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Adele Ferguson | June 26, 2008
A THREATENING letter by a flamboyant British billionaire shareholder in Challenger Infrastructure Group (CIF) to liquidate the fund may save James Packer's Challenger Financial Services Group from posting a loss for 2008.
The hostile broadside from British fund manager Arkmile, which holds more than 19 per cent and is controlled by Vincent Tchenguiz, lifted CIF's share price 10 per cent yesterday, which is equivalent to adding $25 million in net profit to the earnings of Challenger Financial Services Group, according to Wilson HTM analyst Brett Le Mesurier.
Challenger Financial Services Group has given a $20 million earnings guidance for 2008 on various assumptions including CIF's share price closing at $3 on June 30. It closed yesterday at $2.80 after the letter from Arkmile was issued publicly.
Mr Packer, who sits on the Challenger board and has been involved with the company since 1998, has dropped more than $500 million of a 20 per cent investment in Challenger in the past six months. Since a November high of $6.12, Challenger has become one of the worst performers on the ASX. Over that period, its share price has lost almost two-thirds of its value, from $6.12 to $1.98 a share.
Challenger, which owns 32 per cent of CIF, has a lot riding on the CIF price. Challenger closes its books for the financial year on June 30 and it marks to market the value of its stake in CIF through its balance sheet and profit-and-loss accounts. The CIF share price will play a deciding factor in whether it makes a profit or a loss.
In a letter seen by The Australian yesterday, Mr Tchenguiz wrote to the Challenger Listed Investment entity (the group responsible for CIF) chair Brenda Shanahan, with a high-noon deadline of June 27 to respond to his ultimatum to issue a share buyback, gain a seat on the board and wind up the fund.
The letter states that the winding up of the fund is in the best interests of shareholders. "We have concluded that a fundamental restructure of the fund is the only way forward," the letter says. It also says that Arkmile has received several approaches from British operators to buy CIF's 23.4 per cent stake in water and sewerage group Southern Water at above CIF's net-asset value.
In March, Arkmile offered $3.50 for each CIF stapled security it did not already own, valuing the fund's entire capital base -- including listed and unlisted stock -- at $1.22 billion.
It is understood that Challenger knocked the deal back on the basis that it was considering privatising the fund itself and taking fees for selling the assets.
The problem with this scenario was how it would fund the privatisation given the challenges in its other divisions.
This decision by Challenger is believed to have caused some tension on the Challenger board and prompted it to sell three assets in the CIF fund, including an interest in Wales and West Utilities, North Gas Networks and broadcast transmission group Arqiva. Mr Tchenguiz is one of the biggest property investors in Britain and has more recently moved into the hedge fund business.
CIF has three infrastructure assets, all based in Britain: 80.4 per cent of British gas transport group Inexus, 23.4 per cent of British sewerage and water company Southern Water and 66.2 per cent of storage terminals operato LLB.
In a statement yesterday, Mr Tchenguiz said he was concerned about the "endemic undervaluation" of infrastructure funds listed on the Australian Securities Exchange.
"In light of this, it has written to Challenger Listed Investments Ltd requesting the winding up of CIF -- the sale of assets and distribution of the proceeds to investors," he said.
Arkmile has informed Challenger that it is considering asking for an extraordinary general meeting of CIF security holders to consider a resolution calling for the winding up of the fund. CIF securities closed at $2.60 on Tuesday but the reported NTA, which is the true value of the underlying assets, was $4.05 at December 31.
"Winding up CIF would realise significant value for investors at a considerable premium to the units current market valuation," Mr Tchenguiz said. "It would enable them to mitigate the risks which are inherent in the Australian listed infrastructure fund model."
This has put the spotlight on the rest of the listed infrastructure sector, most of which is trading at a hefty discount to net asset values.
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CGF Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
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