BBI - Babcock & Brown Infrastructure

[banska bystrica]

BBI were caught between a rock and a hard place. They dodged a killer bullet but at a big price. The terms as released to the ASX are wishy-washy but appear to be very much in favour of the buyers. BBI got stitched up. The buyers have all the upside and are hedged on the downside. No free cash appears to be available for reduction of corporate debt. All the cash will go into the Euroports business. How they still settle the put option is unanswered.
The deal saves BBI's bacon as far as Euroports administration goes but it does nothing to solve the corporate debt problem or the dilution potential from SPARCS in November.

The stock is rallying but my guess is it will be short lived. Short term target prices: BBI 7c and BEPPA 11c. I may be wrong of course.

 

[random]

On the positive side

Ownership of:

Manuport (Belgium and Bulgaria) 100%.......previously 75%.
Westerlund (Belgium and France) 100%.......previously 75%.
TPS (Spain)100%......previously 51%.
WCT(Belgium)100%......previously 51%.

Whilst ownership of Finnish Ports (Finland), TRI (Italy) and SHRU (Rostock Germany) remain unchanged at 100%, 80% and 50% respectively.

 

[persistentone]

On the positive side

Ownership of:

Manuport (Belgium and Bulgaria) 100%.......previously 75%.
Westerlund (Belgium and France) 100%.......previously 75%.
TPS (Spain)100%......previously 51%.
WCT(Belgium)100%......previously 51%.

Whilst ownership of Finnish Ports (Finland), TRI (Italy) and SHRU (Rostock Germany) remain unchanged at 100%, 80% and 50% respectively.

Good catch. Does Euroports break out a separate earnings statement that gives EBITDA numbers for each of these? If yes, did someone recalculate the new projected EBITDA for Euroports going forward?

 

[banska bystrica]

Good catch. Does Euroports break out a separate earnings statement that gives EBITDA numbers for each of these?

No they do not. It appears as though the put option commitment has been negotiated.

Positives: No cash needed to refund deposit monies.
Euroports survives.

Negatives: BBI suffer impairment in line with my distressed worst case scenario.
Buyers hedged on any future downside at the expense of BBI.
Sale implies an EV of AUD$620M. My distressed value was AUD$609M.
No free cash for payment of corporate debt.

 

[persistentone]

No they do not. It appears as though the put option commitment has been negotiated.

Positives: No cash needed to refund deposit monies.
Euroports survives.

Negatives: BBI suffer impairment in line with my distressed worst case scenario.
Buyers hedged on any future downside at the expense of BBI.
Sale implies an EV of AUD$620M. My distressed value was AUD$609M.
No free cash for payment of corporate debt.

What would you guess would be the impact on overall EBITDA for Euroports given the new ownership percentages for the sub-assets within Euroports?

Owning 100% of subassets might increase overall EBITDA for Euroports, and losing 40% of the equity then cuts into that higher overall number?

I don't suppose you have access to the ABN Amro analyst?

 

[persistentone]

Does anyone know if an Australian pipeline company named APT Pipelines trades on ASX?

In general, are there any natural gas pipeline plays in Australia other than those BBI owns that trade on ASX?

 

[awg]

Does anyone know if an Australian pipeline company named APT Pipelines trades on ASX?

In general, are there any natural gas pipeline plays in Australia other than those BBI owns that trade on ASX?

I think you may be refering to APA

Business Description
APA Group (APA) owns and operates over 12,000kms of natural gas pipeline infrastructure throughout Australia with a significant presence in all mainland states and territories. Over 90% of revenue is contracted or regulated. APA transports over 50% of Australias natural gas through a network of pipelines comprising a mixture of mature, established pipelines - Moomba-Sydney - and more recently constructed pipelines. APA has made significant acquisitions with GasNet - the dominant gas transmission pipeline operator in Victoria, Allgas Energy a South-East Queensland gas distributor and Origin Energy Networks a provider of management and operations services to Victorian gas distribution and transmission company Envestra as well as a 30.6% stake in Envestra and a 33% interest in the SEA Gas pipeline.

