Fund manager agitates for Xero shareholder revolt over delisting

Xero chief executive Rod Drury. Photo / Jason Oxenham

Xero's plan to delist from the NZX and make the ASX its primary listing is facing increased resistance from the investment community, with one fund manager agitating for the issue to be put before a special meeting of shareholders.

Fund manager Milford Asset management has written to the NZX requesting the delisting be put to a shareholder vote, a move that has attracted support from other parts of the investment community.

Xero announced on November 11 that it planned to leave the New Zealand share market and consolidate its listing in Australia. The company's share price has been downward pressure ever since, trading today at $31.47 - down 7.7 per cent over the month.

In a letter to the stock exchange, Milford's Brian Gaynor and portfolio manager Sam Trethewey said: "Milford believes that Xero's recent material share price underperformance is primarily due to the company's delisting ... the decision could encourage other NZ companies to list on the ASX or move from the NZX to the ASX.

"This would reduce the number of domestic investment opportunities for Milford's NZ Equities Wholesale Fund and Milford's other funds."

Fund managers contacted by the Herald said there was increasing disquiet among the institutions over the move.

"It reflects what the institutions are feeling about their interactions with the company," Salt Funds managing director Paul Harrison said.

"Up until now, people have been patient and respectful in trying to understand the logic behind the delisting, but the company has I think failed to convince anybody of the merits of this," Harrison said. "Most of us believe that this is value-destructive," he said.

Harrison also said he believed the institutions had the numbers to call a special meeting.

Xero's chief executive Rod Drury said: "We are disappointed that Milford is using a listed company like Xero to raise its broader concerns about New Zealand's funds management industry and its own internal mandate issues, which could have a negative impact on companies who are considering listing in New Zealand."

"From when Xero was founded as start-up in 2006 our decisions have delivered significant value and we have been clear in our strategy to continue to build a global growth platform supported by shareholders who are aligned to our long term growth aspirations," Drury said.

Xero's corporate strategy should not be constrained by the mandate limitations of New Zealand based funds that hold a relatively small position of Xero, the company said.

Xero's decision to consolidate its shares on ASX was made after careful consideration of all options available to create an appropriate platform for the long term growth of the company's business, it said.

"The clear legal position is that only a change of domicile compels a shareholder vote - Xero is not changing domicile and has deliberately chosen to remain a New Zealand domiciled and headquartered company which is in the long term best interests of Xero shareholders and the New Zealand economy," it said.

"Xero is a proud and ambitious New Zealand business. Remaining New Zealand headquartered with significant creation of high value jobs, we will continue to be a strong contributor to the domestic technology industry and New Zealand economy," it said.

Rob Cameron, one of New Zealand's most experienced investment bankers, said Xero's move made sense.

Cameron said the real issue was too few of the high-growth oriented companies like Xero coming on to the market.

"The Xero decision to get liquidity on another market is a logical one," he said.
"The idea that they want to get a large and deep clientele of people who are prepared to not receive dividends, in favour of growth, is a logical one," he said.

"It's what happens in deeper capital markets," he said.

Xero did not enjoy a high level of institutional interest when it listed in 2007, with much of the initial support instead coming from private wealth and technology investors.

The stock initially traded under its issue price of $1.00 a share before gaining traction, hitting a record high of just under $45 in 2014.