More Babcock Wind hot airNovember 27, 2008 - 11:38AM...

More Babcock Wind hot air
November 27, 2008 - 11:38AM
http://business.smh.com.au/business/more-babcock-wind-hot-air-20081127-6jc0.html

Surprise, surprise, Babcock & Brown Wind shareholders weren't told the truth about why their main European wind farms were put up for sale. Or they weren't told the truth at BBW's AGM yesterday - this is a Babcock and Brown company, so it's hard to be sure where the truth is.

Press coverage of BBW's AGM seems to have been largely written out of BBW media releases and thus doesn't quite tell the full story of this bemusing exercise in backtracking and backside covering, never mind the sudden discovery of very basic corporate governance.

For a start, there was the proposal to increase the share buyback to a massive 30% of the company. Last week I thought I was being a little facetious in suggesting BBW's strategy taken to its logical conclusion would see it disappear up its own fundament in a puff of its own wind (here). Maybe not.

The proposal was passed but some shareholders at the meeting seemed to smell a rat, or at least Babcock and Brown, when they wondered if such a large buyback would mainly be used by substantial shareholders to clear the decks. BNB has 11% of BBW. BNB is desperate for cash. Join the dots.

The current 10% buyback has been spectacularly unsuccessful in supporting the share price, but it did allow Deutsche to unload 17 million BBW securities earlier this week.

Then there was the hilarious haste professed by the board and management to enter into negotiations with BNB to buy BBW's management rights.

Damned if I know why BBW would be in a hurry unless they are so hooked on paying BNB vast amounts of cash, they're desperate for another fix. They only have to wait a day or two for the receivers to arrive at the mothership and BBW should be able to internalise its management much more cheaply. Indeed, some genuinely innovative footwork by BBW's newly-aligned managers could make it free: they could resign en masse from the management company and seek direct employment at BBW.

(One shareholder noted BBW paid BNB $180 million in fees last year - about a third of BBW's current market capitalisation. BBW's independent directors have all the credibility of Babcock satellite company independent directors.).

The wind in Spain

But the bit I would have found particularly galling if I had been a shareholder was the new reasons given for flogging off BBW's Portuguese and Spanish wind farms.

From the announcement in February (in unison with BNB) until yesterday, BBW's board and management have strenuously maintained its policy of "selling the farm to prove the farm was worth owning'' was all about "demonstrating and capturing'' the unrecognised value of BBW's assets.

But when quizzed by a shareholder about why they were selling off such good assets - selling the things investors had bought into BBW to own - BBW came up with entirely new reasons.

Now BBW says the Spanish wind farm operation is a dog - a low-yielding asset that didn't produce and economic return. That's a little at odds with the glowing picture painted in previous reports. I'm not sure it was the smartest thing to say when the sale hasn't settled yet.

And there was an entirely new story on the Enersis Portuguese operation owned 50/50 with the collapsing BNB.

As I've suspected from the outset, rather than being about "demonstrating and capturing value'', there was a hidden agenda that involved BNB.

CEO Miles George (an employee of BNB, at least for the time being) admitted Enersis was a "good asset'' but it "had some other difficulties for us''.

Three options

Turns out what really drove BBW's decision to sell was BNB's need to sell its half. George told the meeting that BNB's move meant BBW had three options: sell out as well, remain at 50%, or move to 100%.

The 50 and 100% options would have meant "we were taking on future obligations that in the current environment we didn't think were prudent''.

So that's why BBW sold the best performing asset in its portfolio - because BNB was selling. The "future obligations'' weren't spelt out, but this is a Babcock satellite.

What also wasn't spelt out was what "certain assets'' BBW is currently negotiating in great haste to buy from BNB. My general observation is that you can generally pick up assets from receivers more cheaply but, hey, these are Babcock people.
The meeting's final joke was the enthusiasm of the board and management to be rid of the Babcock and Brown name and for management to be paid by BBW and have their interests "aligned'' with BBW shareholders.

Well, there's not much point in being paid in BNB shares any more.

As of yesterday BBW has a new independent chairman. Aside from restraining his management from paying BNB any more money, his first duty should be to rid the company of the directors who have been happy to take fees under the Babcock regime and then get BBW to do what it was supposed to do: own and operate a diversified portfolio of wind farms instead of being a reactive and subservient cash cow for a dubious bunch of financial engineers.

END