BBI - Babcock & Brown Infrastructure

[investorpaul]

Hardyakka - I agree that the announcement leaves the potential for BEPPA to convert at fce value and then b diluted (ie making them worth less than face value as per the announcement.

However say we get 14BBI per BEPPA instead of say 7 BBI per BEPPA my fear would be the cornerstone investor says I want 100bn BBI shares as opposed to 50 bn BBI shares (or however many they are buying).

Either way BBI is screwed, BEPPA is screwed but slightly less. The upside for BEPPA after conversion and if everything works out may be 20 or 30 cents at very best, but the risk is now HUGE. It is either all or nothing

 

[hardyakka]

A few other thoughts FYI which I am sure is giving the BBI RE board a few headaches.

BEPPA can be converted when management choses, but to issue more than 15% of new capital the issue must be approved by unitholders. So management need to ensure they have sufficient voting clout to get this across the line.

Secondly I am sure that the precedent set by the James Hardie case regarding duties of directors and executives keeping the market informed at at the back of their minds. Especially considering the turnaround between the year end announcement and yesterday. Did they keep the market informed?

That would be an interesting question for ASX Market Supervision to look at and report to ASIC on.

Only a few thoughts that are likely to give the BBI board food for thought

 

[persistentone]

Does anyone have a link to the prospectus for the New Zealand Bonds BBN020?

These may have been issued in connection with PowerCo, and if yes do they show up as asset level debt for PowerCo?

 

[investorpaul]

BEPPA can be converted when management choses, but to issue more than 15% of new capital the issue must be approved by unitholders. So management need to ensure they have sufficient voting clout to get this across the line.

is it just a majority vote by BBI holders to approve the issuing of new capital or do they require a higher % like 75%?

If so the cornerstone investor will need a stake and/or mates with a stake to get the deal across the line?

If he doesnt have/cant get the votes why would ordinary shareholders dilute themselves to oblivion via approving the issue of new capital.

If you face losing your investment via dilution why not stick it to the board vote down the proposal and see the company wound up. At least then you can get some joy out of the board losing their jobs and being in charge of a company that failed.

 

[drsmith]

A snippet from yesterday's announcement;

Furthermore, associated sales of assets may be at amounts lower than their current book values.

Interesting the directors should say that only a week after the release of the annual report.

BBI is now caught between the corporate knackery and a potential Mr Cornerstone who will be about as forgiving as the baby eating bishop of Bath and Wells. Furthermore, the directors primary interest out of all this will be to preserve their own jobs.

Should Mr Cornerstone come to the party, BEPPA and SPARCS holders will be offered two options and neither will involve anything remotely near their present terms. That's clear from yesterday's announcement.

As a guess, Mr Cornerstone's terms may well be something along the lines of 10% of a recapitalised BBI for existing BBI/BEPPA/SPARCS holders, perhaps more if the option of an equity contribution is also offered to existing holders of the above as part of the deal.

 

[hardyakka]

is it just a majority vote by BBI holders to approve the issuing of new capital or do they require a higher % like 75%?

If so the cornerstone investor will need a stake and/or mates with a stake to get the deal across the line?

If he doesnt have/cant get the votes why would ordinary shareholders dilute themselves to oblivion via approving the issue of new capital.

If you face losing your investment via dilution why not stick it to the board vote down the proposal and see the company wound up. At least then you can get some joy out of the board losing their jobs and being in charge of a company that failed.

Basically it is an ordinary resolution. Have a look at ASX LR 7, it goes into the detail.

http://www.asx.com.au/ListingRules/chapters/Chapter07.pdf

 

[skc]

This thread always fascinates me... and the way it is unfolding requires the private investor to have a strong understanding on how corporate finance really works.

It would be interesting to hear:

1. How many holders here bought because they were first made aware of the stock by BB?

2. How many did significant amount of due diligence before buying?

3. How many has the required knowledge to do such due diligence?

4. How many has an exit plan-B in place if and when the asset sales don't work out?

It feels like to me that BB was a priest who got a lot of people believing in God, pointing to his own research and evidence that God in fact exist. Many people blindly followed, while others accepted / saw the same evidence and became believers. Then BB later discovered that God actually doesn't exist, but is now having a hard time getting the believers to understand the new evidences.

 

[Tysonboss1]

I have been thinking about BBI's current situation this afternoon, And to be honest I think there is a huge chance that the deal with this corner stone investor is going to fall over.

That is unless They offer a worth while deal to beppa holders, I honestly think if they low ball the offer to Beppa, Beppa holders will let the deal collapse.

