the vultures have returned to pick at the bone

March 9, 2011 from
http://www.watoday.com.au/business/the-vultures-have-returned-to-pick-at-the-bones-of-alinta-energy-20110309-1bnyn.html

If the hedge funds opposing the Alinta takeover get their way, there is a possibility unit holders will end up with next to nothing.

AFTER more than two years of clinging to life, the end is nigh for Alinta Energy's long-suffering unit holders. What sort of end this might be will be determined by a vote on Tuesday (with the deadline for proxy voting on Sunday).

If the two hedge funds opposing the takeover of Alinta get their way, there is a distinct possibility unit holders will end up with next to nothing, as opposed to the 10� on the table. And, in what must be the ultimate insult, the funds have been linked to former senior executives of Babcock & Brown, the group of failed financial engineers who orchestrated Australia's biggest corporate collapse.
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It should be remembered that B&B and its senior executives skimmed enormous fees out of Alinta when they snared control of it in the bull market days of 2007 and then paid themselves even more handsomely for successfully loading the group up with close to $3 billion in bank debt.

Now, it appears a few have returned for one last bite at the carcass. The two hedge funds are the tiny Australian group Bronte Capital, with a stake of about 2.5 per cent, and the New York-based hedge fund Coastal Capital, which reportedly has a stake of about 16.4 per cent. (Just how the US outfit has exceeded the 14.99 per cent foreign investment limit has yet to be explained.)

Both have opposed the proposed takeover of Alinta by the equally rapacious private equity firm Texas Pacific Group, which recently attracted the ire of the Australian Tax Office after riding off with a $1.4 billion profit from the Myer float. They have been agitating for a higher bid and have accused the Alinta board and management of rolling over too easily. In what is shaping up as a high-stakes game of bluff, both have threatened to vote down the deal next week.

The biggest shareholder, Sir Ron Brierley's GPG with 19 per cent, already has voted its proxy in favour of the 10� takeover, and so, with the two opposing blocs, it will be Alinta's 61,000 small shareholders who will hold sway.

The wild card is that voter turnout on such schemes of arrangement normally is woeful. The decision may well come down to a mere handful of votes from small shareholders.

There is no doubt Texas Pacific is eyeing off a potential deal it hopes will deliver it another spectacular return. And given Myer's lacklustre sharemarket performance, it is easy to conclude the private equity firm is attempting to back Alinta's board, management and unit holders into a corner.

The hole in this theory is that Texas Pacific had that corner covered long ago. Last year, long before TPG's takeover bid, the private equity group, along with about 35 other private equity players and financiers, began snapping up the senior secured debt from the 11 or so banks owed $2.9 billion by Alinta.

After years of threatening to put Alinta under, all the banks - including Commonwealth, ANZ, NAB and Suncorp - gladly offloaded their exposure at between 60� and 80� in the dollar. This left the new lending consortium with a much lower debt exposure, about $1 billion less. But the face value of that debt remains the same. So, if unit holders vote down the deal, TPG and its cohorts can demand repayment of the full value of the debt.

This puts Alinta back to square one. With insufficient assets to cover this position, the Alinta board will appoint an administrator. This will result in receivers being appointed by various financiers to the subsidiaries.

Like every deal by Babcock & Brown, Alinta is hellishly complex with a debt structure resembling a Sara Lee confection: layer upon layer of senior debt, secured debt, project finance and an ownership structure that was geared more towards tax effectiveness than operation.

Off to one side in this structure is the Redbank power station in the Hunter Valley. A coal-fired generator, it has been saddled with $235 million in project debt that is due to be paid in 2023, at which time it is estimated there will be some equity value.

One simple fact appears to have been ignored. The company's accounts make it clear it is at the mercy of its lenders and its solvency depends on the transaction proceeding. For more than two years, chief executive Ross Rolfe has tried to chart a course through the maze, exploring a capital raising, asset sales or a debt-for-equity swap.

A year ago, it appeared hopeless with an intractable banking syndicate and no chance of raising new capital.

The banks had appointed liquidators KordaMentha to study the outfit and the current lenders have them on standby.

Curiously, both hedge funds have referred to a confidential report by KordaMentha, raising questions about whether or not the market is fully informed.

The 10� offer from Texas Pacific must seem another bitter pill for those who hitched their wagon to Phil Green's gravy train a few years back when Alinta was worth close to $2.

Perhaps his former underlings can squeeze a few more cents out of TPG for themselves and everyone else. But it's a death-or-glory tilt.