10

Powers Play

Geez, you’d be perfect for it.

Kerry Packer to Brian Powers, May 1998

I’d love to own Fairfax, I’d love to control Fairfax, I’d love to run Fairfax. And at any point in time I may do it because, you know, I’m only responsible to you blokes while I have a television station, and at any point in time I can sell the … television station and do what I like.

Kerry Packer, ABA inquiry, October 1998

It was like Groundhog Day, the 1993 Hollywood rom-com in which Bill Murray is stuck in a time loop, restarting the same day over and over again—no matter how much he tweaked events within those twenty-four hours. In this particular version of the movie, Kerry Packer was seated in his Park Street office in Sydney, once again explaining to those gathered that his chief executive was resigning to take a top position at the Fairfax media group. It had happened before, in 1991, with then chief executive Trevor Kennedy. Now it was May 1998 and Brian Powers was the chief executive who was leaving Packer to save Fairfax. A few months later, a different loop would be in motion—Packer would once again appear before a media inquiry to explain, once again, that he didn’t control Fairfax. How long could this go on?

In attendance at the May 1998 meeting were the big man himself, his son James, chief executive Powers and long-term investment adviser Ashok Jacob. Also present was Gary Weiss of the investment company Tyndall Australia. Tyndall had been set up by Weiss and legendary corporate raider Ron Brierley in the early 1990s after they had pulled back from BIL. The company, sensing that a juicy corporate transfer was about to happen, had picked up a 5 per cent stake in Fairfax.

Packer laid it straight out on the table. ‘We want your support’, he told Weiss. ‘We’re going to put Powers on the Fairfax board.’

Powers was leaving the Packer fold and returning to Hellman and Friedman. Five years in Australia was enough—he wanted to be living in the United States again by the end of the year; his son was ready to start college. But he also wanted to maintain the connection he’d forged. As a non-executive chairman of an Australian company, he could commute from the United States for board meetings. And Powers wanted to have a go at Fairfax. The plan, Packer explained, was to force an extraordinary general meeting, or EGM, of Fairfax and spill the board.

Weiss had no problem backing Powers for a board seat—Fairfax was languishing, the share price was falling, costs were blowing out, and the controlling shareholder, BIL, was about to implode. But, he said, why risk another major confrontation? The Friends of Fairfax would be marching in the streets again. It was madness. Weiss had a better plan. Just go straight to the Fairfax board, lay out the numbers and threaten an EGM. The directors were bound to fold.

The stars seem to have aligned for Brian Powers in May 1998. It is tempting to believe now, with the benefit of hindsight, that his power play for Fairfax had been months in the planning. The idea is even more persuasive if the events of some eight months earlier are revisited.

Three days after Howard announced, on 1 September 1997, that he was ducking for cover and delaying any change to cross-media laws until the next federal election, Packer launched a new plan for his Fairfax stake, the architect of which was Brian Powers. The 14.9 per cent Packer stake in Fairfax, held by his public company Publishing and Broadcasting Limited, was sold to a new entity, FXF Trust. The board members of FXF were Neville Miles, the Ord Minnett stockbroker who had been a key part of Tourang’s successful bid for Fairfax; Michael Hoy, a former deputy managing director of Fairfax; and Rod McGeoch, who had headed up Sydney’s successful bid for the 2000 Olympics. It was an impressive crew.

‘There will be no Packer, or Brian Powers, or any other director of CPH [Consolidated Press Holdings] on the board of the management company’, Powers declared. Well, not yet anyway. The purchase of the PBL stake in Fairfax delivered the Packer family nearly $300 million in cash and 45 per cent of FXF Trust. Through this, they still effectively controlled the 14.9 per cent of Fairfax. Yet FXF Trust could more than double its stake in Fairfax to 30 per cent without breaching the cross-media laws. It was perfect.

FXF spent months pushing for a board seat at Fairfax. BIL, as the controlling shareholder, was dismissive, even insulting. The company’s chief executive, Paul Collins, said in a Fin Review story in November 1997, ‘I don’t believe it [FXF] needs additional representation. If [Packer] wants someone else on the board, he has to get [someone] to resign’. This was a thinly veiled reference to the ‘Packer bloc’ already on the Fairfax board.

