Shareholders of Worleyparsons Limited (ASX: WOR) are starting to understand first-hand the African proverb "when elephants fight, it is the grass that suffers".
The new twist in the fight between management of the oil and gas engineering contractor and its biggest shareholder, Dubai-based Dar Group, is the takeover of 3sun Group Ltd.
The Worley share price inched up 0.2% to $13.72 in morning trade, matching gains on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, after it announced that it would buy the UK-based company for an enterprise value of £20m.
But the stock is lagging its other engineering groups. The Lendlease Group (ASX: LLC) share price jumped 1.1% to $18.28 while the Downer EDI Limited (ASX: DOW) share price rallied 0.5% to $8.14 at the time of writing.
Governance risks uncomfortably high
I think Worley's share price is undervalued on a medium- to longer-term outlook (and that's why I hold the stock), but my worry is that the shares will remain depressed for longer as governance risks have increased.
Minority shareholders are trapped between Dar wanting to launch a takeover-by-stealth campaign and avoid paying an appropriate premium for control, and management who seems out of touch with investors with its poor decision to award bonuses to its CEO and CFO for completing the $4.6 billion acquisition of Jacobs' energy, resources and chemicals business.
The transaction left investors nursing big losses as the stock tumbled from its five-year highs of over $19 a share.
Worley is trying to stop Dar from increasing its stake in the company beyond its 20% holding under creep provisions (this allows major shareholders from increasing their holding by 3% every six months beyond the 20% cap). The stakes are even higher now that Worley received its first strike against its out-of-touch remuneration report.
Board spill conundrum
A second strike (where at least 25% of votes are cast against the rem report) will allow shareholders to spill the board and appoint new directors, which Worley believes will play right into the hands of Dar.
If Dar is allowed to lift its stake under the creep provisions, it can single-handedly throw out the board and put its directors up for nomination.
That won't be in the interest of ordinary shareholders and it remains to be seen if management will rely on this fear to do what it will to reward its top executives next year. I don't think so, but it's a risk that needs to be considered.
I can deal with systemic risks (that's risk around the industry, such as a company having to whether an economic downturn), but it's totally different matter for non-systemic risks (where the risk is specific to one company, like governance).
History taught me to sell first and ask questions later when it comes to the latter, even though the 3sun acquisition looks interesting given the UK's pledge to stop using coal power by 2050.
This means the country will increasingly have to rely on alternatives, like offshore wind power. That's the area that 3sun focuses on.
Shareholders will need to watch this space closely.
