Green Mail On Babcock & Brown: It's In The Pink
Sydney Morning Herald
Saturday February 2, 2002
The mid-size banker with discreet, wealthy clients is building a more public face, reports Brian Robins.
Babcock & Brown Australia's boss Phil Green has a reputation for developing clever structures, a skill that has helped him build his investment bank to the point where it is emerging from the shadows to rival the bigger local groups.
For years, Green and his elder brother, Max, tapped into the same power base the very private world of the wealthy elite through rival organisations.
But no matter how hard Max tried, he failed to emulate Phil's success. Max's structures, which unravelled after his murder in a hotel room in Phnom Penh, Cambodia, three years ago, caught a large number of Australia's wealthiest families in their web with investor losses of upwards of $40 million.
Like Max Green, Babcock & Brown, too, is connected with some of the wealthiest names in Australia, along with a growing band of institutional money.
But where brother Max's structures were aimed squarely at avoiding tax, and hence popular with a lot of private family money, Babcock & Brown has taken a far less aggressive approach to tax and investment issues.
The results have been outstanding, for clients and partners, and the firm has gone from strength to strength.
``We have experience in putting deals together, but we don't want clients in a long-term fight with the Tax Office," Phil Green says.
Max and Phil grew up in Maroubra, both graduating in commerce-law from the University of NSW in the mid-1970s. Max married into money Melbourne's wealthy Baron family, whose worth is put at $95 million by BRW magazine. He moved to Melbourne where he was admitted to practise as a solicitor in 1978, after a stint as an articled clerk with Arnold Bloch Liebler.
Phil stayed closer to home, starting as a tax accountant with Andersen, the international accountants now at the centre of the storm over the collapse of Enron.
Phil Green is acknowledged as one of the brightest developers of investment structures in the country, which was fundamental to Babcock & Brown's early success and expansion, in areas such as leveraged leasing, cross- border leasing and property syndication.
It was while working on some of the first leveraged leasing deals seen in the country in the first half of the 1980s that he was approached to set up Babcock & Brown in Australia. And it was while working on the first leverage lease involving property, a deal for South Africa's Pick 'n'Pay in the mid-1980s that he first came in touch with Melbourne's wealthy Liberman family, which has been a core investor in many of Babcock & Brown's deals since.
In 1995, with the growing importance of the Australian operations to the global group, Phil Green was elevated to the international board of the group the same year that brother Max's legal partnership with Geoff Shugg failed. Max went on to join Aroni Colman, where he stitched together the deals which unravelled after his death.
At the time of Max's murder in March 1998, there was natural concern that it would have an adverse impact on Babcock & Brown's operations. It was bedding down the purchase of AIDC with UBS Warburg, and had a number of big property deals on the go.
When asked about his brother, Phil's right hand jerks to the eyebrow in an almost nervous twitch, underscoring the wound that remains open.
The investigation into Max's murder never went anywhere, with no suspect ever found. Speculation of money laundering, gem sales from a mine in Laos the same one over which Kay and Kerry Danes ended up spending most of last year in jail have all done the rounds, but there are so many loose ends, with key players resident abroad refusing to come back to Australia.
Phil Green won't talk about it, certainly not in any public way, and the matter ends there.
Phil and Max were working different sides of the same street, which threatened to unravel badly as details of Max's affairs emerged under public scrutiny. Babcock & Brown worked hard to distance itself from the fall-out from Max's murder, and given its subsequent success, it obviously succeeded. Just as importantly, it has been able to continue to win the support of key investors in its deals.
The AIDC acquisition gave Babcock & Brown the leg up among its investment bank rivals, opening the way into infrastructure investment, and also to more work in corporate finance.
But it is only now, when most of the litigation in the wake of Max's murder and the collapse of his spurious investment schemes has finally been wrapped up, that Babcock & Brown is starting to build up a head of steam.
Putting the group increasingly in the headlines these days is the all but lost art of greenmail, the most recent being the brawl with the board of Ausdoc over the best way to liquidate key assets, which saw Babcock & Brown win board seats just this week.
