Jodee, Bradley and their team have achieved enviable results in a very short time.
John Greaves, One.Tel chairman
Concealing the chaos inside One.Tel was one thing. Hiding the fact that its finances were in a mess was much harder. Every six months, the company was required to report its results to the Australian Stock Exchange, and every year it had to publish a full set of accounts. As time went on, the financial press became increasingly keen to pull these figures apart, but in August 2000, their work was done for them when the Australian Securities and Investments Commission (ASIC) insisted that One.Tel deduct millions of dollars worth of advertising and customer acquisition costs it had previously been deferring.
ASIC had told One.Tel several months earlier that the practice was a rort that breached Australian accounting standards and the Corporations Law, so the company was forced to declare an extra $173 million of costs that it had previously been burying in its balance sheet. As a result, the company plummeted to a shocking $291 million loss, or almost 50 cents for every dollar it collected. Even without ASIC’s intervention, the company was deep into the red.
One.Tel’s spin doctors explained to the press that losses were to be expected because the company was growing fast in Europe and Australia, and spending heavily to set up offices and acquire hundreds of thousands of new customers. But the obvious question was whether it would ever get its money back. The Dutch operation had lost $34 million, the UK business had lost $39 million, and the French venture had lost $40 million. Finally, the Australian operations, including the new local call business, had managed to lose more than all three foreign ventures put together.
Nor was the cash flow any prettier. In the year to June 2000, One.Tel had ripped through $169 million in its day-to-day operations, or six times as much as in 1999. If you added what it had spent on spectrum and hardware, it had consumed almost $800 million. This meant that it had eaten up all the money it had raised from PBL, News Ltd and the other investors during the year.
Worse still, as Keeling admitted to journalists when the results were announced, there would be another massive loss in 2001 and a third in 2002, because One.Tel’s new mobile network was about to start haemorrhaging cash.
Needless to say, none of this was highlighted in the glossy annual report that One.Tel sent to its shareholders in September, which managed to avoid using the word ‘loss’ in the first 37 pages. There was nothing about the $291 million loss in the chairman’s letter or the personal missive from Jodee. Nor was there any mention of it in an entire page of ‘Key Financial Information’ about the company. Strangely enough, the directors also felt it too trivial to talk about in their review of operations. It was in the accounts, of course, as it had to be. And there was one solitary line in the directors’ report, in the boring grey pages at the back, which reported blandly that: ‘The consolidated loss of the Consolidated Entity after providing for income tax amounted to $291.1 million’.
As always, the rest of the One.Tel Story was about ‘success’, ‘achievement’, ‘growth’, ‘the future’, ‘exciting opportunities’ and a whole range of businesses that were going to become profitable very, very soon.
The losses were not the only topic that One.Tel’s annual report glossed over. Deep in the financial statement, where companies have a statutory duty to disclose what they have paid their directors, was the extraordinary revelation that Brad and Jodee had helped themselves to bonuses of $6.9 million apiece—on top of annual salaries of $560,000—despite the company’s shocking performance.
Amazingly, only one journalist was alert enough to spot it. A couple of hours after One.Tel had finished an extremely positive press conference, Christine Lacy of the Australian Financial Review rang the company’s new head of investor relations, Tracy Cutting, to say she had been leafing through the figures and wanted to know what Rich and Keeling’s bonuses were for. Alas, poor Tracy couldn’t tell her, because no one had warned her that Jodee and Brad had been given an extra sack of money—even though she was effectively the company’s PR manager. And neither Rich nor Keeling could even be raised for a comment.
The next morning it was front-page news in the Australian Financial Review and the talk of the town. The company’s chairman, John Greaves, tried his best to justify the bonanza by telling the public: ‘Jodee, Bradley and their team have achieved enviable results in a very short time, and One.Tel has always adopted the policy of rewarding its employees for success’. He was drowned by a chorus of outrage.
Bankers Trust and the other institutions that had stumped up $340 million only six months earlier—after which the share price had fallen steeply—were probably the angriest of all, because they had been kept completely in the dark about the payments. But they were hardly alone, as every man and his dog joined in the attack: on talkback radio, in the letters columns, in the press and in parliament. Jodee and Brad had taken home more than any other executive in Australia except Frank Lowy, the founder of Westfield, whilst presiding over one of the biggest corporate losses of the year. To many, it seemed like the 1980s were back, and greed was good all over again.