Neville Miles was the original FXF nominee for the board when the push began. But Powers and Packer could see the corporate dynamics changing. The key was BIL. It was in danger of falling over, and Rod Price, chairman of Fairfax as BIL’s nominee, looked like being one of the first casualties in the executive ranks. This was a great opportunity—the chairman’s position at Fairfax would be up for grabs.

By February 1998, rumours were sweeping the market that BIL’s main shareholder, Camerlin Ltd, had had enough. Camerlin, owned by Malaysian billionaire Tan Sri Quek Leng Chan, was forcing a shake-up at BIL—a much-needed one. This was a conglomerate that had grown like Topsy and was under severe financial pressure. BIL owned 42 per cent of Air New Zealand, 46 per cent of Britain’s Thistle Hotels, 24 per cent of Fairfax, 28 per cent of the industrial group James Hardie and 50 per cent of Auckland’s Sky City casino, as well as big stakes in a US healthcare company and a British brickmaker. It was all over the place in terms of asset allocation and unwieldy to manage. The Asian financial crisis of 1997–98 had also hit it hard. Asian tourism had slumped, slashing $400 million off BIL’s Air New Zealand stake.

Ron Brierley and Kerry Packer were looking at taking out Camerlin’s 20 per cent stake in BIL. This never eventuated. But Brierley and Packer knew BIL was on the brink and this had implications for Fairfax.

In April, a boardroom purge was forced by Camerlin and other investors. BIL chairman Bob Matthew and chief executive Paul Collins resigned. As Ivor Ries wrote in the Fin Review at the time, ‘A big asset-rich company like Brierley, without a chairman or chief executive, is like a chunk of bleeding meat bobbing around in shark-infested waters’. No prizes for guessing who were among the sharks.

With Matthew and Collins gone from BIL, Price, who held the prized Fairfax chair, was likely to be next. Powers chose this time to move. When he told Packer of his decision, the response was, ‘Geez, you’d be perfect for it … but if you don’t get to chairman or deputy chairman you’d be wasting your time’. The strategy that Powers and Packer devised was daring. Powers would buy 15 per cent of FXF from PBL, leaving PBL with 30 per cent. Powers would use bank funding secured by a limited recourse guarantee from Packer’s CPH for $12.2 million. Powers was also given a two-year consultancy agreement with the Packers at $4000 a day for no more than seventy days a year.

It was an elegant and lucrative exit strategy for Powers—and he knew that he needed one. Kerry Packer was very ill. His doctors had told him he needed another dangerous heart operation. He was handing more and more responsibility over to his son James. Powers got on very well with Packer senior, but his relationship with James was not as close. He had given the Packers five years. It was time to move on.

Powers’ departure signalled the formal anointing of James Packer as the successor at CPH and PBL—he became chairman of the former and chief executive of the latter. All in all, it was a pretty clean manoeuvre for a family company. The next step was to get the agreement of the Fairfax board. FXF wrote to the board in terms eerily similar to those that would be used by Gina Rinehart some fourteen years later:

You will appreciate that the FXF Trust has a very large investment in your company and we have had to stand by and watch it drop in value over the entire period it has been held. We are aware … that a number of major shareholders in the company are presently concerned at the direction, not just of the share price but of the company’s operations as a whole.

When the board became aware of the backing from key institutional shareholders for Packer’s proposal, they quickly realised that the numbers were stacked against them. They agreed that a representative of FXF Trust could join the board, but doubts were expressed about whether Neville Miles was the right candidate. The Fairfax board at this stage had no idea of the plan that Powers and Packer had cooked up. At least, most of the members didn’t, until twenty-four hours before the appointment was due to be confirmed.

It had been a tense meeting of the Fairfax board on Monday 18 May. Chief executive Bob Muscat had informed members he could no longer work with John Alexander, the editor-in-chief of Fairfax’s biggest single money earner—the SMH. When board members retired for lunch, they were due to meet their newest member. They had been told over the weekend that the FXF candidate would not be Neville Miles but Brian Powers. As the board members sat down with Powers in the dining room at Darling Park, PBL was announcing to the stock exchange the changing of the guard in the Packer family. This was huge news. Yet, until the day before, many of the directors of Fairfax, arguably the most prestigious news company in the country, had been completely in the dark.

