Paul Dalgleish, the former chief executive of RCR Tomlinson, once complained that running companies was not “complex” because the commercial astuteness it required didn’t “rack” the brain.
In his spare time, Dalgleish preferred more lofty pursuits – such as writing a doctorate on how companies should value intellectual capital. Five years ago he told The Australian Financial Review he respected “thinking CEOs” like former WorleyParsons CEO John Grill, former CSL CEO Brian McNamee and former Wesfarmers managing director Michael Chaney – none of whom remember ever meeting Dalgleish.
Dalgleish, who was referred to as “Dr Dalgleish” in RCR’s annual reports, had a degree in engineering and a PhD from the University of Melbourne, as well as a second PhD from Macquarie’s Graduate School of Management.
But whatever intellectual capital Dalgleish brought to RCR when he joined as CEO in May 2009 at the age of 47, it was of no use to save the 120-year engineering group when it ran into financial trouble.
Dalgleish departed RCR on August 6 with a $1 million termination payment. Just over three months later, the company collapsed.
Neither Dalgleish or Brown would comment to AFR Weekend on the events that caused RCR’s administration, which has left big institutional investors like Perpetual and the Pendal Group with tens of millions of dollars of losses, and thousands of RCR employees around Australia wondering if they will still have jobs at Christmas.
But people familiar with the company say tensions between Dalgleish and the board emerged well before the CEO was dumped.
Rod Brown, who had been RCR’s chairman since early 2008, hired Dalgleish because he had delivered earnings growth in his previous job running UGL’s infrastructure business.
Described by Brown as the “stand-out choice” after a local and international CEO search, Dalgleish was brought into RCR in early 2009 with a big pay packet for a small engineering group that was then only generating annual net profits of $14 million on sales of $589 million, and had a share price languishing around 30¢.
RCR’s board agreed to pay Dalgleish a “sign-on incentive” of 400,000 shares and a fixed salary of $800,000. He also was given the opportunity to make an annual short-term bonus of $1.2 million and received eight million share options, linked to performance targets, with an exercise price of 39¢ per share.
Dalgleish was quick to find ways of boosting RCR’s earnings. In mid-2010 he announced a profit upgrade after restructuring some operations, getting rid of the company’s vehicle fleet and making property sales, taking home $1.43 million in pay.
In May 2011, he bought AE&E Australia, which had provided engineering services for power projects before going into liquidation, taking on some of its former employees like Graham Salter, who ended up running RCR’s energy business, and Conal McCullough, who became chief operations officer.
RCR recorded a $3.7 million gain on the acquisition and an $8.4 million gain on more property sales, helping it to announce a record annual net profit of $19.5 million in August 2011. Dalgleish got a “special retention award” – another 248,186 share rights.
More profit upgrades were announced in 2012 as RCR won more contracts, including building iron ore processing facilities for Fortescue Metals, and it spent more on research and development, reducing its tax rate. In 2011-12, Dalgleish took home $2.3 million in pay, including a $1.3 million cash bonus.
In early 2013, RCR announced it was buying another engineering services group, Norfolk, to help it target larger projects and blue chip clients. In 2012-13, RCR’s revenues rose 8 per cent to $875 million and profits were up 37 per cent to $37 million, and Dalgleish’s pay rose to $2.5 million. The revenue and profit increases continued and by 2014-15, Dalgleish was taking home $3.3 million and RCR’s stock price was trading between $2 and $3.
But in 2016, just before its ill-fated push into solar projects, RCR took an annual loss of $16 million, burned by closures of loss-making businesses linked to the coal sector and delays in project awards. Dalgleish’s pay packet halved but he remained upbeat, telling investors that RCR was developing “advanced systems delivery” for large solar projects and that the company’s renewables portfolio was growing.
Over the next 12 months, RCR announced more than a dozen solar contracts worth over $1 billion in Queensland, Victoria and Western Australia, and declared itself the “market leader” for engineering, procurement and construction contracts of big solar projects. Its stock shot up as high as $4.65 and Dalgleish cashed more than 2 million options near the top of market, selling at $4.40.
Differing management styles
The board also had concerns that the confident Dalgleish, who was considered to have a brash management style that led some employees to fear him – one describes him as “a control freak” – was starting to treat RCR like his own company.
Dalgleish ran RCR from its corporate headquarters in Sydney’s AMP Centre at 50 Bridge Street, which overlooks Sydney Harbour and is a short walk from his home in Dawes Point, but rarely visited projects in person to check how they were going.
One former employee says Dalgleish and his management team loved “the sexy bit” of bidding for projects and negotiating with developers, and then selling their story to investors. But while the energy team under Salter, who is described by one former RCR employee as “cool, calm and collected”, was considered professional, the infrastructure team – which bid for the solar projects – was more haphazard, with constant turnover of project managers, and wasn’t good at delivering them, particularly when they ran into unexpected problems like late delivery of materials from Chinese suppliers. Employees also say RCR’s financial systems weren’t up to scratch, making it hard to keep track of invoices.
Yet there was no clear succession planning under Brown, who is considered to be “personable” but a chairman for good times, not bad ones. One prominent person in in the WA business community describes Brown as “an accidental chairman” who has always kept a low profile.