Here is one way I think the deal might just work.

- Offer conversion to Beppa holders at 80% of face value at 7c per share.

- Then offer a pro rata capital raising of 2new shares for 1 existing share, to existing share holders (including newly issued shares from beppa conversion) at 5c per share,

-have the deal underwritten by the corner stone.

-offer the cornerstone a bonus 15% holding for participation for 5c per share.

- cease all asset sale transactions.

It all depends on the personality of the cornerstone, there is a good opportunity for them to make a really good investment without them being total vultures about it. If they take to much of a hardline approach, I think this whole deal will come to nothing.

Or,

Let the deal fail and wait and see what our lenders do, This option would be a rocky road. But could still work out ok.

 

[nulla nulla]

is it just a majority vote by BBI holders to approve the issuing of new capital or do they require a higher % like 75%?

If so the cornerstone investor will need a stake and/or mates with a stake to get the deal across the line?

If he doesnt have/cant get the votes why would ordinary shareholders dilute themselves to oblivion via approving the issue of new capital.

If you face losing your investment via dilution why not stick it to the board vote down the proposal and see the company wound up. At least then you can get some joy out of the board losing their jobs and being in charge of a company that failed.

When Graham Hart of New Zealand took a cornerstone investment in Burns Philp the Receivers and Managers were appointed soon after and it looked like the Administrators/Liquidators would be next.
Mr Hart decided liquidation was not an option and worked closely with the Receivers & Managers and the banks to turn the company arround. From memory the share price tanked arround $0.03 but through restructuring, recapitalisation and incredible management, Mr Hart took the company out of Receiver Management and the share price ultimately recovered to $1.25 or thereabouts. Then Mr Hart took the company private buying up the shares he didn't already own (and took over Goodman Fielder along the way).
BBI has significant underlying assets and is generating sufficient income to cover the interest and operating costs. It would be folly to wind the company up simply to put the directors out of work. If you want to flick the directors call a general meeting and replace them.
Maybe BBI needs someone like Graham Hart, a cornerstone investor that can work with the banks; ultimately pay them out from operating capital; organise recapitalisation; sales of noncore assets; and then restore the share price in the market.

 

[hardyakka]

When I step back, what has really changed.

In addition to what we already know, what has really changed?

• Proposed deep value investor ie DVI (or is this just another board lie?)
• Proven incompetence of BBI board (asset sales and disclosure)
• Time to raise cash to meet repayments is running out.
• Major encouragement of negative sentiment

Other key issues

• There is massive value in BBI assets (price discount to net assets, NGPL and DBCT not marked to market, GFC impact in depressing values).
• The banks do not want want to roll facilities, nor do they want a loss.

The deep value investor is not in this to make a few hundred million, more like a few billion. The source of this primarily being DBCT/NGPL mark to market and a slab of existing net assets.

This ignores the additional value to a fund manager in base and performance fees if the assets are put in a fund, these would be massive. Assets in a fund would be revalued annually, on a DCF or EV basis (apply that to DBCT alone and you see the upside).

The bank debt is being serviced but not repaid. I feel this would be rolled/refinanced on a reconstruction with short term facilities being repaid. In an admin situation the banks may lose principal and a secure income stream.

So how would our deep value investor go about unlocking this value, its simple when you think about it.

• Create a situation of uncertainty, maybe negotiate for an asset and put in a low ball bid.
• Hold out a promise of hope to the board making sure they have minimal options.
• The scare mongering will lower the BBI and BEPPA prices.
• Do not acquire BBI, instead acquire BEPPA knowing the lower the BBI price the more BBI you will get on BEPPA conversion
• No substantial shareholding notice is required as the deep value investor is accumulating non-voting BEPPA.
• On conversion guess who is likely to be the major ordinary holder and will require to lodge a substantial shareholding notification, yes the deep value investor.

So the above tells me that there will be a reasonable disguised demand for BEPPA.

The end result is that the deep value investor would, via BEPPA conversion, control the bulk or ordinaries and would not need to make a bid. The banks holding in BBI via BNb is a card up their sleeve.

Next the deep value investor uses that voting power to approve a new issue to all unitholders, underwriting it of course for a fee, and a capital reconstruction, say 1 for 100. When the banks see certainty here debt will be rolled, credit rating regained etc etc normality starts to return.

Again a lot of ifs, either way the risk/reward equation has changed.

Well that is enough from me

Cheers

 

[persistentone]

Page 53 of the BBI 2009 report starts to summarize borrowings. Item 20 "Borrowings" shows a consolidated total borrowing of $6,979,705. Other places they report $9.1B in total asset and corporate debt. What is missing from item 20 on page 53 to reconcile to $9.1B in borrowings?