It was a fait accompli—Powers was in. And just eleven days later, he was chairman. Powers had judged it right. Rod Price had been turfed out of BIL and, as a consequence, he had to step down at Fairfax. And then came the strangest part of all. BIL, even though it was the biggest shareholder, was happy to let go of the chairman’s position. Brian Powers was elected chairman unopposed.

How did Powers pull this off? Powers’ version is that Fairfax director Roger Douglas, a former New Zealand finance minister and a BIL representative on the Fairfax board in 1998, suggested that he, Powers, would be the best person for the job. BIL was in turmoil and Fairfax was way down their list of priorities at that stage. Other Fairfax directors agreed about Powers.

As David Gonski explains it: ‘Fairfax needed a much more hands-on chairman at that time. The business had a lot of decisions to make, the business needed to be corralled. To this date I don’t know why he wanted to do it, but we were fortunate that Brian was keen. He was offering, as a non-executive director of the company, to put in three to four days a week. And he lived up to that. He took an office there and he became deeply involved in the company. We [at Fairfax] were looking for direction and love and that was why the board felt that Brian could do it and I believe it made a difference’.

Powers’ timing had been perfect. Now he held the number one spot at Fairfax. But it had been too easy and the Australian Broadcasting Authority had no choice but to call an inquiry, which took place between May and October that year. A key issue was whether, with Packer’s former right-hand man as chair of Fairfax, just eleven days after he’d stepped down from PBL, Packer now controlled Fairfax in breach of the cross-media legislation. There were two questions to answer: Were Packer and Power associates? And if so, did Powers—and, by extension, Packer—control Fairfax?

The evidence presented to the ABA inquiry on association was compelling. Not only did Powers have a five-year employment history at PBL, he continued to consult for Packer under a lucrative two-year contract. In addition, PBL still provided secretarial services for Powers and paid the rent on his home in the eastern Sydney suburb of Vaucluse, his mobile phone bill, and his memberships at the Australian Golf Club and the White City Tennis Club (although these charges were later reimbursed).

And, on the issue of control, Powers had been an unusually interventionist chairman from day one. He was personally involved in negotiations for a potential tie-up between Fairfax’s digital division and PBL’s Ninemsn. He intervened to stop Fairfax repurchasing The Canberra Times. And he joined three of the four board subcommittees—finance, audit and strategy review—and was chair of the nominations subcommittee. To top it all off, when Fairfax CEO Bob Muscat resigned, he headed up a three-man committee to run Fairfax while a replacement was found.

For some reason, the ABA decided to limit its inquiry to the period from 18 May to 24 August—that is, from the date Powers joined the Fairfax board to the date Muscat resigned. This was to prove critical in the final decision. In the meantime, the ABA inquiry provided some every entertaining evidence, albeit all of it in-camera.

Packer had been too sick to appear in the early sessions of the inquiry. He underwent a heart operation at New York’s Cornell University Hospital in July 1998, booking himself in under the name ‘James Fairfax’ and directing hospital personnel to tell anyone who inquired that he was dying. (Packer might have been sick but he hadn’t lost his sense of humour.) When he finally did give evidence in October, he didn’t disappoint. It was vintage Packer, once again.

‘Operations don’t worry me a lot’, he confided when investigators asked why he had found it necessary to have lunch with Powers and Muscat in Fairfax’s Sydney offices on 20 July, the day before flying to the United States for surgery. ‘That may sound very strange to you, but I’ve had a lot of them and I believe I’m bulletproof.’

As for Fairfax itself, Mr Packer said, ‘I’d love to own Fairfax, I’d love to control Fairfax, I’d love to run Fairfax. And at any point in time I may do it because, you know, I’m only responsible to you blokes while I have a television station, and at any point in time I can sell the … television station and do what I like’.

He was also questioned about the $12.2 million loan to Powers to buy his FXF stake. Wasn’t this a little unusual, a very big decision? ‘I end up lending money to all sorts of people who I don’t have anywhere near the relationship with that I have with Brian Powers’, replied Packer, adding that ‘the financing of Brian’s shares is a conversation which would have taken fifteen seconds’.

