Does Babcock & Brown have any net worth?The sharemarket thinks...

Does Babcock & Brown have any net worth?

The sharemarket thinks so. The market value of the company’s equity is currently $800 million, and while that’s a lot less than the $6.5 billion at which it began the year, and much less than the $2.6 billion book value of the equity, it’s still a lot more than nothing.

But as with many companies in the real estate and infrastructure business these days, if Babcock was forced to mark its assets to market, then the book value of the equity would look a lot more like the market cap.

In that context, the deal that’s been done for Babcock & Brown Communities to buy out its management agreement with Babcock & Brown itself is both good news and bad news: it places a value on assets that are currently not counted in the books (the management agreements), but with every management contract that is bought out, Babcock’s income, and therefore its ability to service debt, shrinks.

Babcock’s assets are in the books at $14 billion, which means that, on the surface an 18.5 per cent decline in asset values would wipe out the equity of $2.6 billion.

As a result of the credit crisis the general capitalisation rate for property and asset valuations has gone up from 7 to 8 per cent. That implies a 15 per cent decline in values, so on a theoretical mark-to-market basis Babcock is already close to wiping out its equity.

However value is now materialising in the management contracts, thanks to the deal with Babcock & Brown Communities. The buyout of that agreement was struck at a price of $17.5 million, which was apparently arrived at by negotiation within a range of values provided by ABN Amro.

The base fee that Babcock & Brown Communities pays to Babcock ranges between $4 million and $8 million a year. That means the multiple applied to the buyout was somewhere between two and four times the base fee.

Babcock’s total base fees in the latest half-year were $138 million. Double that for a full year is $276 million.

The Babcock & Brown Communities management agreement is for 10 years, whereas most of the others are for 25 years (and, outrageously, are unbreakable). It is impossible to generalise about the value of the management agreements, since each one is different, but a multiple of at least four times base fees is probably reasonable.

So it seems likely that on top of the $14 billion in book value of assets there is at least $1 billion in management agreements that could be recovered if each of the funds internalised its management like Babcock & Brown Communities has done.

That is, unless Babcock goes into receivership. In that event, each of the funds could terminate the management agreements without paying a cent.

In some ways, this is probably one of the main things the new CEO Michael Larkin has going for him: if Babcock’s banks trigger a formal insolvency at least a billion dollars in value would be blown up, as each of the satellite funds terminates its contract with Babcock and internalises its management (or perhaps moves to Macquarie or somebody else).

The immediate hurdle is to sell the European wind farm development assets for something approaching book value of $2 billion and feed the baying banks some morsels to keep them at bay for a while longer, while hoping that real estate and infrastructure values recover.

In the meantime he should also continue thanking the gods of accounting standards, and praying that he can continue to report assets at directors valuation rather than marked-to-market.

http://www.businessspectator.com.au/bs.nsf/Article/Putting-a-value-on-Babcock-J44HV?OpenDocument&src=kgb