Beyond the Greek tragedy at Go plc

The financial results reported by Go plc for the year ending December 31, 2011 will, hopefully, mark an end to a sad chapter in the history of this fallen angel. Brought to the market at a valuation of €212 million in June 1998, Go quickly became one of the darlings of the local stock market. Nestled neatly in the telecom sweetspot, with a monopoly on local fixed line telephony, a 20 per cent stake in Vodafone Malta, then the only mobile operator in Malta and a major player in the provision of internet to homes and businesses, the future looked bright. The market could not get enough of this stock. The frenzy of buying reached fever pitch in March 2000 when Go’s market capitalisation peaked at €770 million or €6.94 per share.

Local investors, especially the larger ones, ought to play a much more active role in voicing their opinion at AGMs and where necessary promoting change and accountability- David Curmi

Last Monday, Go’s shares closed at €0.80 per share. Sadly there are no splits or bonus issues to account for the change from the peak. The brutal fact is that Go is today worth 11.5 per cent of the value it reached at its peak or 38 per cent of its IPO price in June 1998. This is a pretty dismal performance by any standard.

It is easy to allocate blame to the management and board of directors of Go. One can fairly argue that while on their watch approximately €285 million value of Go plc has been wiped out, significantly affecting those Maltese investors who bought into these shares. Even the purchase by Emirates International Communications (Malta) Ltd, part of Tecom Investments, has proved a disastrous investment.

EIC purchased 60 per cent of Go plc from the government of Malta at €3.62 per share in May 2006. Certainly shareholders are right to ask thorny questions of the management and board, and I expect them to do so in the most direct fashion. The board is, after all, the steward of shareholders’ investments and is accountable ultimately to the body of shareholders that places them there. Or are they? This perhaps is the more fundamental issue that investors should be asking themselves at this point in time.

Companies that have used the Malta Stock Exchange as an avenue to raise capital tend to do so by releasing a minority stake to incoming shareholders, retaining all the decision making power through majority ownership. This brings with it both positives and negatives – investors buying in may want to see that the incumbent shareholder has retained a substantial portion as a sign that they still believe in the future of the company. On the other hand this means that the incoming investor can exert precious little influence on the board and management of any listed company.

Take Go plc as an example. The investment in Forgendo /Forthnet was not driven by Go’s desire to expand outside of Malta but by the majority shareholder’s strategy. Go was simply a convenient tool that contained significant cash on its balance sheet at the time and was therefore used as an investment vehicle into the Greek market. Ultimately this investment was flawed and pretty much outside the scope of Go’s operations but the question that this raises is to what extent was the process adopted to make the investment and the subsequent level of disclosures flawed?

Even though the majority investor wished to make this investment, there should be sufficient safeguards to protect the general body of shareholders from decisions that, like this one, have effectively bet the farm on one investment. We live in a democracy and in a democracy, majority wins. Though we don’t know how the local directors voted when making the first decision to invest, the fact that the 60 per cent shareholder wanted to make this investment was sufficient. For the minority shareholder, this is the risk.

Investors buying into local shares need to be aware therefore that besides taking on market risk when buying shares, they are also taking on “minority shareholder” risk which may manifest itself in many forms, as well as corporate governance risk. As minority shareholders, even as a group there is a limited amount that can be achieved. There are numerous examples of local listed companies where majority decisions are taken and outside shareholders are, in my opinion, not treated with the honesty and respect they deserve. This is not to say that minority shareholders should not be more active in the management and board selection of a listed company.

On numerous occasions, I have had the opportunity to suggest that local investors, especially the larger ones (funds and insurance companies included) ought to play a much more active role in voicing their opinion at AGMs and where necessary promoting change and accountability. Sadly we remain lacking in this field.

Each share carries a vote. That right is sacrosanct to the free operation of a capital market. Shareholders should use that right in a more positive way, seeking change where necessary, asking and probing, and demanding greater accountability of directors’ actions.

Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. It is based on public information and should not be viewed as investment advice in any manner. The value of investments may fall as well as rise and past performance is no guarantee of future performance.

www.curmiandpartners.com

Mr Curmi is managing director of Curmi and Partners Ltd.