Company Strategy
APAs strategy revolves around the development of Australias leading energy transmission and distribution business. There is a commitment to grow the business and to maximise the value for the securityholders. Growth is achieved via a three pronged management philosophy - organic growth within the business; the development of brownfields and greenfields projects; and by outright acquisition. The APA business model is a low cost, transparent and competitive with no fee leakage. Financial strategy aims at increasing annual distributions by at least the CPI. Of high priority is the development of a gas transmission grid linking the populous eastern states of Australia. The grid would enable a seamless tariff to be charged for gas supplied throughout the eastern seaboard which would drive the expansion of a competitive gas market in Australia. It would foster an increase in competition between gas producers regardless of the location of their reserves. APA Group reported NPAT up 18.4% to $67.19m for the year ended 30 June 2008. Revenue from ordinary activities were $897.73m, up 65.5% from last year. Basic EPS was 14.9 cents compared to 15 cents last year. Net operating cash flow was $186.42m compared to $136.71m last year. The final dividend declared was 9 cents, taking the full year dividend to 29.5 cents compared with 28 cents last year. APAs operations and financial performance in the financial year reflect full and part year contributions of acquired businesses, growth in existing businesses, and benefits achieved through the continued integration of recently acquired businesses into its internal management model.

 

[persistentone]

I think you may be refering to APA

Business Description
APA Group (APA) owns and operates over 12,000kms of natural gas pipeline infrastructure throughout Australia with a significant presence in all mainland states and territories. Over 90% of revenue is contracted or regulated. APA transports over 50% of Australias natural gas through a network of pipelines comprising a mixture of mature, established pipelines - Moomba-Sydney - and more recently constructed pipelines. APA has made significant acquisitions with GasNet - the dominant gas transmission pipeline operator in Victoria, Allgas Energy a South-East Queensland gas distributor and Origin Energy Networks a provider of management and operations services to Victorian gas distribution and transmission company Envestra as well as a 30.6% stake in Envestra and a 33% interest in the SEA Gas pipeline.

Company Strategy
APAs strategy revolves around the development of Australias leading energy transmission and distribution business. There is a commitment to grow the business and to maximise the value for the securityholders. Growth is achieved via a three pronged management philosophy - organic growth within the business; the development of brownfields and greenfields projects; and by outright acquisition. The APA business model is a low cost, transparent and competitive with no fee leakage. Financial strategy aims at increasing annual distributions by at least the CPI. Of high priority is the development of a gas transmission grid linking the populous eastern states of Australia. The grid would enable a seamless tariff to be charged for gas supplied throughout the eastern seaboard which would drive the expansion of a competitive gas market in Australia. It would foster an increase in competition between gas producers regardless of the location of their reserves. APA Group reported NPAT up 18.4% to $67.19m for the year ended 30 June 2008. Revenue from ordinary activities were $897.73m, up 65.5% from last year. Basic EPS was 14.9 cents compared to 15 cents last year. Net operating cash flow was $186.42m compared to $136.71m last year. The final dividend declared was 9 cents, taking the full year dividend to 29.5 cents compared with 28 cents last year. APAs operations and financial performance in the financial year reflect full and part year contributions of acquired businesses, growth in existing businesses, and benefits achieved through the continued integration of recently acquired businesses into its internal management model.

Yes that is it. Supposedly they have an income security as well APTIT but initial investigation suggests it is a stapled security, so when you buy APA you are getting some units in the partnership and some separate units in this income trust. So I'm sure the taxation issues alone will make for interesting reading. :/ It's probably a very tax advantageous investment for an Australian resident. For a U.S. resident it is probably a headache, but I'm a masochist so I'll probably have a close look at it.

My first glance convinces me they own outstanding assets. I guess they have a gearing problem, but given the solid revenues pipelines bring in they can afford to push on gearing.

I would appreciate feedback on APA from any of you who have studied it.

 

[Paragon1]

Does anyone know if an Australian pipeline company named APT Pipelines trades on ASX?

In general, are there any natural gas pipeline plays in Australia other than those BBI owns that trade on ASX?

Hastings Diversified Utility Fund (HDF) own Epic Energy which owns natural gas pipelines throughout Australia. A recent takeover proposal by Trust Company of the West valued it at 10.1x EBITDA (which was 68m in 2008)

 

[persistentone]

Hastings Diversified Utility Fund (HDF) own Epic Energy which owns natural gas pipelines throughout Australia. A recent takeover proposal by Trust Company of the West valued it at 10.1x EBITDA (which was 68m in 2008)

Sure, but Hastings is a bit of a mess, or was until it did its recent capital raising. The TAPS Trust income security associated with HDF was a real home run, though, and has been made money good for all effective purposes.