Later, Packer was asked why the ABA should be satisfied that he was now not acting with Brian Powers in relation to Fairfax, to which he responded: ‘Because I am not a liar and I am telling you I’m not. I do not control Fairfax and I never ever have, much as I would like to, and much as one day maybe I will … not for one second of one minute have I ever controlled Fairfax, unfortunately. If I controlled Fairfax, do you think they’d run the stories they run about me? I mean, I would have thought it was self-evident that I have no damned control of Fairfax’.

Packer was foul-mouthed and dismissive. He had recently faced his own mortality and he didn’t have to put up with this meaningless bureaucracy in the few years he had left. He wasn’t holding back but, rather, was happy to share his views on all and sundry. Mark Burrows, the investment banker who had led the Fairfax auction for the receiver and the banks, was described as a ‘merchant bloody banker; they sell out for two bob’. Bob Muscat was ‘a weak man … Rupert’s stooge’. Greg Gardiner was ‘a joke’. Stephen Mulholland was ‘an absolute joke’.

As for Fred Hilmer, the recently appointed chief executive of Fairfax, Packer said, ‘I wouldn’t fucking hire him as a sweeper. For Fairfax to be run by a management consultant is just an act of stupidity. I think it’s ridiculous … He came from McKinsey and he has never run a business in his life. Now, if that is the right criteria for running a newspaper business then I am a Dutchman’.

And on the Fairfax business model, Packer asserted: ‘I am not sure what the future of Fairfax is without classifieds [but] without classifieds they’re a dud business, they’re going to go broke’.

The ABA was very slow in producing a decision. When its report was finally aired in March 1999, it was declared that neither Packer nor Powers had broken the cross-media laws, which prevented anyone from owning both a TV station and a newspaper in the same city. Despite the compelling evidence of an association between Packer and Powers—the loan, the consultancy, the Vaucluse house, the club memberships—the ABA had decided not to address this question. Instead, it had focused on whether Powers ‘controlled Fairfax’. It decided that, as he was only one of several board members, he did not control the company; therefore, the issue of an association with Packer was irrelevant.

It was a very convoluted decision and an embarrassment for a government regulator. The inquiry had taken eight months. The report was 181 pages long. Yet, to many, it seemed that the ABA had only managed to dodge the issue at hand.

The backstory of the delayed ABA report is intriguing. Much of it centres on the role of the then chair of the authority, David Flint. An avowed conservative, a monarchist and a vocal supporter of Kerry Packer and radio shock jock Alan Jones, Flint was decidedly unpopular with his fellow ABA board members. Their decisions were often six to one, with Flint in the minority.

Flint was rolled by fellow ABA board members on the first draft report of the Powers/Packer inquiry. The draft stated that there was an association between the two men at the heart of the investigation, but ducked the issue of control. Flint disagreed with this decision and insisted that he write a dissenting minority report. The other board members were astounded. This wasn’t the High Court, this was a government regulator. It was bound to provide a clear decision.

Flint’s minority report was almost unreadable, its flowery language peppered with Latin references. Two other ABA board members, Michael Gordon-Smith and Ian Robertson, decided that they, too, could play this game. They would write their own minority report. This one was direct, readable and explosive. The conclusion—there was an association between Packer and Powers, and, therefore, control.

The stand-off lasted several weeks. Eventually, Flint relented—he would withdraw his report if Robertson and Gordon-Smith would withdraw theirs. The final report was a compromise. Flint was off the hook—he hadn’t betrayed Packer. The remaining board members consoled themselves with the flimsy justification that by the time the final report came out, the association between Powers and Packer, or proof of it, was gone. The consultancy Powers had at PBL had been terminated. The leases, club memberships and mobile phone bills had been transferred. There was no provable ongoing association, so even if the ABA found against Powers and Packer, it would be looking at a historical breach. Powers had been chair of Fairfax and owned his stake in FXF for nearly a year. It could not be undone.

This decision should be a case study in regulatory cowardice. Instead, it has been forgotten.

This is almost as baffling as the unusual corporate animal that was the new Fairfax board of the 1990s. It was not at all like the old Fairfax board or the young Warwick board. These were essentially family affairs with a few close connections granted privileged seats—very similar, in fact, to the way Packer and Murdoch handled their board structures. It wasn’t like a traditional public company board, either. Rather, the new board was ridden with factions, suspicions, even paranoia, but mostly inaction. One skill it rarely possessed was media expertise, a problem that has plagued it ever since.