BNB - Babcock & Brown

[blaze87]

Yeah, I realise that is Uncle Phil's spin, I just wonder how it accords with reality.

Institututional investors like Chinese and Middle Eastern sovereign funds could easily afford to buy infrastructure directly. In many cases there is no need for a middle man. They are cashed up and don't need credit at all in many cases. And if they do need credit, they can get it more easily than BNB in many cases (which admittedly is not that big an achievment these days).

Furthermore, even if insitutional investors do go through BNB, it is unlikely they will tolerate the rate of fees that retail funds give to BNB. They are too smart for that, notwithstanding Uncle Phil's claim to the contrary.

Bottom line is this - institutional investors are big and powerful, there is not much value adding that BNB can do.

It's true that institutitional investors are able to buy the infrastructure directly. However BNB does offer value, BNB has knowledge about the core areas it gotten itself into. It is able to structure financinal arrangement and and diversify its assets to reduce the riskyness of the portfolio. You cannot just ask any random person to blindly buy infrastructure. There's so much more to buying infrastructure than say.. this looks nice, i think i take it. The whole process of buying, ie( looking at value and not just price, maintainance, financial arrangement, management, takeover and such is what BNB offer.
I'm sure that if an institutitional investor would incurr much more cost and risk if it tried to acquire infrastructure without extensive knowledge in that particular market.
It's like asking you to assemble a computer. Sure you might have the internet to help you. But unless u have the expertise and creditability to do it, im sure u will not take on such a tedious task. Imagine buying the components of the computers and realising later u cannot fit it. The middle man in a capitalist system acutally helps to reduce the costs than if every individual tried to do it himself. If u think about it, Woolworths is also a middle man, so is QBE, but they have been around for a long time and will continue as long as the services(benefits) outweights the cost individuals/institutional.


Debt is not neccessarily a bad thing(it's much like margin loans), but in this current market condition, the difficulty in accessing capital markets and the increased cost of debt will negatively affect BNB. That being said, it's rare to see any financial firms or real estate trust not using some form of leverage.

 

[Mr_T]

It's true that institutitional investors are able to buy the infrastructure directly. However BNB does offer value, BNB has knowledge about the core areas it gotten itself into. It is able to structure financinal arrangement and and diversify its assets to reduce the riskyness of the portfolio. You cannot just ask any random person to blindly buy infrastructure. There's so much more to buying infrastructure than say.. this looks nice, i think i take it. The whole process of buying, ie( looking at value and not just price, maintainance, financial arrangement, management, takeover and such is what BNB offer.
I'm sure that if an institutitional investor would incurr much more cost and risk if it tried to acquire infrastructure without extensive knowledge in that particular market.
It's like asking you to assemble a computer. Sure you might have the internet to help you. But unless u have the expertise and creditability to do it, im sure u will not take on such a tedious task. Imagine buying the components of the computers and realising later u cannot fit it. The middle man in a capitalist system acutally helps to reduce the costs than if every individual tried to do it himself. If u think about it, Woolworths is also a middle man, so is QBE, but they have been around for a long time and will continue as long as the services(benefits) outweights the cost individuals/institutional.


Debt is not neccessarily a bad thing(it's much like margin loans), but in this current market condition, the difficulty in accessing capital markets and the increased cost of debt will negatively affect BNB. That being said, it's rare to see any financial firms or real estate trust not using some form of leverage.

Yes, I agree expertise is required. I just think that if you are a "big boy" there are many ways to acquire it. Bottom line is that wholesale investors can hire a team of experts to advise them, even if it means paying them each super high salaries - and it would still be infinitely cheaper than the ongoing "management" fees the like of BNB charge.

 

[blaze87]

Yes, I agree expertise is required. I just think that if you are a "big boy" there are many ways to acquire it. Bottom line is that wholesale investors can hire a team of experts to advise them, even if it means paying them each super high salaries - and it would still be infinitely cheaper than the ongoing "management" fees the like of BNB charge.

Well,
BNB are the experts. If they aren't experts, they will not be able to such a high roe every year.

secondly, "the team of experts''- mqg, any of the other investment banks comes into mind. Compare the fees between them and u see that's not much difference. Now the next question is why would investors pay such fees, the answer is beacuse they are the experts.

You can think of Investment banking as a form of outsource companies. They are efficient and can only can get efficient as time goes on.

