Friday, November 21, 2008

Macquarie nails investors: "The gift that has kept on giving in a very wrong way."

This parrot's dead, not resting

Monty Python's Flying Circus 'Dead Parrot' sketch: [LINK]


Michael Sainsbury
Copyright 2008

Shareholder: I wish to complain about this parrot what I purchased not half an hour ago from this very boutique.

Executive: Oh yes, the, uh, the Norwegian Blue ... What's, uh ... What's wrong with it?

Shareholder: I'll tell you what's wrong with it, my lad. 'E's dead, that's what's wrong with it!

Executive: No, no, 'e's uh ... he's resting.

*AS Babcock & Brown moved ever closer to its maker yesterday, nicely positioned to follow Allco Finance Group to the corporate graveyard, there still seemed to be a stubborn refusal to acknowledge that the so-called Macquarie model is, like Monty Python's parrot, actually dead.

Just like his predecessor Phil Green, Babcock chief executive Michael Larkin, while he went close, could not quite admit the bird was indeed no longer alive.

"The idea of assets being pooled for investment has been around forever," Larkin said.

"What we recognise is that is going to happen and we think we are well placed to do it."

Then he gave a just a little ground: "The compensation that individuals receive has to be appropriately matched to the return that investors can get. We are changing to align our compensation model and our fee model to align it with the return that investors get in our funds."

Too little, too late?

"I not trying to move away from the Babcock structure," Larkin said. "The infrastructure business, we think, is very sound and that is what we put to the banks. We think we have got a very credible business; it is unique and world class."

The "Macquarie model" -- picking up infrastructure assets, preferably monopolies, with reliable income streams to service the debt used to buy them, then banking millions of dollars in fees for the deal, packaging the assets into a fund and stitching up long-term unbreakable contracts to manage them -- has been Australia's gift to the financial markets.

Unfortunately for shareholders in Babcock & Brown, it has been the gift that has kept on giving in a very wrong way.

In trying to hard and too fast to mimic the Macquarie model, Babcock finally admitted last night, after stringing its syndicate of 25 banks along for most of the year, that it really wasn't going to be able to deal with its $3.1 billion debt load after all.

And that's just a small slice of the $50 billion debt that the whole group, struggling satellites and all, continued to creak underneath.

It was apposite, too, that on Tuesday, Macquarie Bank chief Nicholas Moore waited until he was quizzed on the future of the listed infrastructure model, before making the signal sweep of his hand to remove his spectacles as he delivered his 43 per cent profit slump. It was, of course, precisely the right time for the only mini-moment of drama at a typically dry briefing.

Moore had just been forced to write down $1.1 billion -- possibly the first of many -- on all sorts of infrastructure assets (somewhere along the way property became infrastructure as well).

Yet Moore too, continued to mount a defence of the model that he himself had pioneered and used to drive the highest executive salaries ever seen in this country.

Not that he was too sure Macquarie would spin off separately listed companies after the abject disaster of its BrisConnections toll-road project. Nor would it use its own balance sheet, preferring to work with any partners still game enough to jump in.

"It's wrong to lump Macquarie in with the Wall Street firms when you're talking about what we are doing and where we are going. We have a different model," Mr Moore said later.

The Macquarie model, which no doubt keen students will be studying for years to come in courses on what went wrong in the noughties share market boom, has already claimed one local victim.

Last month, the last-out-of-the-gate Macquarie mini-me, Allco, collapsed in a steaming heap of debt. Like Babcock, it started paying too much for assets, more eventually than the model could bear.

Babcock's defining moment was outbidding Macquarie for the assets of West Australian energy group Alinta -- a company where Macquarie had been assiduously working both sides of the transaction.

But despite this, Babcock and its rivals pressed on, buying assets as the market was clearly getting more and more expensive.

Still, as Moore rather archly noted on Tuesday as he launched his defence of the model, Macquarie's London water utility Thames Water was still a good investment because people always need water, slump or no slump.

It's worth noting, too, that there is a big push by governments around the world -- Australia's included -- to spend up big on infrastructure projects to help kick-start faltering economies around the globe.

But in the old days, they used to call them utilities, governments owned them and there were no management fees.

Shareholder: Look, I took the liberty of examining that parrot when I got it home, and I discovered the only reason that it had been sitting on its perch in the first place was that it had been nailed there.

Nailed indeed, poor shareholder.

© 2008 The Australian:

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