One.Tel provided no detail as to why the bonuses were paid, but it was presumably connected with the company’s share price, which had briefly pushed Rich’s fortune towards the magic $2 billion mark before heading downwards. Two weeks later, after more pressure from ASIC, this was confirmed by One.Tel. The first payment of US$1 million apiece had been made to Jodee and Brad when the company’s market capitalisation went above $1 billion. A further US$2.5 million each had been paid when it topped $2.4 billion, and yet another US$1 million each when it rose above $3.4 billion. Sportingly, Jodee and Brad had agreed not to collect another US$1 million each for the few hours in which the market capitalisation topped $5.4 billion in November 1999. All the payments had been made between August 1999 and February 2000.
Typically, Jodee was keen to imply that these huge handouts had been someone else’s idea. ‘Just after we listed’, he told the Australian Financial Review’s Christine Lacy, ‘we were a little company with just over 300,000 subscribers. The board said to us, “Gee wouldn’t it be great if some day we were a $1 billion company and maybe a $2 billion company one day”’.
Followed no doubt by: ‘Please, Jodee and Brad, have some more money’.
Meanwhile, without any trace of irony, Brad Keeling told Lacy: ‘We have been very open about it’. There had just been some ‘shareholder association types’ and ‘the stock exchange’ asking a few questions, he explained.
It clearly did not occur to either man that One.Tel’s millions rightly belonged to all its shareholders, who should have been told about such payments and asked to approve them. After all, it was a public company, not Brad and Jodee’s private money box.
But Bradley—as he insisted on being called in print because it was better feng shui than Brad—had badly misjudged the whole affair. On the day the news of the bonuses broke he assured a distressed Tracy Cutting that there was no need to worry because the story would soon be wrapping fish and chips, and the fuss would die down. Dead fish would have been a better analogy, because the bad smell from this affair would never go away.
Almost a year later I asked Jodee whether he regretted taking the money and he said: ‘In retrospect, of course’. Then he pondered silently for 20 seconds. I waited, expecting words of contrition, but he offered justification instead. ‘When the bonuses were paid, shareholders were making heaps of money, seven or eight times their investment, and the press were writing that we were gods, for creating all this wealth. I do regret that we didn’t disclose the agreement to the market when it was signed.’
I told Jodee that these huge bonuses were how most people remembered him, and that some thought him no better than Skase or Bond. I also asked him whether he had considered giving the money back. ‘I don’t think it would make any difference’, he said, looking pained. ‘The company has gone down, and I have been painted as a villain.’
Even if the bonus payments could be justified, they were not Rich and Keeling’s only reward. Anyone who looked at the company’s full accounts, rather than the bowdlerised version sent to shareholders and the press, could see that Jodee and Brad had amassed a load of booty since the One.Tel train had left the station in 1995. Prior to the float in November 1997 they had shared consultancy fees, dividends and royalties worth around $12 million in cash. On top of that they had picked up stock options worth many tens of millions of dollars.
Eight months later they had split the lion’s share of $16.9 million from the sale of One.Net and One.Card, of which almost $7 million was in cash. And eight months after that, in February 1999, they had shared some $62 million of the money the Packers and Murdochs had put into One.Tel.
More prosaically, they had paid themselves salaries of almost $1 million each in 1999, on top of which they had also collected dividends, which in Jodee’s case were worth more than $1.3 million. Better still, they had picked up royalties from One.Net and One.Card in 1999 and 2000, even though they had sold these businesses back to One.Tel. In Jodee’s case these came to another $2.1 million. And finally, they still had hundreds of millions of dollars worth of shares.
In cash terms, Jodee and Brad had pocketed almost $115 million from the company between them in three years, and since One.Tel had not made any money in that time, almost all of this had been provided by the Packers and Murdochs (and their shareholders). Quite what they felt about footing the bill for all this largesse one can only guess, but since James had himself lined up for some of these benefits, such as the consultancy fees, dividends, royalties and return of capital, he was in no position to criticise.
As for the bonuses, it was agreed that they were a publicity nightmare. At the News Ltd annual general meeting in October, Rupert Murdoch said he still had faith in One.Tel but wished it had better PR. A month later, James Packer told One.Tel’s shareholders that it was ‘a mistake’ not to have disclosed the bonus agreement in 1998 and that the timing was, ‘to say the least, unfortunate’. But James emphasised that he and the Murdochs still supported the company and its founders, despite the blizzard of bad publicity and the $291 million loss. ‘The opportunity for this company is an enormous opportunity’, he said. ‘It is growing very quickly. From our perspective and News’s perspective, that is indeed what we wanted.’