 

[pilbara]

BNB does offer value, BNB has knowledge about the core areas it gotten itself into.

I see this as the most valuable asset in the BNB business, truly global knowledge and connections in the core industries they invest. If they can keep these teams of people together they will get critical mass and build a sustainable business model.

 

[pilbara]

Institututional investors like Chinese and Middle Eastern sovereign funds could easily afford to buy infrastructure directly.

It's ironic, because Australia has its own sovereign fund (The Future Fund) but I doubt they would invest in infrastructure, because they are the government and government worldwide has given up spending on infrastructure!!

 

[blaze87]

I see this as the most valuable asset in the BNB business, truly global knowledge and connections in the core industries they invest. If they can keep these teams of people together they will get critical mass and build a sustainable business model.

Since people are the most valuable asset, it makes sense to pay big for salaries and bonuses as well as cultivating a sense of belonging in the company as well as being evironmentally-friendly as stated in BNB Annual report. Unless the time comes that the cost of hiring these people outweight the benefits, it makes no economical sense not to give them those monetary incentive. Think about it, no employee no money, low-quality employees= poor profits and deal-making, High-quality employee= good profits year in, year out.

On the other hand, when the market slump, these employees also have to understand why they will be taking home a lower bonus.

 

[Mr_T]

Well,
BNB are the experts. If they aren't experts, they will not be able to such a high roe every year.

secondly, "the team of experts''- mqg, any of the other investment banks comes into mind. Compare the fees between them and u see that's not much difference. Now the next question is why would investors pay such fees, the answer is beacuse they are the experts.

You can think of Investment banking as a form of outsource companies. They are efficient and can only can get efficient as time goes on.

I'll keep away from the term "efficient" as it isn't relevant here.

What the market has decided is that they (the management fees) are a rip off, ie the management fees that BNB, etc charge are not proportional to what they offer. Evidence of this is seen in the huge dive in value of satellites of BNB, Mac, etc etc. Not to mention the dive in value of the motherships.

Your comments implies that BNB and MCQ and the other set of clowns are all that the wholesale funds have to choose from in finding someone to manage infrastructure investments. They are not. These are rich organisations run by clever people, they will find a cheaper way to run their infrastructure investments (such as having it in house management).

 

[blaze87]

I'll keep away from the term "efficient" as it isn't relevant here.

What the market has decided is that they (the management fees) are a rip off, ie the management fees that BNB, etc charge are not proportional to what they offer. Evidence of this is seen in the huge dive in value of satellites of BNB, Mac, etc etc. Not to mention the dive in value of the motherships.

Your comments implies that BNB and MCQ and the other set of clowns are all that the big boys have to choose from. They are not.

First i think u need to define how is the management fee a rip-off. they are providing a service to it's satellites, but i confess there's a conflict of interest particularity in the term-mangement contracts and such.

What has gone down is the PRICE, not value for the satellties. Im unaware of the mac models so i won't touch it. However for BNB, with the exception of BBP, the other funds have not met with any problem. Investors fled from these vehicles beacuse of the general market condition and the negativity surrounding the financial sector. Just look at bear stern, a stock trading a 80 plus dollar suddenly selling for only 10 dollars. Look at allco, abs, mfs. Fear is a psychological factor that can contribute to one's trading/investing.

Now let's go back to the DCF model u mentioned a couple of post ago.
DCF tries to make a vague estimation on VALUE. Price is what you get if u choose to sell the 'asset' now.
Now imagine if like what u said, price of ur house doubled, whilst the value remained the same, the most sensible answer would be to sell it.
On the other hand, if price is lower than value, than therotically you will buy the asset or you can try to see check ur DCF model to see if your previous assumptions are correct.
On many occassion, they are known to move in different direction, BUT if the company is solid, price will slowly, evenutally follow value, however patience is needed.

-think about the number of people even needed to buy 1 single infrastructure.
im sure there would be too many to count. Now u need more than 1 infrastruture and they have to be in different geographic areas. now the number of people needed just got doubled. you need people to organise these people and make sure they are trustworthy and competent, now you have even more people. now consider the ongoing maintance and security and you got urself a whole lot of people which will be rather uneconomical to hire no matter how you think about it. BNB is the company that assemble the correct people to do the job. It's not as easy as you make it sound

 

[blaze87]

I'll keep away from the term "efficient" as it isn't relevant here.
QUOTE]

I meant efficent as they have to keep their prices for their services fair. perhaps a better word would be competitive. sorry about that

 

[pilbara]

What the market has decided is that they (the management fees) are a rip off, ie the management fees that BNB, etc charge are not proportional to what they offer. Evidence of this is seen in the huge dive in value of satellites of BNB, Mac, etc etc. Not to mention the dive in value of the motherships.