 

[ricee007]

It would be interesting to hear:
1. How many holders here bought because they were first made aware of the stock by BB?
Not I.

2. How many did significant amount of due diligence before buying?
I did.

3. How many has the required knowledge to do such due diligence?
Sort of? 3rd Year Commerce (Corporate Finance and Account double Major) and Law University double degree student.

4. How many has an exit plan-B in place if and when the asset sales don't work out?
I got out at 13.5c, despite believing that BEPPA will be AT LEAST 20c (more than likely, much more)... but, my risk profile told me to be happy with a 35% profit.

It feels like to me that BB was a priest who got a lot of people believing in God, pointing to his own research and evidence that God in fact exist. Many people blindly followed, while others accepted / saw the same evidence and became believers. Then BB later discovered that God actually doesn't exist, but is now having a hard time getting the believers to understand the new evidences.

Hmmm, no... God MIGHT exist in this case... BBI might be worth 15c soon, and I believe BEPPA will be worth AT A MINIMUM, almost twice what it is worth now...

But, again, too risky for me.

 

[Tysonboss1]

[

Hmmm, no... God MIGHT exist in this case... BBI might be worth 15c soon, and I believe BEPPA will be worth AT A MINIMUM, almost twice what it is worth now...

But, again, too risky for me.

I hope your right, I would like to believe in god.

But what are you basing your statment on, I would love to hear your thoughts.

 

[persistentone]

This thread always fascinates me... and the way it is unfolding requires the private investor to have a strong understanding on how corporate finance really works.

It would be interesting to hear:

1. How many holders here bought because they were first made aware of the stock by BB?

2. How many did significant amount of due diligence before buying?

3. How many has the required knowledge to do such due diligence?

4. How many has an exit plan-B in place if and when the asset sales don't work out?

It feels like to me that BB was a priest who got a lot of people believing in God, pointing to his own research and evidence that God in fact exist. Many people blindly followed, while others accepted / saw the same evidence and became believers. Then BB later discovered that God actually doesn't exist, but is now having a hard time getting the believers to understand the new evidences.

BB's research has always been of high quality. The fact that he has an opinion, states a clear set of facts, states his argument on those facts, and then states clearly how he will act on those facts is only a credit to him. I wish we had 20 more just like him.

I created my own spreadsheet based on the same set of facts and came to a different conclusion than BB. I calculated BEPPA as getting at best a 22 cent recovery on Administration and quite likely getting zero on Administration. I didn't see a victorious path out of the debt death spiral they were in, so I am really glad I did that homework. When I started to follow BBI the BEPPA were already near 10 cents, so it was an equal reward to the risk, and for me that meant pass. Had I been around when BEPPA was trading at four cents, I would have been sorely tempted to pull the trigger. Even though I came to a different conclusion, I am deeply indebted to BB for sharing facts and research that were instrumental to, and improved the quality of, my own research.

People who only follow instead of thinking independently will never make money. Failure to accept responsibility for one's own actions, and looking for someone to blame for those actions, is not a path to success. We have met the enemy and he is us. That's my two cents.

P.S., I agree that BBI and BEPPA are situations that really require the investor to be analytical and savvy about how to calculate financial results. It's a difficult exercise because of the amount of asset level and corporate debt they have, and because of the different characteristics of so many businesses that they own. No doubt 80% of those investing shouldn't.

 

[hardyakka]

There has been a fair panic today, so I am going to look at this logically. Below are some numbers I have put together, follow those through and you will understand my logic. You can flex these as you chose, but it really boils down to the discount the market applies to the Net Assets of a revived Prime Infrastructure Trust

Known data

• *]Net Assets $1720M
• Units on issue 2591M
• Net Assets 67 cents
• BBI conversion rate 7 cents
• Total value of SPARCS and BEPPA $771M

(I am ignoring accrued BEPPA interest and assuming both are converted at
the same time)


Conversion at 7 cents

• 13605M units on issue ($771M @ 7 cents +2491M)
• Net assets now 18.3 cents ($1720M+$771M / 13605M)
• BBI price drops to 1.33 cents (pro-rata with dilution ie 2491M/13605M X 7 cents)

Investor comes in with $1billion

• Net assets now $3491M ($771M + $1720M + $1000M)
  [*]Units issued to new investor=200,000M ( $1000M/0.5 cents)
  [*]Total units on issue 213605M (200,000M + 13605M)
  [*]Net Assets 1.63 cents ($3491M/213605M)

What does conversion mean?