In private, James was an even more ardent believer. In mid-October 2000, with the bonus storm still raging and the shares down 40 per cent since the news had broken, he went into the Sydney Morning Herald at Darling Park to lunch with its editor Paul McGeough and a clutch of senior journalists. Normally, those who don’t work in the building have to wait at security till someone escorts them upstairs, but as James’s family were part owners of the paper he was able to sign himself in and go straight to the executive level on the 19th floor.
There’s no doubt he impressed the Herald journalists. He was poised, self-confident, and clearly on top of the detail of his businesses. Ranged against his ten examiners, if that’s the right word, he gave at least as good as he got. Unlike most high-profile businessmen at such lunches, he was on his own, with no finance people or PR flunkies to hold his hand. When someone suggested this was brave of him he joked that it was a good tactic: if he said anything stupid that was reported in the paper he would be able to claim that the journalist had misquoted him.
He drank orange juice throughout the lunch, left his glass of wine untouched and hardly looked at the food on his plate. While others ate, he talked about Telstra, which he clearly disliked; the internet, which he raved about; and Fairfax Newspapers, publishers of the Herald, which his family still wanted to buy. When asked why the Packers were so keen to acquire it, he told the journalists passionately that it was because the National Times had treated his father so disgracefully in the mid-1980s, by outing him as the Goanna. In short, it was revenge. ‘If any company had done that to your father’, he told them, ‘you would feel the same’.
When it came to One.Tel, he was just as straightforward. The Sydney Morning Herald, and other journalists, had got it wrong. The company was not in trouble, Rich was a visionary, he and Keeling were brilliant managers, and the business would be a huge success. What’s more, the shares would soon climb again. Just to show those present that he was prepared to back his judgment, he suggested they each take a piece of paper and write down where they thought the One.Tel share price would be in a year’s time. He was sure he would be closer than they were. No one wrote down zero, but only because no one took him up on the offer.
Few people in the market shared James’s ebullient optimism. Indeed, one of the company’s bigger shareholders, the American venture capitalist Steve Gilbert, was about to fold his tent and leave. He resigned from the board in November 2000 and, shortly afterwards, it was revealed that he had been selling his One.Tel shares for almost a year. Having paid around $54 million for his 5 per cent stake in the company in December 1998, he had cashed in most of it by April 2000 at almost three times the price, thereby escaping the worst of the tech wreck. He was famous for having earned his investors a return of 38 per cent a year for many years, and now one could see how he managed it: he knew when to get out.
Remarkably, news that he was selling had not reached the market, even though the law required him, as a director of One.Tel, to notify the Australian Stock Exchange within 14 days of any sale. His lawyers apologised for the oversight, but only after details of his dealings had been revealed by the Sydney Morning Herald. Neither the ASX nor ASIC saw fit to punish him.
A couple of analysts and journalists had also taken a hard look at One.Tel’s future prospects and concluded that it faced serious problems, and they began to warn publicly that the company would run out of cash by mid-2001 unless more money was raised. The stock watchers at Merrill Lynch even dared to suggest, after emerging from a briefing Jodee gave to analysts a few days before Packer’s Fairfax lunch, that One.Tel might be prepared to solve its cash problems by selling its Next Generation mobile network to someone else. The Herald picked up Merrill Lynch’s report and gave it a run in the business pages.
Shortly after the article appeared, Brad Keeling rang Merrill Lynch and spoke to one of the analysts, Alice Begun, whose name appeared on the report. According to a couple of people, he abused her for ten minutes, threatened to ‘ruin her career’, and called her a range of unsavoury names, including ‘little cunt’, for not checking her story with the company. When she tried to point out that the report was quoting, or interpreting, remarks made by Jodee Rich, who was One.Tel’s founder and joint managing director, he continued cursing her. Soon afterwards, he angrily told The Australian that the Merrill Lynch report was ‘grossly inaccurate’.
A few days later, with the shares still sinking, Brad was in New York for a telecommunications conference. He assured Michael Pascoe of Channel 9’s ‘Business Sunday’ that the stories about One.Tel needing more money were complete nonsense: ‘It’s not a question of us requiring an injection of cash, because the European businesses are becoming and, in fact, now are cash flow positive and about to explode into earnings. This company is going to be very, very profitable over the next few years’.
Keeling assured Sunday viewers that One.Tel still had several hundred million dollars in the bank and would have $75 million left at the end of the financial year, 30 June 2001. After that, he said, the company would be coining money. It was a claim he had already made in September to coincide with the release of the annual report, and it would be repeated by One.Tel’s chairman, John Greaves, at the company’s annual general meeting in November then reaffirmed twice by Jodee Rich, in February and April 2001.
