babcock makes its case

Babcock makes its case

Alan Kohler
The Spectators



The entire focus of the Babcock & Brown team right now is on persuading the 25 banks that lent the company $2.8 billion in February not to trigger a four-month review.

Every waking hour is devoted to that task, and when the assembled Babcock brainpower focuses on something, lights dim across Sydney.

The 25 decision-makers at those banks and their advisors are now besieged. Tents will have been erected in each of their front lawns to ensure that someone is on hand if they wake up in the middle of the night with a question. Meetings go for days. Phil Green and his team are talking and cajoling like they never have before, babbling as if their lives depended on it. Paperlinx is staggering under the demand for Reflex paper as the bankers are inundated with information on the Babcock group.

And so a week has passed and the banks have still not triggered the review. Maybe they won’t.

Why wouldn’t they? Because Phil Green and the Persuaders convince them that the loss of market confidence that that would cause would be against their own interests; that if they announce next week that they have decided not to trigger the review because they have confidence in the management it would restore market confidence; and because they don’t need to, because everything that would happen during a four month debt review is already happening (paper, tents, meetings…).

But apart from the short-term impact of their decision, the main thing bankers are being told about is the fabulous future of global infrastructure.

This is not the same as the future of infrastructure funds, which is lousy.

The era of the externally managed high-geared fund that pays fees and distributions out of debt will soon be a thing of the past. The funds will be privatised, unlisted and owned by institutions. The public will participate through their super funds, not directly.

Ironically this will usually mean higher fees for the managers, because the super funds seem to be quite happy with ridiculous fee levels that make managers extraordinarily rich.

It has been going on for quite a while with private equity, where most of the funds are unlisted and the fees are negotiated between the super funds’ asset allocation advisors and the private equity managers.

The advisors have been, and apparently still are, perfectly happy with 2 per cent base fees plus 20 per cent performance fees, and more, and unlike the infrastructure fund managers the private equity guys don’t have to worry about publicly quoted fund share prices that provide a daily reminder of their failings.

So expect to see all of the listed infrastructure funds taken private over the next 12 months by consortiums of super funds employing the same managers.

The only difference between private equity and infrastructure is the term of the fund. PE is mostly a quick turn caper, in which the business has its cracks fixed and gets a coat of paint before being sold and the performance fees calculated as a percentage of the sale profit.

If super funds like investing in a toll road or an airport, they like it forever. Private infrastructure simply needs an agreed valuation metric other than market capitalisation, and there are plenty of models for that.

Infrastructure itself – as opposed to the vehicles used for owning and funding it – undoubtedly has an incredible future, notwithstanding the credit crisis.

The US has a massive road building task and very little in the way of government funds to do it. Infrastructure privatisations have barely started in Europe. And we know there are tens of billions of government dollars to be spent on infrastructure in Australia, probably via public private partnerships.

Moreover the task of building renewable energy generation has also only just begun. Oil will remain expensive and in short supply, and transport will have to shift more to electricity, just as electricity generation must shift away from coal. The task of funding this is well beyond governments and taxpayers.

The business of funnelling money from pension savings into infrastructure has therefore also just begun. Trillions of dollars worth of projects will be securitised and sold to institutional investors over the next decade. Those who organise and manage this process will make billions.

The fact that infrastructure fund promoters over-geared their funds with debt and are now having to rethink the model is a separate matter.

I imagine that this is what the Babcock & Brown team are telling the 25 banks every minute of every day at the moment, that if the banks keep their nerve and announce that there will be no review, then Phil Green’s dream of a global empire that intermediates between the projects and the funds can be kept alive and that they, the banks, will get their share of it.

By the way, I wrote the other day that the four-month review period is reset back to zero if Babcock’s share price goes above the trigger point of $7.51 for two days in a row. That’s not correct.

Once the banks trigger the review, it goes for months no matter what – except if the price is back above $7.51 on the last day, then the situation is “cured” and the banks don’t get the remedies they would otherwise get – in particular that if there is no agreement between the banks and management about the way forward, then the banks, by two-thirds majority, can ask for their $2.8 billion back.

But at this stage, the four months has not been triggered. That also needs a two-thirds majority.