1M BEPPA would convert to 14M units (1/771 x 11014M)
14M units represents $228,200 of Net Assets (14M x 1.63 cents), ie 22.8 cents per existing BEPPA.

The 22.8 cents is a function of the Net Assets attributable to the ordinaries issued as satisfaction of BEPPA/SPARCS conversion.

BUT
What value would the market put on these Net Assets?
By this time:

• Corporate debt will be virtually eliminated,
• Sweep gone
• Investment grade rating back,
• No debt problems
• Institutional buying will commence
• Cashflows from expanded DBCT received
• GFC recovery well underway.

Considering this I think the market would pay at least 50% of Net Assets as a market value for regulated quality income stream


So the if market price represents 50% of net assets, then the price for 1M BEPPAS would be $114k (Net Assets $228k x 50%)

What upside/downside is not counted above?

Downside-None as assets that are overvalued are fully impaired as at June 2009

Upside-The difference between the market value and book value of DBCT and NGPL, which I consider to be at least a $1billion.

Am I selling out of BEPPA..no, but I know its going to be a bouncy ride

Any comments?

NB- When checking I just noticed that I have used 2491 rather than 2591 for current units, the 100M makes little difference to the numbers.

Cheers

I am going to go out on a limb here and vary the above scenario adopting a "doomsday" approach.

The key assumption I will vary is the price at which units are allocated to the deep value investor. Instead I will vary this to be $1000M at 0.5 cents rather than the diluted original 1.33 cents per BBI.

Numbers affected are highlighted in bold and underlined

I am not changing the rather high 7 cents conversion price of BEPPA/SPARCS, this allows for a little more prudence in my numbers. More likely the price would be lower than 5 cents, but leave that as unrecognised upside.

The same upside as noted in the original post exists except I now consider that the following should be added:

a) There will be a non-renounceable rights issue after a reconstruction.
b) The real value to the deep value investor is moving the BBI assets out of BBI into a fund. To do this cleanly they need 100%. So I can see a situation where any investors still in the game after the above has transpired will be bought out at a premium to current market prices.

BBI is now taxing my brain and I am more and more of the view that there is pretty good upside if you bought in below about 10 cents.

Cheers

 

[suhm]

I actually was made aware of this stock because of BNB, I had a look at all of the satellites, as the guilt by association can lead to some opportunities like AEP with AFG previously which had a net asset value of more than $5 with about $1.10 being net cash was selling for <1.70, that was a no brainer.

Problem for me with these BNB entities were that they were a lot more complicated, had a ton of debt so valuations in liquidation would be rubbery and I think the only ppl who would know how much the assets are worth would be other infrastructure groups, certainly not me.

Cheers, for all the great posts though, BEPPA was about 12c when the posts on this thread got me interested in it again, but for me the risk reward ratio wasn't there. I should have read this thread earlier .

 

[hardyakka]

I think the only ppl who would know how much the assets are worth would be other infrastructure groups, certainly not me.

Summed up nicely, the market really has no idea of the real value of the BBI assets is, having been in that industry for many years I have a small appreciation.

As BB has often pointed out there is incredible unlocked value in BBI, however the banks stance has basically resulted in that value likely being transferred to an offshore deep value investor.

The sad thing is that Australian superannuants will likely be the recipients of the income streams from these assets, but they will pay full market price for them when acquiring the assets.

Still that is how the markets work, I for one will be looking to acquire additional BEPPA, my reasons for doing so are basically outlined above.

Cheers

 

[ricee007]

I hope your right, I would like to believe in god.

But what are you basing your statment on, I would love to hear your thoughts.

Bbi im really not sure about...

For beppa, i doubt the cornerstone would be unwilling to give at least 20c... Even at 50c, it is a massive profit for the cornerstone. Furthermore, i doubt the majority of beppa holders (especially the fact that we are talking about a case where they require virtually all to be sold, not just a majority) would be willing to accept 15c or so or less. I just cant see that happening.

So, lets recap. The cornerstone gets a massive profit at, say, 30c...i dont believe virtually all beppa holders will be happy to convert at 15c.... .

 

[banska bystrica]

The problem for BBI and the cornerstone investor is the fact that BBI is still trading. I'm certain they were expecting a suspension pending finalising of the deal.
They would have been working their numbers around 7c but now it's all a big unknown? Will the market smash it to 3c and then what? The price will be so low that any deal will be rejected by SPARCS or BEPPA holders.

 

[persistentone]

I am going to go out on a limb here and vary the above scenario adopting a "doomsday" approach.