APA actually looks like a well-oiled and well managed machine. I think I might actually trust a company like APA with some debt.

 

[nathanblack]

interesting that the original announcement was to sell 29.7% and stated wanting to sell down further to 49% minority stake. now they've done this deal suddenly there is no desire to sell down anymore, yet not cash from the sale has been diverted to corporate debt. obviously part of the deal is that they dont further sell down, and even if they wanted to i guess they now need to retain atleast enough to give the consortium 65% in a few years time.

overall im happy with the deal. europrts is healthier, own 100% of most ports(simpler), has someone to share capital expenses with going forward, put option out the way.

not impressed with the change of direction, ie not dealing to pay down corporate debt. hate to see them do a similar deal on DBCT. but i'd say this deal makes 49% sale more likely??? also shows that a "friend" could get involved in DBCT. They probably need 100% sale more than ever now.

 

[persistentone]

interesting that the original announcement was to sell 29.7% and stated wanting to sell down further to 49% minority stake. now they've done this deal suddenly there is no desire to sell down anymore, yet not cash from the sale has been diverted to corporate debt. obviously part of the deal is that they dont further sell down, and even if they wanted to i guess they now need to retain atleast enough to give the consortium 65% in a few years time.

overall im happy with the deal. europrts is healthier, own 100% of most ports(simpler), has someone to share capital expenses with going forward, put option out the way.

not impressed with the change of direction, ie not dealing to pay down corporate debt. hate to see them do a similar deal on DBCT. but i'd say this deal makes 49% sale more likely??? also shows that a "friend" could get involved in DBCT. They probably need 100% sale more than ever now.

I'm sure they wanted to sell down to 49%, but they couldn't. And it looks like they had to agree to horrible terms just to get any equity sold at all.

From the standpoint of corporate debt repayment, this deal leaves them worse off not better. They lose 40% of the EBITDA but only lose about 30% of the asset related debt. That makes their debt coverage overall worse not better.

Let's be honest here: they did this deal to avoid the embarrassment of having Euroports do an Administration. As far as helping BBI with its debt problems, it doesn't look like this deal does that, and in fact sets us backward.

 

[nathanblack]

From the standpoint of corporate debt repayment, this deal leaves them worse off not better. They lose 40% of the EBITDA but only lose about 30% of the asset related debt. That makes their debt coverage overall worse not better.

i dont entirely agree with that. the proceeds of the sale went towards buying out minority holders in indidual assets and paid out the put option. the remainder pays off some asset level debt.

so 100% euroports(presale)<100% euroports(post debt reduction/port acquisitions)

earnings from 100% stake in smaller ports will be greater than before and less interest will be payable. the downside if it doesnt perform, ie giving up 65% of euroports is a bad situation, but if things rebound globally then some of the increased port holding will increase in value(i assume we paid fair market value).
also future costs are now split 40-60.

so i think euroports will be able to contribute to corporate debt reduction within a short period of time.

i agree its not great news, but its not terrible either. i just question the direction of the company, they announce a strategy then change plans with this particular sale. this makes you wonder how hell bent they are on selling DBCT in a straight forward cash for asset sale.

will they try orchestrate a similar sale for DBCT. are they still devoted to asset sales and debt reduction?

personally, the recent rally from 6.3c to 8c at one point today, compared with a flatter beppa over the same period has convinced me to swap out of BBI and back to BEPPA. for my sitution the changeover cost will work and i see more upside in beppa and possibly when the gap opens again a switch back to bbi.

if i can do that a few times before sparcs dilution, then one final time after the dilution i will have a larger holding than just holding throughout

 

[persistentone]

i dont entirely agree with that. the proceeds of the sale went towards buying out minority holders in indidual assets and paid out the put option. the remainder pays off some asset level debt.

so 100% euroports(presale)<100% euroports(post debt reduction/port acquisitions)

earnings from 100% stake in smaller ports will be greater than before and less interest will be payable. the downside if it doesnt perform, ie giving up 65% of euroports is a bad situation, but if things rebound globally then some of the increased port holding will increase in value(i assume we paid fair market value).
also future costs are now split 40-60.

so i think euroports will be able to contribute to corporate debt reduction within a short period of time.

