Thursday, August 24, 2006

The "Macquarie model" is one of underperformance

MIG driven to road self-off

August 25, 2006

Robert Clow
The Australian
Copyright 2006

MACQUARIE Bank's flagship infrastructure fund has been forced to sell stakes in its US toll roads to fund a share buyback and arrest a slide in its share price that would starve its parent of performance fees.

It is the second major step this year to appease investors in Macquarie Infrastructure Group, which has lagged the broader market by 35 per cent in the past 12 months.

Last month it spun off all but one of its Sydney toll roads to give investors a stock that was focused on generating income rather than capital growth after three years of highly leveraged acquisitions.

MIG's underperformance has cast a shadow over the so-called Macquarie model. It has raised questions about Macquarie's ability to continue to buy assets and package them into fee-paying vehicles that can be sold to investors.

MIG generated performance fees of $91.5 million for Macquarie Bank in 2004-05, but its underperformance in the past year means it will not generate any performance fees for Macquarie Bank in the year just passed.

Yesterday's announcements pushed MIG securities 10c higher to $3.

MIG chief executive Steve Allen said the toll road company's lacklustre price performance prompted several of the moves.

"Long term, we have outperformed (the market)," Mr Allen said. "But - no illusions - short term we have underperformed."

MIG's securities suffered from interest rate worries along with all of the other infrastructure stocks, and investors may also have worried about the impact of rising fuel prices on toll road traffic.

But the biggest worry for MIG shareholders appears to have been the high prices the company paid for its US assets such as the $US3.8 billion (about $4.97 billion) MIG and partner Cintra paid for the Indiana Toll Road. One underbidder said that it bid $US1 billion less for the road.

MIG will sell 50 per cent of its stakes in four US toll roads at values equivalent to the infrastructure company's net asset backing.

Macquarie's US wholesale fund, Macquarie Infrastructure Partnership, plans to buy the roads for $US762 million.

Mr Allen acknowledged that it might be easier to prove the roads' value by selling to a third party. "There's certainly going to be questions about selling them to a related party," he said.

But both sides would hire independent experts to assess the fairness of the sales.

MIG's partnership with US-based MIP is also designed to avoid US worries about infrastructure being sold to foreigners. The two funds have agreed to work together in buying US roads in the future.

Mr Allen has said nationalist worries were one of the biggest issues he faced when MIG and Cintra bought the ITR.

Mr Allen said that partnering with an unlisted US fund was preferable to selling into one of Macquarie's listed US funds because of the volatility of the markets and also because toll road valuations were not well understood in the US.

Mr Allen also stressed that the underlying road performance was strong, with toll revenue up 61 per cent from $486.6 million to $783.7 million; and earnings before interest, tax depreciation and amortisation (EBITDA) up by more than 57 per cent from $369.8 million to $581.8 million.

Much of that increase came from the acquisitions of the ITR and the Autoroutes Paris Rhin Rhone, but even on a pro-forma basis, ironing out the effects of the acquisitions, MIG's revenue grew by nearly 7 per cent and its EBITDA by over 9 per cent.

© 2006 The Australian: