what to do? from rbs

Babcock & Brown Infrastructure (BBI)


Key points:

* What do BBI security holders get under the offer?:

A 4cps capital return;
A negligible shareholding in the recapitalised vehicle; and
The option to purchase up to $15,000 of new shares the recapitalised vehicle (record date was 8 October 2009).
* What will the SPP price be?

We don't know what price the new shares will be issued at and this will depend on a number of variables including the VWAP that BEPPAs convert at and the number of SPARC holders that elect to convert. BBI has given an estimate range of $0.34 to $0.67 per parcel of 1,000 Securities (before Security Consolidation) assuming no SPARCS are converted. The total number of shares on issue following recapitalisation (up to 845 billion shares) will be consolidated into a much smaller number in the new recapitalised vehicle. The focus shouldn't be on price but rather that the shares will be issued at a value of 8.7x EV/EBITDA.


* Should clients participate in the SPP?

This is a difficult one. In our view there is similar of better value elsewhere in the sector with lower risk attached in companies such as APA, MAP, SKI, SPN and HDF. At 8.7x EV/EBITDA the offer is not cheap and post the recapitalisation BBI will still have higher gearing (~68%) than most peers. At 8.7x we would not expect to see the shareprice rally strongly once the new recapitalised vehicle commences trading (c.f. Asciano and TPI) Going forward do you also trust the same management that got BBI in this position in the first place...


* If I don't participate in the SPP is there any reason to hold onto BBI shares?

BBI shares are trading at ~4cps on market. The only (apparent) reason you would hold onto BBI shares instead of selling now on market is if you thought a higher offer was coming. Speculating on whether a higher offer comes is just that and it becomes less likely as each day passes. If BBI holders don't sell on market they will get a 4cps capital return at the end of November, however there is the risk that the recapitalisation proposal gets voted down at the shareholder meeting on 16 November. 75% of BEPPA holders who vote must pass the resolution and 50% of BBI ordinary holders must approve. If the proposal gets voted down there is a risk that BBI goes into administation and BBI holders get nothing.


* Action

Hold BBI if you think a higher offer is coming. We have no insight on whether a higher offer is coming or not or whether the Board would support it. Regarding participation in the SPP there are other stocks in the sector we would recommend putting money into ahead of BBI. If you don't think a higher offer is coming (and not participating in the SPP) then probably best to sell on market now at 4cps so as not to take the risk that the recapitalisation proposal gets voted down at the shareholder meeting. Your existing shares in the new vehicle will be virtually worthless (~0.034 to ~0.067 cps).