Tuesday, December 02, 2008

"Selling something to yourself ... tends to create suspicion among even the least cynical of observers."

Macquarie road ploy holds a gun to Transurban's head


Ian Verrender
Sydney Morning Herald
Copyright 2008

It's a wonderful thing to behold that, even after the almost complete collapse of the global financial system, our very own home-grown investment bank, Macquarie, just can't help itself when it comes to paper shuffling.

The reputation of investment bankers and highly geared infrastructure funds may have been tarnished somewhat in recent times, but those trend-bucking bods up at the Silver Doughnut obviously believe it is best to stick to what you know.

The deal in question relates to Macquarie Infrastructure Group's decision to sell its half share in the Westlink M7 for $805 million.

There's nothing wrong with selling an asset for a decent price in these cash-strapped times, even if it is at a discount.

The main problem, however, is the mechanism. Selling something to yourself in any sort of environment usually leaves a sour taste in the mouth of everyone involved. And it generally tends to create suspicion among even the least cynical of observers.

So it was yesterday, when Macquarie Infrastructure Group boldly announced it would sell its half share in the toll road to the newly formed Western Sydney Roads Group, a company jointly owned by Macquarie Infrastructure Group. And the other half? Well, MIG wasn't letting on the identity of the other party. But make no mistake, it's a really big institution with impeccable credentials.

So under the deal announced yesterday, MIG really is selling only half its half share in the M7 and will pick up $402.5 million.

Why engage in this kind of half-arsed behaviour? The answer is that Macquarie is desperate to raise cash and this is a none-too-clever attempt to force Transurban, which owns the other half share in the toll road, into bidding for the lot.

Essentially, it has put a non-negotiable price on its stake.

Under the partnership agreement, both MIG and Transurban have pre-emptive rights. So if one party decides to sell, the other has first right to override any deal and buy the stake at the agreed price.

MIG's announcement that it was selling will trigger those rights. And if Transurban decides to bid, it will have to offer $805 million for MIG's half share.

In doing this MIG, which has stated its objective to raise cash and sell assets before Christmas, has decided to put a gun to the head of Chris Lynch at Transurban.

While it is clear MIG can't find a buyer elsewhere, in pulling this kind of stunt it has denied Lynch any opportunity for setting his own price on the M7 if indeed he had been considering taking advantage of the weaker market for infrastructure to wrap up full control of the Westlink.

Let's take a look at the price.

According to MIG's accounts, its half share of the road was valued at $844 million at June 30. So the sale price is a 5 per cent discount to Macquarie Infrastructure Group's valuation.

That means any sale at this price will crystalise a loss and in theory would suggest MIG is being generous and taking a haircut on the deal.

But given international asset prices have crashed in recent months, and remembering most infrastructure groups took every opportunity to bump up values during the boom so they could borrow more money, it is something of a surprise the M7 values have held up so well. Or have they?

A casual observer might believe that Macquarie Infrastructure Group is using whatever means possible to obtain the best possible price or maybe something even better than the best possible price. Only Transurban is in a position to determine this. Given it owns the other half share, it is the group best placed to extract any efficiencies from buying the stake.

Not only that, if Transurban doesn't act now, it will be more difficult for it to wrap up control at some stage in the future. At the moment, it only has to deal with MIG.

If it doesn't exercise its rights now and buy out MIG, in future it would have to deal with Macquarie and its mystery partner in Western Sydney Road Group. Just imagine it; clandestine meetings in telephone booths, false moustaches, dark sunglasses.

MIG needs the cash to fund its share buy-back program so it can prop up its sagging unit price. The parent company, Macquarie Group, has poured vast amounts of cash into MIG this year precisely for that aim. What will Chris Lynch at Transurban do? This is the ultimate game of corporate chicken.

© 2008 Sydney Morning Herald: www.business.smh.com.au

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