And as the investment bank has expanded in the past few years it has created some seriously wealthy people among employees and co-investors, and the next few months are likely to see that wealth profile move up several notches as a number of big deals reach fruition.
At the same time, it has amassed some of the top talent in the country in the fields of corporate law and finance, including a foundation partner of Atanoskovic and Hartnell, Robert Topfer. He was a prime mover in the creation of Rupert Murdoch's Super League concept, for example.
Not to be confused with Babcock and Wilcox, the maker of electrical equipment, Babcock & Brown has emerged as the largest specialty investment bank in Australia.
It is arguably the most profitable part of the worldwide group which is headquartered in San Francisco.
Shareholders in public companies as diverse as MTM Entertainment Trust, the then Australian Wine and Horticultural Fund (now the International Wine Fund), Carillon Development, Tourist Asset Holdings, Ausdoc, and Vincorp have bumped up against the firm in the past few years.
Some of these companies it has taken over, and others it exited for a handsome profit.
Successful greenmail can also boost returns significantly off only a modest investment: buy a big enough stake to be noticed by the board, rattle the sabre with the aim of getting taken out and turning a quick profit.
Both International Wine Fund and now the board of Ausdoc have been subject to this manoeuvre.
Taken case by case, the deals in the public company arena have not been especially large, mostly targeting mid-cap companies, such as the $180 million acquisition of Tourism Asset Holdings, which brought with it control of a $700 million portfolio of hotel properties.
But the bank has set its sights on doing more, much more, in the public company arena as its traditional area of leasing has slowed.
Like most investment banks, Babcock & Brown looks after its partners exceptionally well, along with its co-investors.
Notable co-investors are the likes of the Liberman and Heine families in Melbourne, and the Adler family in Sydney.
A range of other investors has also come in on its deals, but detail is scant. ``They come to us for discretion and the lack of a tombstone," says Andrew Tyndale, one of the local partners and head of corporate finance.
And how profitable is the company? That, too, is confidential. However, one of those rare slips revealed Phil Green had $7.5 million invested in the AXA Asia Pacific millionaires' investment club, eclipsed only by Sydney real estate agent of choice to the eastern suburbs glitterati, Bart Doff. He also has a handy $4 million property in Point Piper, bought in the wake of the success of the AIDC deal.
With six local partners out of 47 worldwide, Babcock and Brown has access to as much as $1.2 billion in its own capital and discretionary lines of clients for investment. ``That pretty much allows us to do what we want in the mid-cap market," says Tyndale.
Typically, it likes to bring in partners for its deals, as they will often contribute ideas which can help maximise the profits on the way through.
Babcock & Brown prospered on the back of the boom in leveraged leasing, and cross-border leasing which began in earnest in the early 1980s.
One of the largest of the earlier syndications was Prime Credit Property Trust, which it took public. This was followed by a series of much larger syndications, which benefited from both the Federal Government's asset sale program and the deepening of the superannuation fund investment market.
By mid-year, Babcock and Brown will have three publicly listed vehicles Environmental Infrastructure Ltd (originally Vincorp Wineries, about 75 per cent), Dalrymple Bay Coal Terminal (10-15 per cent) and MTM Entertainment (80 per cent). A few years down the track, both Environmental Infrastructure and the coal terminal are likely to have sharemarket valuations running to several hundred million dollars. As part of the bulking up of Environmental Infrastructure, an initial $30 million biomass project has been backed into the company, with a series of wind farms, and maybe some hydro projects, lined up to sell into the unit as well, which may result in the Babcock and Brown stake being reduced to as low as 30 per cent over time.
Dalrymple Bay Coal Terminal, too, is likely to become a vehicle for other specialty port investments, although details here are scanty. It is already the largest coal export terminal in the country, accounting for about 25 per cent of the total, with an expansion program under way.
Babcock & Brown has been in the public company sphere in the past, originally with the float of its $225 million property trust, Prime Credit Property Trust, with the management sold to Heine Management for shares and cash ($6.5 million), gaining an initial 10 per cent stake, which it subsequently built to near control.
In the late 1990s Mercantile Mutual took over the Heine trusts and their management, paying a little over $110 million for Heine Management, crystallising a handsome profit all round.