The key assumption I will vary is the price at which units are allocated to the deep value investor. Instead I will vary this to be $1000M at 0.5 cents rather than the diluted original 1.33 cents per BBI.

Numbers affected are highlighted in bold and underlined

I am not changing the rather high 7 cents conversion price of BEPPA/SPARCS, this allows for a little more prudence in my numbers. More likely the price would be lower than 5 cents, but leave that as unrecognised upside.

The same upside as noted in the original post exists except I now consider that the following should be added:

a) There will be a non-renounceable rights issue after a reconstruction.
b) The real value to the deep value investor is moving the BBI assets out of BBI into a fund. To do this cleanly they need 100%. So I can see a situation where any investors still in the game after the above has transpired will be bought out at a premium to current market prices.

BBI is now taxing my brain and I am more and more of the view that there is pretty good upside if you bought in below about 10 cents.

Cheers

I think you are just kidding yourself that the investor is going to be so kind to us. Two things you didn't consider are that the investor is most likely going to steal one of our key assets (probably DBCT or NGPL) at below book value and also a private equity investor is never going to accept a deal of this type that doesn't leave him in control of 51%+ of the equity.

These kinds of deals are typically based on a proposed valuation that is a calculation of a distressed EBITDA multiple, not based on net asset values. So here is one typical deal that could happen:

1) All hybrids are converted 10 to 1 (I think the real number will be between 3 and 5 to 1 because if you don't lower the conversion ratio the BBI common are destroyed and will never vote for the deal, but let's use a favorable case for BEPPA and do this with a 10 to 1 conversion). This gives us a new share count of 95.79B

2) Sell DBCT at $2016, which is an EBITDA of 9 against 2010 earnings. That nets us $210M cash over the debt recorded on the books. It would be a crime to sell it at this price, but please everyone stop being optimistic about the asset sales. We have a private equity investor and these people are vultures and they will extract their pound of flesh. Whatever asset we sell, the price is going to be ugly.

3) I took BB's old model which included a distressed EBITDA multiple against 2011 earnings for each asset, and I adapted that with my own more pessimistic numbers. I then took a midpoint of the two estimates. Excluding DBCT (which by hypothesis we have sold), the valuation for the remaining businesses is $7,184M using this midpoint number.

4) We subtract out the adjusted debt, which is now $6,379M ($9.1B - $915M hybrid debt - $1.8B DBCT debt)

5) We add back the net cash on hand which is now $470M ($260M + $210M net from DBCT sale)

6) This gives us a proposed market cap of $1,275M *pre-money*.

7) Assume the investor puts in $700M. This gives us 116.6B new shares and investor takes 54.9% of company. The new value per share is 0.6 cents. Hybrids converting at 10 to 1 are valued at 6 cents.

It would be ordinary in a deal like this for the shares to immediately double in value because of the release of the company from crisis, so 6 cents might quickly trade to 12 cents. But that's hardly a windfall for the BEPPA.

8) Assume the investor puts in $1B. That gives us 348.3B new shares and the investor takes 78.4% of the company. The new value per share is 0.29 cents. Hybrids are worth 2.9 cents at 10 to 1, and trade up to 6 cents as deal nears completion.

At the end of this, we haven't really cleared our problems. We have simply substituted a taskmaster (the banks) for a slave master (the private equity investor). Sure, we avoid Administration, but most of the value we unlock here is for the investor and not for us.

Some things to consider that should temper your optimism:

1) A private equity investor will most likely do this deal with convertible preferred shares that pay out 8% or higher interest. So we just substitute the bank's interest payments with payments to the investor. He takes his common shares much later in the game when he is ready to cash out.

2) In any scenario I could develop, the BBI shares are just worthless. At what point do BBI common investors revolt and flip the finger at BBI and refuse to do the deal, sending the company into Administration?

To save the common and provide BBI some value, the new deal could instead shaft the BEPPA and propose a 3 to 1 or 5 to 1 conversion. At that point do the BEPPA revolt and refuse the deal?

So in my estimation, BBI are screwed, no matter what deal is done or not done.

BEPPA are at best looking at a risk reward that keeps them even in a best case and sends them to $0 in a worst case.

If anyone can invest on terms the new investor is getting, that is probably a sweet deal.

Let's see whether the new investor is actually a white knight and looks for a way to give value to shareholders. You find such an investor in one out of 10 deals of this type. So don't hold your breath waiting for it, but if it does kiss the ground and count your good luck.

For me, this isn't an investment; it's a crap shoot.