i agree its not great news, but its not terrible either. i just question the direction of the company, they announce a strategy then change plans with this particular sale. this makes you wonder how hell bent they are on selling DBCT in a straight forward cash for asset sale.

will they try orchestrate a similar sale for DBCT. are they still devoted to asset sales and debt reduction?

personally, the recent rally from 6.3c to 8c at one point today, compared with a flatter beppa over the same period has convinced me to swap out of BBI and back to BEPPA. for my sitution the changeover cost will work and i see more upside in beppa and possibly when the gap opens again a switch back to bbi.

if i can do that a few times before sparcs dilution, then one final time after the dilution i will have a larger holding than just holding throughout

Really good point regarding the possibility that Euroports post-sale may have much better EBITDA. But can you quantify the claim?

Euroports and PD Ports are cyclical assets with revenue models that are usage based. Those kinds of assets get lousy prices when you sell them in a distress situation. And who can blame the buyers for not wanting to pay up for declining revenues?

DBCT is a different animal entirely. As BB points out, the revenue is guaranteed whether the ships use the facility or not. They are using more of a pipeline reservation model where they get paid even during low utilization. DBCT should be able to fetch a much better multiple.

The risk with DBCT as I see it is more around conspiracy by the bidders for the asset. Given the need for a quick sale, couldn't the coal companies conspire to put BBI into Administration, then when dealing with an asset sale through an Administrator, they could conspire to form a "joint venture" that avoids all competition on the asset purchase. The purpose of the joint venture would be to buy the asset for low dollar and then to pass on that low cost to all coal companies who own stakes in the venture. If BBI had no liquidity issues, they could wait a long time for the bidders to compete. BBI would see through any "joint venture" in a second and reject their bid. An Administrator won't be that savvy.

 

[random]

I realize that 2012/13 is a long way off and i am happy to take flack on this but my taking on this deal is that if trade in euroports ports returns to 2008 volumes or better we will actually be in a favourable position.

By that i mean that our "take home pay" will be as good as it was, or better than before this deal was done with the additional % of ownership of ports we now have.

If trade does not return......well i'd rather not go there for now.

Its a bitter sweet pill we just took.
We just don't know quite how bitter yet - time will tell.

Just my take at this time!

 

[nathanblack]

Really good point regarding the possibility that Euroports post-sale may have much better EBITDA. But can you quantify the claim?

unfortunately BBI dont breakdown the results for individual ports, but obviously 100% belgium port > 50% belgium port.

Euroports and PD Ports are cyclical assets with revenue models that are usage based. Those kinds of assets get lousy prices when you sell them in a distress situation. And who can blame the buyers for not wanting to pay up for declining revenues?

but as i said, BBI bought out quite a few minority stakes in todays announcement. hopefully we paid todays prices for the increases from 50%-100%. Again BBI havent disclosed at this stage how much was spent "simplifying the structure", but if it was fair then when things rebound so will those ports

DBCT is a different animal entirely. As BB points out, the revenue is guaranteed whether the ships use the facility or not. They are using more of a pipeline reservation model where they get paid even during low utilization. DBCT should be able to fetch a much better multiple.

yes, its different, yes its regulated. but have BBI set 2 precedences now ?
1. powerco + europrt = "price haircut"
2. partial sale and restructure


The risk with DBCT as I see it is more around conspiracy by the bidders for the asset. Given the need for a quick sale, couldn't the coal companies conspire to put BBI into Administration, then when dealing with an asset sale through an Administrator, they could conspire to form a "joint venture" that avoids all competition on the asset purchase. The purpose of the joint venture would be to buy the asset for low dollar and then to pass on that low cost to all coal companies who own stakes in the venture. If BBI had no liquidity issues, they could wait a long time for the bidders to compete. BBI would see through any "joint venture" in a second and reject their bid. An Administrator won't be that savvy.

BBI directors will look after themselves, not me or any other BBI holder. Selling DBCT will result in job losses for mates, but selling to mates and restructuring could allow them to keep there jobs and any mates to make a fortune.

someone mentioned yesterdays heavy volume and price rise as clearly an indication of inside trading regarding euroports. let all the connected people buy in before announcing to general public.

if you buy into that theory, then there must be some concern that there isnt huge volume and price rises based on the current bidding process at DBCT. there must be several people at BBI and MAQ in a position to know the likelyhood of no/bad/good/great sale yet no leak?

