Macquarie Group chief executive Nicholas Moore must be approaching the point where he considers putting into action the privatisation proposal that has been talked about internally for many years.
A management buyout led by Moore and Macquarie's 250 elite executive directors could take advantage of the near 80 per cent slump in Macquarie's shares from their peak near $100 last year.
On most valuation measures Macquarie is cheap. At Friday's close of $22.73, the stock is trading at its lowest level in more than five years. The prospective PE ratio is a fairly modest 5 times earnings according to Deutsche Bank. The price to book value is 0.7, just under the 0.8 price to book valuation that Commonwealth Bank used for its purchase of BankWest. The forward dividend yield is more than 10 per cent.
A sum of the parts valuation done last week by broker Goldman Sachs JBWere came up with a low point valuation of $42.64 and a high point of $55.64. The same broker said a discounted cash flow valuation was $57.90.
Brokers are forecasting Macquarie's interim results, out tomorrow, will include the first chunk of $1 billion in impairment charges for the full year to March 2009. But even after factoring in an earnings decline of 30 per cent, analysts such as Ross Brown at Deutsche Bank rate Macquarie a buy with a price target of $40 and forecast fiscal 2009 profit of $1.22 billion.
Privatisation via a management buyout would have all the ingredients of a typical Macquarie deal: buy assets cheaply, repackage them into a new corporate structure and, in the process, generate huge advisory fees.
Taking the group private would remove the confidence-sapping share price volatility. The volatility and associated share price weakness have been caused by the combination of the uncertainty about the Macquarie model, broker downgrades, attacks by hedge funds, alleged manipulation of credit default swap rates and market rumours.
Privatisation would allow the group to restore certainty and predictability to its staff share schemes. Equity incentives are critical to Macquarie's ongoing success. But the share price slump has meant that virtually all the options issued since early 2005 are out of the money. Macquarie has about 54 million options on issue, equal to about 18 per cent of current shares on issue.
As an unlisted public company Macquarie could issue equity incentives tied to profitability and other operational measures and not movements in the share price. Senior executives are already being forced to take more equity in the group because of changes to the equity incentive component of profit sharing arrangements. Why not take more equity in a company you controlled?
A privatisation proposal could start from a reasonably sound equity position as Macquarie staff own about 5 per cent of the group. That puts them just behind the two substantial shareholders Capital Group with 7 per cent and Barclays with 5.3 per cent. Macquarie's 13,000 staff have significant financial resources. In the year to March 2008, the group's total staff compensation was $3.8 billion or about half of total revenue earned.
The restructure of the group last year into a non-operating holding company ought to have made it easier to take the group private. The restructure separated the bank from the non-banking activities with separate capital requirements for the bank and for the holding company.
Privatisation would not remove the obligation to report financial results. Macquarie would still be regulated by the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. A deal would require the approval of the Treasurer.
A privately-owned Macquarie would be subject to less disclosure about executive salaries. Macquarie's highly paid bankers would finally be on a level playing field with their counterparts at foreign banks who reveal virtually nothing about their huge remuneration packages.
Macquarie's management led by former chief executive Alan Moss agonised for years about whether or not to go public. They finally opted for an initial public offering in October 1996. The bank came to the market with a valuation of $1.3 billion.
Twelve years later the market cap is $6.4 billion. The market valuation has fallen about 35 per cent in less than two weeks.
Macquarie's executive directors are believed to have seriously discussed the idea of privatisation in recent years. The topic would almost certainly be revisited if the share price were to continue heading towards $10.
The idea of financing a multi-billion dollar leveraged takeover of an investment bank would seem a little ambitious at this time in the credit cycle. But there is no shortage of private equity capital in the Asian region. Private equity funds focused on Asia have at least $US20 billion to invest. They would be eyeing the huge discounts to net assets in the Macquarie listed funds.
Macquarie could count on support from bankers here and offshore that have previously worked with the group's executives on various transactions. Macquarie has relationships with banks all around the world thanks to the $50 billion that has been borrowed by its satellite funds.
A management buyout of Macquarie would seem outrageous in the current climate. But it is be the sort of audacious, counter cyclical and innovative response to a crisis that we have come to expect from the millionaire's factory.
MQG Price at posting:
$20.26 Sentiment: Buy Disclosure: Held
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