The announcement today basically results in a shift of another $16 million in earnings before tax to the 40 doctors [page 15 doctor remuneration costs increase to 45% of personal exertion revenue in 2013, from 24.7% in 2010]. That is, average pay increases from around $470,000 [$19.8m for say an average of 42 doctors in 2010] to around an astonishing $900,000! per doctor [$80.3m of personal exertion revenue at 45% share for doctors, divided by 40 doctors].
A good outcome; Ill say! Not many of us can set our own salary increase and hold our owners at ransom in the process (shareholders).
The end result is that by 2013, normalised EBIT (earnings before interest and tax) will have been crunched from $30 million in 2009 to around $10 million (normalised EBIT will be $26 million in 2010, less the additional $16 million to be paid to doctors by 2013). That is a reduction of around $20 million, which at a market multiple of say up to 8 times, leads to total wealth destruction for shareholders of circa $160 million. WOW!
At $10 million earnings before interest and tax, when the interest bill on $100 million of debt is around $10 million per year, nil profit is left for shareholders. Incredible.
It raises an interesting legal question: the same doctor partner group that sold its practices to shareholders has now basically destroyed the value attributed to those practices. The same doctor partner group that took the proceeds on sale of their practices, is now dipping in again on an on-going basis to an extent that it wipes out earnings to virtually $nil for other shareholders.
Included in the 2009 annual report and subsequent ASX announcements were comments made by the Chairman and Chief executive Officer that doctors were recontracting well, where the general tone was that all was proceeding well on this front. For example on page 4 of the 2009 Annual Report we read On 7 August 2009, after the close of the reporting period, the Group announced that seven of the forty-five doctor partners had chosen to enter new, long-term contracts prior to the expiry of their current contracts. This is a firm indication of doctors support for the Vision Group operating model and Vision Group itself, and provides for long term security of revenue.
Or what about this beauty on page 11 of the 2009 Annual Report: The Board approved (yes, approved) a final contract structure and variable EBIT based remuneration model in June 2009, and contracting terms and conditions were presented to doctors in July 2009. Since then seven doctor partners recontracted long term and early, as a firm commitment to the business model and Vision Group. These seven doctors account for 28% of revenues.
What the Chairman and Chief Executive Officer failed to do was inform shareholders that the recontracting process would wipe out profits.
Presumably there was a strong legal obligation for the Chairman and Chief Executive Officer to inform the market of the anticipated negative financial effect these executed re-contracts would have on the future profitability of the Company. Surely the trend in future remuneration was known at this time and therefore why was the market first informed on 25 June 2010?
Unfortunately for non-doctor shareholders, the Board is dominated by doctor partners. Such is the power of dominance.
Todays announcement also makes it clear the Company has effectively been put up for sale. Details on this were scant; again, lack of disclosure in what this will lead to in terms of proceeds and company value, now customary at Vision Group. Nothing short of an embarrassment for a public company listed on the Australian Stock Exchange.
One hopes the CEOs 100 day plan will do much to turn the fortunes around for non-doctor partner shareholders...
VGH Price at posting:
28.0¢ Sentiment: LT Sell Disclosure: Not Held