I think the market has reacted to the dive in asset values and the increase in debt costs, combined with a business model that only worked when asset values were rising, and the perception that the business is new and it bought at the top of the asset bubble.

 

[blaze87]

I think the market has reacted to the dive in asset values and the increase in debt costs, combined with a business model that only worked when asset values were rising, and the perception that the business is new and it bought at the top of the asset bubble.

I think they are alot of reason why people choose to sell/avoid bnb.

1) it's in a financial sector
2) it relies on debt to create deals
3) public believes the model does not work

1) nothing i can say about pt 1... no1 likes catching a falling knife
2) High interest on debt will reduce the high margins that BNB has previously enjoyed over the years. However that does not mean that they will neccessarily be making a loss on their investments. Bare in mind that they take into account of risk profile of the various projects as well as specific IRR hurdles. It only makes sense to take on the projects that generates the highest IRR given the NPV is also positive. As long as BNB has access to the capital market, it's ability to create deals will continue. As evidenced by previous annoucements, BNB has shown that it does have access to capital markets.

3) the reason why asset values are falling is primarily due to fear that these leverage companies will be unable to refinance their debt facilities or to find bankers to fund their capex. Now 1 bad apple can have a massive psychological effect on the rest of the market.

Now this might sound strange, but i actually believe that this downturn will acutally help BNB acquire good and attractive assets at a even more attractive prices. Even warren buffet has said it, he believes the value of stocks has gotten better. As long as BNB is able to fund it's deal and able to wait it out, BNB should be able to generate good profits over the long-term

 

[stoxclimber]

a) No, he's not that important, not part of review committee.

b) Even if he was - how would it be a criminal offence? Please specify which criminal law he has broken?

Its a criminal offense to disclose non-public price sensitive information in certain circumstances. See s 1043 of the Corporations Act

 

[Mr_T]

Its a criminal offense to disclose non-public price sensitive information in certain circumstances. See s 1043 of the Corporations Act

Wrong. Disclosing information by itself isn't criminal. Only if it is somehow tied with the information being used for "insider trading" is the disclosure criminal.

 

[stoxclimber]

That's why I said in certain circumstances. The Act does not require that you in fact did trade on the information.

Criminal matters aside, it would most definitely be a breach of his employment contract, so I don't really think it's appropriate regardless to post that your mate at ANZ told you such on a public forum. But hey, he's your mate.

 

[Mr_T]

That's why I said in certain circumstances. The Act does not require that you in fact did trade on the information.

Criminal matters aside, it would most definitely be a breach of his employment contract, so I don't really think it's appropriate regardless to post that your mate at ANZ told you such on a public forum. But hey, he's your mate.

No it doesn't require that you trade on the information, but it requires something along those lines, eg that there is an expectation person that you tell will trade on it.

Somehow, I don't think he's going to lose his job by me posting this piece of information on a forum.......

 

[Mr_T]

Another brilliant recent article by Michael West regarding BNB and their neverending spin.

http://business.smh.com.au/asics-jihad-on-babcock-rumours-20080702-305r.html

ASIC's jihad on Babcock rumours

Michael West
July 2, 2008 - 6:26AM
The regulator's jihad on rumour-mongers is something of a Babcock-centric affair. It kicked off in March after chief executive Phil Green complained that short sellers, hedge funds and rumour-mongers were destroying his stock price.

In reality, it was unshackled greed and recklessly-leveraged empire building which had done the trick - whipping the stock way too high in the first place - and its recent thrashing through $7 a share simply proved B&B's short-sellers had it right in the first place.

Getting it right has come at a price though. A gaggle of brokers including Merrill Lynch and Lehman Brothers, and a coven of hedge funds including the James Packer-backed fund Ellerston, have had a visit from the corporate plod.

