Is this the same reporter who wrote the famous MQG article? Interesting point on the BBI shareholder vote for management agreement, see below.
Paulson bailout won't impress scepticsFont Size: Decrease Increase Print Page: Print Adele Ferguson | October 06, 2008 THE passage of the $US700 billion ($895 billion) Paulson bailout might offer a band-aid solution to the crisis in confidence facing debt and equity markets, but it won't fix investor scepticism about the debt-laden, outlandish external management models that continue to exist in most listed infrastructure stocks.
The onus is now squarely on independent directors to restore credibility, increase transparency and improve investor confidence in the model. The most obvious way to do that is to internalise management agreements.
In the case of Babcock & Brown Infrastructure, its shareholders -- who have seen 82 per cent of value destroyed in the past year -- had hoped to get some relief on September 30, the date chairman David Hamill promised to complete a review started a month earlier into the external management agreements and governance arrangements.
September 30 came and went without a murmur. But pressure from shareholders for an answer prompted Hamill to put out a statement on October 2 saying that the review was not yet completed.
"The independent directors consider significant progress has been made, but in the interests of ensuring that the best possible outcome for security holders is achieved, further time needs to be spent in analysing the various options and outcomes," he said.
The statement went on to say that a more detailed announcement would be made when the review process was finalised.
If the share price is any indicator -- it has fallen 14 per cent in the past few days -- investors are punting that B&B will remain external manager, but will offer concessions to make the decision more palatable.
Put simply, Babcock has a huge amount resting on the outcome and will fight tooth and nail to keep as much of the status quo as it can get away with.
Babcock makes a fortune out of external management fees. In the past year, Babcock & Brown Wind, BBI and Babcock & Brown Power together paid the mothership hundreds of millions of dollars in various performance, base, acquisition and other related-party fees.
If BBI opts out of the external management agreement, it will put pressure on the boards of other entities to follow suit, snuffing out a lucrative source of income for the motherships of these entities -- Babcock & Brown, Macquarie Group and Challenger -- both now and in the future.
Hamill, who joined the Babcock empire as a director of Prime Infrastructure, a business that originated from the float of Babcock's Dalrymple Bay Coal Terminal in Queensland in 2002, is in an unenviable position.
On the one hand, he will be under huge pressure from Babcock to retain it as the external manager and on the other hand, he has to be seen to be acting in the best interests of the BBI shareholders. If there is even a hint that he isn't, he will be in breach of his director's duties under the Corporations Act.
But Hamill is a tough nut and is no stranger to controversial situations: he had a career in politics as Treasurer of Queensland and Minister for Transport until resigning in 2001. The most likely scenario is that Hamill recommends keeping the external management arrangement with Babcock, but tweaks it so that some of the less palatable conditions are removed. For instance, he could recommend removing the 25-year contract, lowering fees, including corporate costs under the base fee, confirming any termination fees payable and clarifying pre-emptive rights from a change in control.
In an interview with The Australian, Hamill said he had spoken to many shareholders about corporate governance issues arising from having Babcock as external manager. "It ranges from some people who are very unhappy with Babcock & Brown, to others that have other concerns," he said.
He said the delay was due to "a range of issues" such as contractual relationships, legal documents and drafting issues. He would not elaborate on what that meant or when a decision would be made. "The devil is in the detail."
Interestingly, in a management agreement questionnaire prepared by UBS and sent to Asciano, BBI, Macquarie Airports, Macquarie CG and Macquarie Infrastructure Group, BBI confirmed the management agreement could be terminated by the board if security holders resolved to do so at a general meeting (50 per cent simple majority vote). Given the annual meeting is on November 5, it could be argued that it is in shareholders' best interests if the board makes a recommendation well in advance of the meeting, so shareholders can cast a vote.
Babcock was paid more than $140 million in various fees by BBI in the year to June 30, of which 76 per cent was transaction-related. Given the size and problems associated with its debt -- including repayments -- and the fact that it was forced to cut its dividend, shareholders have expressed much consternation about the external management structure and just who it benefits.
Indeed, governance advisory group RiskMetrics has put out two reports questioning the quantity and structure of fees paid by the likes of BBI to external managers such as B&B or Macquarie Group when the market performance of listed infrastructure plays has been poor.
Others have raised concerns about the often high levels of debt held by the satellite funds. BBI, along with most other satellites have got themselves into such a pickle that they are being forced to announce the part sale of key assets to reduce borrowings.
Like BBI, shareholders in Babcock & Brown Power are hoping for some answers. The company appointed UBS to do a review of its business and external management and shareholders are hopeful the initial findings will be released at the annual meeting next month.
But as Merrill Lynch analyst Matt Spence said: "The August management changes were an attempt to purge the stock of its poor M&A and funding track record. We've always viewed mergers and acquisition and funding as the domain of Babcock & Brown, the external manager, rather than the chief executive/chief financial officer, and investors will remain suspicious of BBP despite the changes."
The UBS review is aimed at addressing many of BBP's risks. But with a litany of risks to be resolved, it is unclear whether the UBS review can address all the issues and attract investors to revisit the name again.
"We are forecasting no distribution in 2009. BBP also faces a liquidity squeeze with near-term refinancings that may not be able to be funded without an equity raise. It's unclear whether B&B will roll over the $400 million in loans that mature progressively over the next 15 months," according to Spence.
The sad reality for investors is, although they have watched their investments in these various entities tank, governance features make them virtually impregnable to takeover.
Aged-care operator Babcock & Brown Communities broke free last month after the board agreed in August to buy out its 10-year management rights from Babcock & Brown for $17.5 million.
A month later, Lend Lease won a 41 per cent stake in B&B Communities after buying the management from B&B, injecting its own retirement business and recapitalising the operation for $236.8 million.
The hope is that this will set the template for others to follow. Otherwise, investors in these funds will be forced to rely on the manager's ability to restore the security price through asset sales.
The ASX and ASIC allowed such financial abominations to spawn over the past few years. ASIC is now saying it will be paying particular attention to disclosure around proposals to privatise or realise value in listed asset vehicles, while the ASX recently introduced a new guidance note, aimed at entities seeking to list, on what aspects of the management agreement should be disclosed in IPO documentation on an annual basis.
The hope is that their words become actions rather than rhetoric.