Brown lives in an expensive suburb of Perth, Mosman Park, in a house that has a roof covered with solar panels. But unlike Dalgleish, who is a teetotaller, Brown – who used to run mattress flogger Joyce Corporation before joining the RCR board in 2005 – is known to be happy to socialise over a few drinks.
Brown has his fans, including Immersive Technologies founders Wayde and Peter Salfinger, who have praised his role as a mentor. Brown has been chairman of their private company, which has grown from humble beginnings to become a global leader providing training simulators for the mining industry, since 2004.
But Brown – who hasn’t spoken publicly or responded to questions about the RCR implosion since the company’s annual general meeting in October, when he talked up its order book – responded slowly to directors’ concerns about Dalgleish, not acting until the board found out in early August that the company was facing $57 million of write-downs on its Hayman and Daydream solar projects in Queensland.
Bruce James, a former engineer and Transfield Services executive, was parachuted in as interim CEO while the board started looking for someone to replace Dalgleish, a process that was expected to take up to six months. RCR remained in a trading halt for a month while James and the board looked over the books, bringing in McGrathNicol in mid-August to review cash flows – and develop a contingency plan if the company ended up in administration.
James started taking out layers of management and made plans to move RCR out of its expensive corporate headquarters, which were recently moved to 1 Macquarie Street in Sydney. (Most engineering companies are located in cheaper quarters in North Sydney.) James also convinced Macquarie to underwrite a $100 million capital raising in late August. The equity issue was successfully sold to investors, with the $70 million institutional portion oversubscribed, after they were told RCR’s problems were “project-specific”.
Macquarie was not left with any RCR stock, passing shares left over from the retail portion of the offer, which only had a take up rate of 47 per cent, to sub-underwriters.
But it soon became apparent that the capital raising had not stabilised the company.
Perth-based director Eva Skira, who had sat on RCR’s board for a decade, stepped down 12 days after the $100 million capital raise, holding no shares on her departure. Skira, who was the chairwoman of the WA Water Corporation when it sold the utility’s engineering and construction division to RCR for $10 million in 2015 in a deal that guaranteed RCR work to the value of $130 million over three years, has declined to comment on why she left.
A month later, RCR chief financial officer, Andrew Phipps – who was close to Dalgleish – suddenly resigned, telling people he wanted to spend more time with his family in Port Macquarie. In late October, unions revealed RCR had been firing workers from some solar projects.
When RCR went into another trading halt on November 12, it became apparent that James had misjudged how much cash the engineering group actually needed, and how extensive the cost blow-outs on its solar projects were as delays led to liquidated damages.
James has told people that RCR had lost a contract that it had been preferred on after the capital raising, and that decisions were delayed on other contracts, reducing how much cash it expected to receive.
James went to RCR’s banks, CBA and Japan’s MUFG, to ask for more money, saying the company needed as much as $86 million. But he was knocked back, with the banks believed to be lacking faith the board and interim management team could in fact turn RCR around.
The board wanted to get RCR out of solar projects, which by the time of RCR’s collapse were contributing more than $1 billion in revenues – three times as much as they had contributed a year earlier. Solar was bringing in far more revenue than any other business unit, with RCR’s resources division contributing just $157,343 in revenues and its rail division just $145,081.
But an exit was not expected until after RCR completed its nine outstanding solar projects in early 2019.
The administrators had the power to cease RCR’s solar contracts immediately without being sued, and are now looking for buyers for other parts of its business.
No internal communication
Investors, suppliers and employees remain angry at the board, which went into lockdown mode as RCR’s finances worsened after the capital raising and has not responded to questions on what exactly was happening at the company.
RCR employees say there was no internal communication ahead of the company’s collapse, with staff only finding out about it through the statement issued to the Australian Securities Exchange on November 22.
Allan Gray managing director Simon Mawhinney, who snapped up a 7.8 per cent stake in RCR after the August capital raising, becoming the company’s third-largest investor, says he tried to get in touch with Brown after the second trading halt but received no response.
He still has questions he wants answered, including how RCR’s business deteriorated so fast, especially given previous reviews by McGrathNicol and Deloitte Corporate Finance, who were appointed as investigating accountants, of its financial books.
“What went wrong and why was the market not informed earlier?” says Mawhinney. “Fraud, incompetence or – and I feel this is quite unlikely – an unpredictable event that was a game changer?”
Sub-contractors who haven’t been paid for work done for RCR are also calling for explanations.
Kane Dangerfield says his firm, Perth Building and Maintenance, has been left at least $250,000 out of pocket for work done on a pumping station upgrade for the Water Corporation in Perth.
Dangerfield – who has done plenty of work for RCR in the past and says he put up with late payments dragging out to 60 days from the time work was completed – has had to make some staff redundant and is angry over the company feeding information to the market that “we all now know was BS”.
He made inquires with RCR management and financial investigators after the company’s initial trading halt on July 30 and was told there were no significant issues.
“We were shocked to find administrators had been appointed after being told everything was sweet,” Dangerfield says.