According to research from the peak super fund body, Australian Council of Super Investors (ACSI), Babcock & Brown is among the most prolific procurers of waivers from the regulators in the marketplace - second perhaps only to Macquarie when it comes to gaining exemptions from listing rules - and now it appears the relationship with officialdom is extending to investigating those market players who had the hide to call it a ''sell''.

Lehman's trading desk had sent out a note to clients on March 5 pointing out Babcock was vulnerable to $631 million in margin loans over shares it held in its satellites. They were simply doing their job; broking a story that is to their clients - and getting it right.

Around the same time, incidentally, this website discovered the same information thanks to another source. It wasn't inside information. There it was, buried in the notes to the accounts, albeit disguised somewhat, as is de riguer for the accounts of a financial engineer.

Lehman and its clients, among others, are now being investigated for transmitting Babcock's own publicly-available information.

The irony is that over the past few years, during the biggest bullmarket in Australian corporate history, there has been no investigation into the orgy of rumour-mongering which pushed share prices up - and almost always ahead of the statutory disclosures.

A casual glance at almost any chart of a share price in the lead-up to a any takeover, or similarly price-sensitive announcement will show the inside traders and the rumour-mongers getting set for the news.

The entire market is obsessed with rumours. Investigating rumour-mongers is as useful as investigating life. Every day, telephones and trading desks hum with talk of what could happen, as much as what is happening. Share prices swing as much on rumour as reality.

When ASIC investigators approached Ellerston to trawl over their trades in B&B they are rumoured to have been told politely it might be more useful to investigate B&B. Good call, though the primary task of ASIC is to help it stay alive at this point. The stakes are high.

The Ellerston anecdote is just a rumour by the way. But it is no rumour that investors had been led to believe by B&B that the market cap review clause - which sparked the latest rout in the stock - would be triggered only by a four-month share price fall below the prescribed level of $7.50 a share. In fact, it was a one day breach that had been stipulated by the banks, not four months.

That's just one dodgy incident. They are many. No one would expect the regulators to police every corporate shenanigan or even stem the rushing tide of market implosions. Markets fall.

Resources would be better deployed though than chasing Phil Green's balance sheet sceptics for getting it right. What message does this send to those who would give fearless and honest advice - buy or sell?

What did lead to this mass destruction of wealth at B&B? Leverage, the corporate structure and a failure to evaluate risk. And now that Green has got to drag his empire back from the brink it's hardly useful to have the dealing desks as well as the analysts offside by sooling ASIC onto them.

The investigation may well turn up evidence somewhere of a short-selling conspiracy which destabilised B&B shares. Even so, it would be hard to justify the assault on the flow of information when there are so many big ticket targets for a regulator to chase.

These B&B margin loans and related party transactions - why did the risk committee sign off? Did the independent directors know about it? What of the auditors? What were they doing to justify their million dollar audit fees?

What were all the big broking houses doing with ''buy'' recommendations on B&B at $28 when the stock was $14? Why were positive B&B stories consistently leaked to selective press?

Why did ASX and ASIC approve the myriad of waivers which may now be helping to bring the externally-managed structures unstuck?

In the 1980s the regulators introduced laws to stop companies from buying shares in themselves and their related entities. Over the past few years the regulators have been granting waivers so companies can do just that. The ramifications of this folly are now in full swing

 

[Mr_T]

First i think u need to define how is the management fee a rip-off. they are providing a service to it's satellites, but i confess there's a conflict of interest particularity in the term-mangement contracts and such.

What has gone down is the PRICE, not value for the satellties. Im unaware of the mac models so i won't touch it. However for BNB, with the exception of BBP, the other funds have not met with any problem. Investors fled from these vehicles beacuse of the general market condition and the negativity surrounding the financial sector. Just look at bear stern, a stock trading a 80 plus dollar suddenly selling for only 10 dollars. Look at allco, abs, mfs. Fear is a psychological factor that can contribute to one's trading/investing.

Now let's go back to the DCF model u mentioned a couple of post ago.
DCF tries to make a vague estimation on VALUE. Price is what you get if u choose to sell the 'asset' now.
Now imagine if like what u said, price of ur house doubled, whilst the value remained the same, the most sensible answer would be to sell it.
On the other hand, if price is lower than value, than therotically you will buy the asset or you can try to see check ur DCF model to see if your previous assumptions are correct.
On many occassion, they are known to move in different direction, BUT if the company is solid, price will slowly, evenutally follow value, however patience is needed.