 

[nathanblack]

I realize that 2012/13 is a long way off and i am happy to take flack on this but my taking on this deal is that if trade in euroports ports returns to 2008 volumes or better we will actually be in a favourable position.

By that i mean that our "take home pay" will be as good as it was, or better than before this deal was done with the additional % of ownership of ports we now have.

If trade does not return......well i'd rather not go there for now.

Its a bitter sweet pill we just took.
We just don't know quite how bitter yet - time will tell.

Just my take at this time!

yes i'd assume the same. if things are rosey in 2012, then the earning will rebound and the asset value will increase. and this will be amplified by the increased holdings in some smaller ports that were acquired today. you would ASSUME that under those trading condition BBI retain 60% odd of euroports.

IF euroports isnt performing, the new buyers will get an increased stake(up to 65%), so effectively they cant lose. it would be a bit like your house dropping in value by 50%, but then your neighbour gives your there house for free. you now have 2 houses 50% + 50% = 100%.

they cant lose. BBI can.

Hopefully BBI will reveal under what performance target each trigger event occurs, hopefully they are realist and not stacked against BBI too much. Np insto will commit until those details are transparent. especially when sparc is dilutionary, we dont want euroports diluted to 35% too

 

[cpsharky]

The risk with DBCT as I see it is more around conspiracy by the bidders for the asset. Given the need for a quick sale, couldn't the coal companies conspire to put BBI into Administration, then when dealing with an asset sale through an Administrator, they could conspire to form a "joint venture" that avoids all competition on the asset purchase.

I agree peristentone. DBCT is a very large asset; and divided up could keep many buyers content so buyers conspiring is my greatest worry. Given the time this has taken and the apparent lack of insider buying, I am concerned about not achieving the price multiple we are after.

If we can't find a real buyer then I would be hoping to unlock the equity in DBCT some other way. In my mind, it would make for a great float. It is a very straight forward investment to rate and understand and Asciano has shown there is still plenty of capital out there able to be raised for infrastructure investments. Beppa holders would quite likely agree to being "transferred" over to the new float also if they were given appropriate ranking in the new structure. I hope Maquarie/BBI is at least considering it.

 

[persistentone]

I agree peristentone. DBCT is a very large asset; and divided up could keep many buyers content so buyers conspiring is my greatest worry. Given the time this has taken and the apparent lack of insider buying, I am concerned about not achieving the price multiple we are after.

If we can't find a real buyer then I would be hoping to unlock the equity in DBCT some other way. In my mind, it would make for a great float. It is a very straight forward investment to rate and understand and Asciano has shown there is still plenty of capital out there able to be raised for infrastructure investments. Beppa holders would quite likely agree to being "transferred" over to the new float also if they were given appropriate ranking in the new structure. I hope Maquarie/BBI is at least considering it.

That's a very interesting idea. I guess Maquarie's fee would be semi-outrageous, but in absence of a real buyer I believe an asset of that quality could get a 10 multiple. And what I particularly like about that idea is that BBI could float more than 49% of the asset without losing effective control, and that BBI could control use of the funds, specifying clearly how much of it would stay with the asset and how much would go back to pay corporate debt for BBI.

BB: since you have an in with the CFO, is that an idea you might try to suggest to him?

 

[nathanblack]

That's a very interesting idea. I guess Maquarie's fee would be semi-outrageous, but in absence of a real buyer I believe an asset of that quality could get a 10 multiple. And what I particularly like about that idea is that BBI could float more than 49% of the asset without losing effective control, and that BBI could control use of the funds, specifying clearly how much of it would stay with the asset and how much would go back to pay corporate debt for BBI.

BB: since you have an in with the CFO, is that an idea you might try to suggest to him?

Persistent1, its not a new idea and has been discussed before. the biggest dilemna is what price should BBI put on DBCT for purpose of floating? Be realistic in your answer to your self. Think along the lines would YOU invest into the float at that price.

If BBI tried to float it at say $2.8bil, the first thought that jumps into my mind is that they DIDNT recieve an offer of that much or more, otherwise they would acept it. Are you willing to buy in at an inflated price? Its a good idea and could have worked IF they went down that path from the beginning.

The other aspect is, assume they did sell 50% in a float at $1.4bil. most of that money will need to go to asset level debt reduction. Think if you buy a house do you inherit the previous owners mortgage aswell? so a 50% float will not reduce the corporate debt, we need 100% really.