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Those who dare at Dulux do so with little downside

The Dulux chief executive Patrick Houlihan's $188 million offer for the garage door company Alesco Corporation may reflect increased risk-taking thanks to his ''call option-like'' incentive scheme, the investment bank Goldman Sachs says.

Goldman ranks Dulux as one of 15 companies on its ''Structural Leaders Focus List'', a grouping of companies like Amcor, BHP, Woolworths and CSL that have market leadership in their sectors and are most likely to deliver superior returns.

Goldman equity strategists Hamish Tadgell and Jien Goh reviewed Dulux's membership of the list in light of the $2 a share offer for Alesco - and decided that it still rates favourably. The duo did, though, raise the question of whether Dulux's long-term incentive (LTI) program, which provides executives with non-recourse loans that can only be used to buy Dulux shares, encourages risk.

Goldman's reading is that the scheme has two possible outcomes. First, if executives do not meet performance hurdles they do not get the shares - but they also do not have to repay the loans. Second, if they do beat the hurdles and the share price rises, they get the benefits when the shares vest - which is kind of the point of an incentive scheme.

''The combination of a non-recourse loan and shares alters the LTI payout from equity-like to option-like [specifically a call option, with limited downside and unlimited upside],'' the Goldman report said. ''The asymmetrical shape of this payout incentivises management to take on risk,'' they said - quickly going on to point out that risk is not necessarily a bad thing if it also works in shareholders' favour.

''However, we believe such incentives are better structured and more closely aligned with shareholder interests when they have more equity-like payouts. It is worth noting that, apart from [Dulux's former parent Orica], we have not found any companies in the ASX200 that utilised non-recourse loans in this manner.''


Insider cannot vouch for that last statement, and clearly the Goldman team's concern is not so much with the Alesco acquisition but whether that is a sign of the company becoming more acquisitive - and whether it takes more risks on the road to doing so. The other thing to remember is that pressing the ''go'' button on the Alesco bid was made at board level, not just optioned-up executives inspired by fumes from the paint factory.

On a positive note, the sharemarket yesterday did not seem concerned by Dulux's impending bid for Alesco. Its shares bounced above $3 for the first time since the paints and adhesives company bought 19.96 per cent and pitched its woo.

The shares gained 11¢ to $3.06 on solid turnover. The most likely explanation for the activity is that if you believe this week's building approvals figures are the start of an upward trend, then Dulux ought to be a beneficiary of a more confident market even though only about 10 per cent of its business faces the new housing market.

At the moment, Dulux gets about 75 per cent of its sales from maintenance and improvement markets, although if it wins Alesco that will probably double its exposure to the housing starts market.


Leighton's audit committee chairwoman, Paula Dwyer, might have breathed a sigh of relief when she signed off on the construction and engineering group's quarterly accounts yesterday and they showed no reason to again slice the company's forecast results.

Dwyer, who only joined the Leighton board at the beginning of January, had to wait until March 20 to find a trading window so she could fulfil the minimum shareholding requirements of directors - buying 2000 shares at $23.35 each.

Sadly for Dwyer, just over a week later, the company revealed that cost overruns and delays on its Brisbane Airport Link toll road and Victorian desalination plant projects were going to slice more than $250 million from its pre-tax profits.

Predictably, Leighton shares dived from near $24 to $21 each. On Monday they copped another belting when Leighton confirmed what most had suspected - that the completion of Airport Link was going to run overtime and faced liquidated damages of $1.2 million a day from June 30 through until its new latest estimated completion time of August 20.

Dwyer, along with fellow audit committee members Leighton chairman Stephen Johns (who, given his former job as finance director at Westfield shopping centre group, also sits on the audit committee) and David Robinson, still had to sign off on an ugly $80 million loss for the March quarter - but at least it was no uglier than the last profit revision.

The sharemarket, though, responded otherwise and after running the shares up, cut them by another 23¢ to a $19.02 close.

Dwyer is now down more than 15 per cent on her investment, although there are two compensations. The first is that her integrity is intact because she clearly did not buy the stock with any knowledge of the profit downturn. The second is that the $8000 paper loss should be covered by her $46,000 a year as audit chairwoman and $185,000 non-executive director's fee.

Wondering why Leighton, in its embattled post-Wal King world, went the ''death of a thousand cuts'' route by spreading its announcements over two days, Insider was told that could be put down to coincidence over conspiracy.

The Airport Link owner, BrisConnections, which has also had a troubled life, has been pressing Leighton for an opening date so it can hire bells, whistles and the obligatory politicians for a ceremony.

Leighton told BrisConnections late on Friday night that it should finish the roadway no more than two months late, although neither company made a statement on the project until early Monday.

Serendipitously, Leighton had already factored a likely delay and damages into March's profit revision. So, by the time yesterday's quarterly result was released (on the same day that its website financial calendar had long predicted), there was no need for another humbling downward revision - a good thing when you have already been pinged $300,000 this year by the corporate watchdog over the timing of profit revisions.