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Steadfast’s plan to unlock value through a public float

Steadfast Chairman Robert Kelly isn’t known for holding back on the colourful language when he has something he really wants to say. But shareholders who attended his unveiling of the plan that will lead to a public float of the country’s biggest broking group (the meeting was strictly private) remarked later on his calm and dispassionate presentation.

That’s how it had to be. After years of careful consultation and thousands of hours of face-to-face discussions with his shareholders singly and in groups, the formula Mr Kelly detailed at the pre-convention meeting on the Gold Coast on Saturday required icy calm and concentration. There could be no confusion over what he was saying.

What the Steadfast board is proposing is a remarkable solution for an organisation whose 273 members range in size from very small to very large brokerages.

The buying group Mr Kelly co-founded has grown enormously in just 16 years. It has produced a wide range of services that brings its giant band of shareholders many direct benefits.

The size of the crowd at this year’s Steadfast Convention – it has attracted more than 2200 delegates and runs until tomorrow night – illustrates just how high the organisation’s profile has become. When Mr Kelly calls, no one in the industry would dare to refuse the call.

Just two examples of Steadfast’s power: One is the Steadfast Virtual Underwriter platform, built by the company in the face of some stiff opposition. This is now growing rapidly as more insurers, underwriting agencies and products come on board.

The other is Macquarie Premium Funding, a joint venture with Macquarie Bank.

But the project to take what was 16 years ago a cluster group containing a disparate bunch of brokers to a public float and possible riches for Steadfast shareholders is the boldest plan of all.

Under the float plan unveiled by Mr Kelly on Saturday, nothing would change in the way shareholders work around and through the Steadfast organisation. Each would still own their brokerage.

At last year’s pre-convention meeting in Melbourne, 80% of Steadfast shareholders voted in favour of listing Steadfast Group Limited. Asked if the board had shareholders’ permission to “take Steadfast to the market”, 93% said yes.

On Saturday the vote in favour of proceeding towards a listing was coincidentally 93%, with 82% of the shareholders attending the meeting.

The proposal now is to convert the value of Steadfast into shares in the listed entity, and to “reward” the people who have supported the premium funding joint venture by providing them with extra shares based on their support for the joint venture over the past three years.

The formula – which Mr Kelly emphasised to is hypothetical only and cannot be construed as anything else than that – addresses most of the questions he has fielded over this issue during the past few years.

Due diligence done over the past year on 80 brokers’ businesses has revealed that 55 would be prepared to sell 25-49% of their brokerages to Steadfast. The remaining 25 said they are willing to sell 100%.

Taking its assets and income from its businesses and adding the total to the value of the amount of their businesses shareholders have indicated they are willing to sell, Steadfast’s market capitalisation is estimated at well over $300 million.

Under the hypothetical scenario – a term he emphasises constantly when explaining the scheme to – Mr Kelly explains it like this:

The amount of shares a member will be able to access will reflect the amount of business the brokerage has put through the Macquarie Premium Funding joint venture facility over the past three years. In the example given by Mr Kelly, the maximum allocation of 170,000 shares is used.

Shareholders have agreed to forego 30% of an annual rebate from Steadfast. The company’s value is about $98,000 per shareholder, and coupled with the value of the Macquarie Premium Funding activity the total available to each shareholder is about $170,000. 

“This will allow around $170,000 worth of $1 shares to be passed over to the current Steadfast shareholder,” Mr Kelly says.

“In order to allow some latitude and also leave plenty of shares for the market, the board has decided it would allocate – at par value – an equivalent amount of shares to be purchased at par value by the shareholder.

“So again in a purely hypothetical situation, if you received 170,000 shares you could swap your equity in Steadfast and then buy another 170,000 shares for cash, which would give you a parcel of 340,000 shares.”

The upside for shareholders is obvious. Austbrokers shares, for example, trade at around $6.50 at present. There’s no reason to believe investors couldn’t push the value of Steadfast shares into similar territory. Even at just $4 a share, 170,000 $1 Steadfast shares would be worth $680,000.

Of course, in a journey where everyone is sharing the ride, there will be under-performing smaller brokerages that may find it difficult, even impossible, to achieve the benchmark figure of 25% EBIT.

“We will work with them to normalise their accounts and fix whatever has caused their expenses to be out of kilter,” Mr Kelly says.

Such brokerages could also be placed in “hubs” with other brokerages in similar condition, with shared support facilities owned by Steadfast. Others could be consolidated.

Under a public listing, there are some things about Steadfast that would change. For starters, its board of 12 experienced brokers would be replaced by a board of just six – with three of them appointed from outside the organisation.

And what of Robert Kelly, whose five-year quest to find a way to unlock Steadfast’s value for the people who own it is now close to the endgame?

“What happens to me is a decision for the board,” he says. “The chairman will have to be completely independent. But I do intend to put myself forward as the first MD and CEO of the public company.”

Whatever the eventual fate of this plan, a float seems inevitable. Mr Kelly would have reason to see Saturday’s overwhelmingly positive vote as proof of that. He has told brokers it could be in the last quarter of this year, or perhaps early next year.

And after all, as he points out, for most of the brokers who call Steadfast home there will be no real change. “They’ll still be in Steadfast and they’ll still be masters of their own destinies.”

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