Running the corporate finance side, which is putting the group increasingly in the public spotlight, is Tyndale, who came from Macquarie Bank via Reil Corp, Phil Cave's 1980s vehicle backed by Macquarie Bank, and Dominguez and Barry. He quit Reil Corp just before it bought Wormald, which brought it undone.
For Babcock & Brown, the shift into the public company arena follows the gradual loss of activity in cross-border leasing, following a tougher stance adopted by the Australian Tax Office.
``We believe there are a considerable number of companies on the ASX that are undervalued for a whole range of reasons," says Tyndale.
``We are looking at companies where the underlying businesses and investments are in good shape, but other factors have depressed the share price.
``Where there are structuring or financing factors, we can look at bringing our skills to bear to unlock value," says Tyndale. ``Where the board is recalcitrant, we've also demonstrated that we are happy to step up."
Its key advantage over other players in the same end of the market is the size of its balance sheet.
To bulk up for the role it sees for itself, Babcock & Brown has hired a string of analysts, at a time when other long-time players at this end of the market, such as GPG, have decided there may be more opportunities in the UK for this type of activity than in the local market.
Babcock & Brown's first greenmail tilt in the public arena was Australia Wine and Horticultural Fund, now known as International Wine Fund. ``We made about a 30 per cent return in four months. We were quite happy with that."
Perhaps the most successful move to date was for the listed Carillon Developments, controlled by the Higginbotham family of Tamworth.
Here, the $57 million acquisition of the listed company and associated unlisted companies, snared control of assets with a book value of $75 million.
Most of the assets have now been sold, in a deal that passed with no public comment, at all.
``The ones that come and go in the dark are the good ones," says Tyndale.
But success has also begun to get in the way of completing deals.
Tourism Asset Holdings had languished on the stock exchange for years, with any number of groups sizing it up to make a tilt for control, to unlock the value of its sizeable freehold holding of hotels.
Eventually, by teaming up with GPG and Accor, which leased most of the company's hotels, a deal to take the company private was brokered, winning control of assets with a gross value of well over $700 million.
Two firm offers are now on the table to buy the hotel portfolio lock stock and barrel.
But when it came to MTM Entertainment, the owner of the Imax cinema screens in Sydney, Melbourne, Brisbane and Adelaide, Babcock & Brown's track record meant that its bid for full control failed, leaving it with 80 per cent, and a string of minority shareholders, led by Brian Sherman and Laurence Friedman, the emigre South African fund managers.
When you're in the takeover game, you can end up with some real dogs of assets like the management rights to Stadium Australia, which it bought from Kerry Packer's former friend, Neville Miles.
Like Channel 7 with the Colonial Stadium in Melbourne, there is a major challenge in generating a flow of big name acts from overseas to fill the bleachers.
However, it is Stadium Australia that is likely to prove the ultimate challenge.
Phil Green, along with Michael Maxwell, the head of Babcock & Brown's Australian real estate activities, and Robert Topfer, is on the board of Stadium Australia Trust, which is in the process of being merged with Stadium Australia Management, forming a single entity which will allow a more direct focus on resolving its financial problems specifically the $131 million facility owed to ANZ Banking.
Given Topfer's history in creating the Super League, he will be putting his skills to test in Stadium Australia.
Stadium Australia is a classic play for Babcock & Brown, given the huge debt the balance sheet is carrying, which will demand a fundamental restructuring, especially since the company is valued on the sharemarket at less than $6 million.
To realise a return will demand not only access to big offshore shows, but the big football games all weekend through winter to have much chance of avoiding collapse.
This week, Babcock & Brown had a notable loss, when it failed in its bid to buy National Freight and FreightCorp, which went to Chris Corrigan's Lang Corp, and Toll Holdings.
Even so, the bank's mid-size makes it popular with many of its co-investors.
``Babcock & Brown is the most responsive investment bank in Australia," was how one co-investor in some of the bank's deals put it.
``Macquarie is a great bank, and BT was a great bank, but it is now too large.
``Babcock & Brown is still responsive, in speaking to smaller investors.
``It is not a case of chasing only deals over $50 million."
© 2002 Sydney Morning Herald