Related-Party Deals as Control Ratchet

“Stokes continued to look beyond shopping centres. Planning and building regulations were multiplying faster than the population. The fun had gone out of it, and while there was still money to be made, the golden days were over. Having founded CPI as a public company, in 1977 Stokes and Bendat decided to privatise – but through a strange mechanism. Instead of the pair buying directly, their associated private companies, Retford Pty Ltd and Villaro Pty Ltd, employed a mining company, North West Mining NL, to make a takeover bid. The money for the takeover was raised through a loan organised by North West from the merchant banker Hill Samuel, which later became the Macquarie Bank. The loan was to be repaid by declaring a dividend funded from revaluing the shopping centres after the takeover deal was complete. The complicated deal was put together by Geoffrey Cohen, for years Stokes’ corporate lawyer, and director of many of his companies. Also acting for the pair at this time was David Gonski, then with the law firm Freehills. A key feature of the Stokes–Bendat success, as it had been with that of the Stokes and Merifield partnership, was their ability to hire the best advisers and work closely with them. Why was the deal done through the proxy company? Stokes later told journalists there was ‘nothing untoward about it’. The reason had been legal problems to do with tax and capital distribution. ‘It would not have been possible without the interpositioning of another public company.’8 It was less than a complete explanation. Retford and Villaro were trust companies, and the beneficiaries of the trusts were members of the Stokes and Bendat families. The directors were Cohen and a chartered accountant. Stokes and Bendat did not technically control the companies but had the power to appoint and remove their trustees. In fact, they were clearly their companies, used both for this transaction and for their interest in South Western Telecasters. When it came to CPI, Stokes and Bendat were selling their shares to their own associated companies and asking other shareholders to follow. It was effectively a related-party transaction but without the level of transparency that would have been necessary if the deal had been done directly, rather than through North West. The offer document declared that the shares would ultimately be transferred to Retford and Villaro, and it also disclosed that Stokes and Bendat had ‘an association’ with those companies but was less than completely transparent about the nature of the association.”

“In 2011 it was announced that West Australian Newspapers, once a cashed-up, debt-averse and conservatively managed local newspaper company, would bid to take over the whole of the Seven Media Group, in a $4.1 billion merger, creating a new entity called Seven West Media. Stokes controlled both companies, and the deal was yet another immensely complicated related-party transaction. Market analysts agreed that this deal made more sense than the previous merger of earthmoving equipment and media assets. It would bring newspaper and television assets together. The immediate spur was almost certainly that Stokes’ private equity partner, Kohlberg Kravis Roberts, wanted to sell off its investment, having done no better than break even. The deal allowed Stokes to consolidate all his media investments in one vehicle, while allowing Kohlberg Kravis Roberts to leave its Seven Media Group investment without Stokes having to use his own money to buy them out; the money was coming from the West Australian Newspapers balance sheet. The deal meant that $2 billion of debt went into the listed West Australian Newspapers, now reborn as Seven West Media. Kohlberg Kravis Roberts would receive $920 million for its stake, and would be left owning just 13 per cent of Seven West Media, a stake it sold in 2013. The deal gave the Stokes-controlled Seven Group Holdings Ltd increased control of West Australian Newspapers – from 24 per cent up to 33.6 per cent. Once again, debt shifted down the corporate structure, further from Stokes’ private interests, while he increased his equity and control. Financial journalist Alan Kohler described it as ‘deal-making 101 of the Kerry Stokes business school – gaining control of a company without the inconvenience of paying a direct takeover premium’. It was, said Kohler, ‘just about the high-water mark of complicated related-party transactions in Australian corporate history’.24”