It was the first time in its history that One.Tel had nailed its colours to the mast like this, and it was not a particularly smart thing to do, but, according to Jodee, there was little alternative: ‘I was being called by analysts every day, Brad was being called, James was being called, and we were all being asked how much cash we would have by June 2001. There was enormous pressure on us’.
The aim was clearly to reassure investors that the company would not go bust despite its $291 million loss in 1999–2000, but after the bonus row and One.Tel’s frighteningly bad performance, the promise was now seen as a test of Jodee and Brad’s credibility. It became a forecast they absolutely could not afford to miss. The company’s internal budgets suggested it would have $105 million cash left by June 2001, so Rich and Keeling felt sure they had a buffer. But it wasn’t hard to see that things might go wrong. If the Next Gen network ate more cash than it was supposed to, or if the European and Australian businesses continued to lose money, they would be in trouble. And regardless of Brad’s assurances to Channel 9 viewers, One.Tel’s European ventures were certainly not yet cash flow positive. Nor were they just about to become so.
Unfortunately for One.Tel’s two founders, the company had just missed out on a deal that would have made it safe. Back in May 2000, Jodee had asked the bankers at ABN Amro in London to find a ‘Big Brother’ for One.Tel, to give it more financial muscle and support in Europe, and before long, the Finnish telephone company Sonera had tentatively agreed to invest $1.1 billion for a 30 per cent share. Teams of bankers and lawyers had then looked at the books, done their investigations and blessed the deal. By September, a memorandum of understanding had been signed, and everything was ready to go.
On the 28th floor of One.Tel’s Sydney headquarters, the chairs in the meeting room had even been set out for a press conference to announce the linkup. Then, with less than 24 hours to go till the sounding of the trumpets, Jodee was told it had all fallen through. The investment had been vetoed by bankers acting for the UK mobile giant Vodafone, which was trying to buy Sonera and did not want to pick up One.Tel as well.
Naturally, Jodee was hugely disappointed. He knew perfectly well that the injection of another $1.1 billion would make One.Tel far more robust and remove any worries the market had about the company running out of cash. He also knew the deal would be one in the eye for One.Tel’s growing band of critics. According to Jodee, James Packer was also upset because he was counting on the deal helping him win his battle with Kerry over One.Tel. ‘James must have told me half a dozen times that Sonera’s investment would give great credibility to the business’, says Jodee, ‘and it would put to rest all the shit he was taking from his dad’.
Unbeknown to Jodee and the Packers, or anyone else at One.Tel, Merrill Lynch in London had investigated One.Tel’s finances on behalf of Sonera, and come to a disturbing conclusion. By their calculations, the company was likely to run out of cash in early 2001 if it didn’t get help from Sonera. This was the verdict that the same bank’s Australian analysts had also reached quite independently, for which they had been so roundly abused by Brad Keeling.
Poor Bradley was clearly finding the pressure hard to take. His father was dying, there was the row over the bonuses, the share price was diving and the company was losing more money than ever before. According to one of his close colleagues, in September he was forced to pass up seats at the opening ceremony of the Olympics in September, as a guest of James Packer, because he had a rash of cold sores.
In November, he lost his temper with a journalist from the Sydney Morning Herald in spectacular fashion. The paper’s telecommunications correspondent, Kevin Morrison, had emailed him to ask about rumours that One.Tel’s chairman John Greaves was planning to step down. Morrison was keen to know whether the company had lined up anyone to take Greaves’s place, or whether Brad might take the chair himself. It was a perfectly reasonable enquiry about the direction of one of Australia’s largest public companies, but it was enough to send Keeling ballistic. He went off like this:
I get enough flak from you, that I think I’ll just keep my head down, tail up, and work to build an even greater business than the great business we already have. If John resigns we won’t be in any hurry to find a replacement. If someone shows up, fine; if not, so be it. It’s not essential. One day we will find a new chair if we need one.
Keeling then turned his attack on the man, who happened to be one of the mildest-mannered journalists on the paper:
I am the parent of a teenager. If you were a student in her schoolyard you would be classed as a bully. Were you a bully at school? Do you ever feel pride in anything anyone else ever does? Or do you only feel pride when you hurt someone else and their families? I think I know.
Finally, the chief of Australia’s fun and friendly telephone company called another great warrior to his aid:
It is said that one night at a dinner party Winston Churchill, having had a little too much to drink, was spoken to by a lady guest who said: ‘Sir, you’re drunk’, to which Churchill replied: ‘Madam, you are ugly, and yet tomorrow morning I will be sober’. In the morning, following this long correction in the telco sector, this long night, the dawn will reveal a robust, bright, brilliant, great company, One.Tel. What is it, exactly, that you will still be?