Article on theage.com.auAsciano investors may become their own...

Article on theage.com.au

Asciano investors may become their own white knightsELIZABETH KNIGHT
June 11, 2009
Shareholders might cover the cost of past mistakes for some of the upside.

AFTER a long, drawn-out process, Asciano will tomorrow make an "in-principle" decision about who will rescue it, and how, from its corporate coma, induced by excessive debt.

But the difference between this restructuring package and those that Asciano had previously contemplated is that the company now has options. It is still weighed down by a stupid amount of debt and predatory creditors but, since the sharemarket has shown its willingness to fund debilitated corporates out of their positions using capital, the need to sell assets at fire-sale prices has all but disappeared.

If you looked for a parallel, it would be Rio Tinto, whose shareholders forced its board and management to reject the Chinalco rescue attempt that involved selling prime assets at discount prices. Instead, they insisted that they be allowed to get in at the ground floor and recapitalise Rio. In a rising equities market, the existing shareholders are willing white knights.

The game has moved on.

If the rescue strategy involves Asciano selling any assets, it will need to persuade shareholders that the purchase prices are at the top end of valuations. The window for private equity to buy at fire-sale prices has closed.

The most likely scenario is that the private equity players who have been sniffing around Asciano previously looking to snap up assets at distressed prices will now be looking to pump equity into the company and become cornerstone investors rather than buying the jewels out from under the nose of the company.

Like Rio, Asciano has very valuable assets. It has rail and port assets that operate in monopoly or duopoly markets. And like Rio, the company has wound up in a position where it has borrowed too much and been hit with a cyclical downturn in earnings. Asciano has made more rescue propositions and more mistakes than most and has cost its shareholders dearly.

It can't undo this damage but it can mitigate some part by taking the right decisions now.

It's the worst time to sell to opportunistic private equity funds attempting to pick up cheap assets.

The improvement in debt and equity markets over the past couple of months has severed Asciano's dependence on white knights. That's yesterday's game. The new saviours are existing shareholders. They are willing and able to cover the past mistakes made by management if they get a slice of the upside.

In February, Asciano's share price hovered around 45¢. Yesterday, it had more than trebled from those levels. Sure, it's a long way from its highs but at least it's off the critical list.

For companies in this position there is plenty of self-interest and face-saving to overcome. For the chief executive and major shareholder in Asciano, Mark Rowsthorn, an equity issue of the size needed to relieve the debt burden would undoubtedly dilute his 10 per cent parcel to one that would see him lose his control of the company.

But the injection of capital of say $1 billion to $2 billion would allow a re-rating of Asciano that could ultimately increase the value of his investment.

The merits of a capital raising have not been lost on Asciano's advisers, who at this stage seem to be leaning that way.

The template was provided by the deal Transpacific did this week. It received a lifeline from a private equity investor that has pumped in $800 million in capital to the company to take a major equity position rather than buying assets.

Four months ago this would not have been an option for Asciano. Today it is.

This equity window has now opened and Rowsthorn needs to overcome any of his private control interests and allow the company to use it.

If equity markets continue to rise, then this opportunity to re-capitalise will remain. But there are no guarantees.

The Asciano assets are currently trading at 9 times earnings before interest, tax, depreciation and amortisation (EBITDA). Historically these assets have traded at 15 times.

But Asciano is a cyclical company and its earnings are under pressure thanks to pressure on volumes of goods using its rail and port facilities. And this is not the time to sell assets — unless there are no alternatives.

The banks are applying maximum pressure to this company. It is experiencing a pincer movement from lower revenues and high debt-servicing costs. It is a problem of its own making and shareholders are well within their rights to question the foolhardy strategy the management and board have employed.

But they have a chance to redeem the situation for the shareholders, who would be looking to the company to remedy a balance sheet dilemma by using capital initiatives rather than selling the company's jewels.