-think about the number of people even needed to buy 1 single infrastructure.
im sure there would be too many to count. Now u need more than 1 infrastruture and they have to be in different geographic areas. now the number of people needed just got doubled. you need people to organise these people and make sure they are trustworthy and competent, now you have even more people. now consider the ongoing maintance and security and you got urself a whole lot of people which will be rather uneconomical to hire no matter how you think about it. BNB is the company that assemble the correct people to do the job. It's not as easy as you make it sound

Management fees are a rip off. If you don't believe me, have a read of the Riskmetrics report. It's not light reading, but well worth, available at http://www.riskmetrics.com/pdf/RMG_Infrastructure_Funds_080326.pdf

Bottom line is if they weren't a rip off and offered good value, then
a) There wouldn't need to be such a "waterproof" contract that forces BNB satellites to use BNB as a manager. If there was such good value contractual enforcement wouldn't be required, the satellites would naturally use BNB as a manager.

AND

b) The BNB satellites would have a market value similar to the net market value of the underlying assets. The reason that the BNB satellites are trading at a substantial discount to their Net Assets is because those management fees devalue the assets. They do this because they profits less than they otherwise could be compared to if those satellities were internally managed (like normal businesses are).

Release those satellites from those management agreement and I assure you their Market Value will reflect the underlying Net Assets very quickly.

The proof is in the pudding.

Don't agree with your house comment - just because it rises in value but rent stays same isn't a sell signal. This is in fact what happened to Melbourne real estate for many years (ie house prices went up, but rent stayed the same - until the last year or so that is when rents have been rising) but a decision to sell as this process was occuring would not have been a good one.

 

[pilbara]

http://www.riskmetrics.com/pdf/RMG_Infrastructure_Funds_080326.pdf

thanks Mr T for that report, it's pure gold!! Will read it carefully to better understand the "Macquarie Model".

 

[pilbara]

the EPS is much larger than the dividend so I don't think they will lower the dividend, and even if the earnings halved then thats still a price earnings of 6.

With guidance still for 750 million "profit", but not much recovery in share price, and no serious takeover offers made, I think the market doesn't believe this result can be repeated, even if they make the 750 million this time.

But with 43% of the company held by senior staff maybe takeover isn't likely.

Management buyout isn't likely either because management want the riches granted to them by the stock market.

 

[johenmo]

I've followed this thread with interest (still having a very small parcel of BNB, and being new to shares). But I have been through quite a bit in businesses and was working for a company when it's parent several steps removed suffered a drop in share price that forced a firesale of it's subsidiaries.

Financially the parent was fine but with high debt levels but sentiment was such that fear of the debt over-rode logic. And that's a common theme in many threads - that all the logic (FA, TA, anything else) can go out the window if people start to worry.

After buying BNB, and then finding this forum, I looked deeper at BNB and in hidsight, wouldn't have bought it due to 1) falling sector/market 2) how similar modelled businesses were faring elsewhere in the world (indicates a change in sentiment?) 3) things that were missing from the official information (e.g. annual report) 4) what I would call creative accounting.

I don't always agree with Mr T but I think, in this case, he has more than enough grounds to be wary of BNB. History is littered with "stock market darlings" who have gone from being a model business to a train wreck on the side of the tracks (and opposites can be found!). NO doubt some sentiment contributed to the drop.

Management fees have to be justified. And any one who signs management contracts such as BNB have organised (25 years) is looking for trouble. There must be a break clause. With anything it's the return on investment that is the bottom line. And if the fees are at the upper end then they have to deliver.

We kept the stocks for a number of reasons - did not believe the banks would do their worst, we are looking long term (but this isn't a good stock for that IMO), investment was so small that I've treated like a lesson. And it's been a good one.

I now look closely at who the directors are (only gave it scant attention). If Mr T's Uncle Phil is involved I will circle warily or go elsewhere.

The past few years have been such that it was almost too easy to get good returns. So past performance may not be as good a guide for as newbies such myself. I am looking for more stocks but now have a good set of guidelines to pass before consideration - using mostly FA but some TA as well.

The brokers were recommending optimistic target prices and strong buys even as it dropped. I suspect they don't revisit/update their recommendation as often as they should - probably impossible with the # of stocks out there. Good dvice isn't cheap, so how does that value free advice?

Will follow the thread with interest...............