking trillions of dollars out of the financial system worldwide.
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Michael King sheds more than money
The first domestic giant to feel the sting of the market's short sellers was Centro Properties in December 2007.
A month later, the short selling barbarians were at MFS's gates and the Gold Coast company had little more than a couple of hours' warning of their arrival.
On the morning of January 10, 2008, Mr King received a gut-churning call from an institutional broker who warned him that hedge funds were looking to 'short' his company to 'zero'.
While he declined to disclose the identity of the broker, Mr King said he took the threat seriously.
The alarm bells were triggered in earnest that morning when the trading volume of MFS shares exploded by more than five times the previous day to 11.6 million, pushing the share price below $4.
A second assault came the following day, January 11, with more than 15 million shares changing hands and the shares dropping to as low as $3.21.
"It was a problem, and it became a bigger problem as the days went on and as the implications of it grew wider," recalled Mr King in an exclusive interview with The Weekend Bulletin.
The falling share price that Friday -- January 11, 2008 -- triggered a margin call on then MFS director Michael Hiscock's shareholding, wiping out his personal stake in the company.
Apart from margin calls also hanging over Mr King and his business partner Phil Adams, the falling share price was also putting pressure on the group's tenuous debt position.
All options were placed on the table, with wealth manager UBS recommending MFS raise $550 million through a rights issue.
The funds would help repay $150 million in debt owed to Fortress Capital at the end of March 2008 as well as providing working capital to help the planned spin-off of tourism and travel group Stella into a separate company.
In hindsight, the advice was flawed -- largely due to its unfortunate timing.
In early 2008, any company that went cap in hand to investors seeking a cash injection was thought to be on the ropes, perhaps even suicidal.
Of course, Mr King didn't help matters when, two months earlier, he told the market MFS had no need to raise fresh capital.
It was little wonder then that short sellers were on a 'bet the house' winner that would eventually claim billions of dollars in investor funds as the company crashed and burned in less than an hour on the morning of January 18.
The fact that UBS was willing to support MFS by underwriting the new share issue was swept aside that Friday morning during a disastrous conference call to brokers and investors.
Mr King, who is a measured orator and is still regarded in the industry as one of Australia's foremost authorities on funds management law, uncharacteristically lost control of his audience that day, and possibly with good reason.
Mr King fronted brokers and analysts at the teleconference after he and his team spent three sleepless days putting together details of the $550 million issue with UBS.
"We basically worked 24-7 on that proposal," he said.
Mr King took the microphone on January 18 with his mind not as sharp as usual.
During a gruelling session of questioning, many peppered at him by Lehman Brothers analysts, the MFS share price went into a death spiral, falling from $3.18 to a close of 99c.
The short sellers made a killing.
If the Friday conference was tough, Mr King's weekend was not much better.
With his fortune gone and his company on the brink, Mr King began negotiating with six different parties who had lined up with their own brand of opportunism to secure MFS assets.
Among them was Macquarie Bank, which wanted to buy MFS's tourism company Stella Group, and Challenger Investments, which wanted to inject capital into MFS.
The ill-fated City Pacific also was in the mix, after a previously unsuccessful attempt at a merger with MFS.
The capital-raising proposal ultimately sounded the death knell for MFS, which, under its present guise as Octaviar, is in the throes of liquidation.
But advice from Macquarie Bank six months earlier was equally critical to its fate, showing that no one was anticipating the catastrophic events of 2008.
Macquarie compiled a 500-page report for MFS in which it recommended it should not sell Stella, a business which cost $2.2 billion to assemble.
It was advice MFS did not ignore.
In November 2007, it rejected a $1.7 billion offer from CVC Asia Pacific for Stella, only to be forced into a fire sale to the same raider in February 2008.
Mr King does not resile from his own errors of judgment.
One of them was his decision to quit as MFS chief executive during the weekend following the conference call.
GAfter emailing staff Saturday morning on January 19 that he would stay the distance, Mr King said he ultimately decided at 11.30pm the following Sunday night that the best course would be to relinquish his position.
It was doubtful that outcomes would have been much different had he remained in the chair.
But MFS and Michael King were inextricably linked.
Mr King built the company deal by deal, and there was no denying his departure put both internal management and institutional investors into a bigger panic than they had been the previous week.
He said the loss of confidence in the company was too much to overcome at a time when the world was on the brink of economic chaos.
"The people that owe you money don't want to pay you, and the people you owe money to want to be paid yesterday," he said.
"The deals you've got on the go that will grow your future profits disintegrate, and overnight you go from everything being sweet to it all being over.
"Whether anything changed between the Thursday and Friday didn't matter.
"It was a complete play into short sellers hands."
Mr King ultimately blames himself for not being better prepared for the rout.
"My job was to see all risk and manage all risk, even if that risk was fair or unfair."
"Not only did (short sellers) charge at a company, but even the fact that they might charge at a company was enough to scare everybody out of that company.
"Everyone in the game knew what was going on and if you thought they were going to target a company you had invested in, there was no point in hanging around."
Market analyst Charlie Green, formerly a long-time supporter of MFS, is probably the man who crystallised the collapse of MFS.
He's the one who called it 'all over' during the teleconference.
"I don't think you'll make Valentine's Day, Michael," Mr Green told Mr King at the time, and he was right.
He stunned market observers when he opened fire on Mr King that morning.
Normally it would have been the kind of conversation held behind closed doors.
Mr Green this week played down his role in the demise of MFS.
"I don't think it had anything to do with the conference call, but everything to do with MFS overpaying for assets," he said.
But there was no denying his effect on the share price on the day.
It also was the beginning of years of pain for the thousands of investors who were either shareholders in Octaviar or unitholders in any of its funds.
Although creditors are still squabbling over the $130 million in cash the company still holds, the good news is that all of Octaviar's businesses - Stella (now known as Mantra Group), GEO Property Group, Living and Leisure Australia and HFA Holdings - have made a new start.
Certainly, investors in these companies have a long way to go before they claw back their losses, as do unitholders in the Premium Income Fund.
Octaviar shareholders can only count on a tax write-off.
The pain of the past remains raw for some, while others have moved on.
Some may still blame Mr King for the devastating collapse, but others have taken it in their stride.
The body count across the Australian Stock Exchange in 2008 - including the likes of Allco Finance and ABC Learning Centres - made it clear we were all in exceptional times.