Infrastructure Growth Engine Mangles The Smooth Macquarie Message
Sydney Morning Herald
Saturday July 27, 2002
The bank that sold Australia on backing big projects has some explaining to do, reports Brian Robins.
The normally staid world of banking was ruptured this week as the surefooted Macquarie Bank suddenly found itself on the defensive.
Questions were being asked about the massive amount of money it had forked out for the recent Sydney Airports deal and the disastrous performance of Macquarie Airports.
At stake was more than investment banker testosterone. Billions of dollars of superannuation funds were on the line, punted on the dullest sector of the market; infrastructure assets such as airports and tollroads.
Macquarie seized upon infrastructure as its niche in the world of investment banking, but the poor performance of Macquarie Airports has threatened to undermine much of its hard-won gains.
Some big investors such as Colonial First State have all but bet the shop that infrastructure assets are the way of the future. At one stage, Colonial held more than 20 per cent of Macquarie Infrastructure Group, the tollroad investor. It since has cut that to a still substantial 12 per cent without even a board seat to protect its unusually large exposure.
Others, unable to understand investment banker contortions that can be used to determine value for these assets, opted to sit on the sideline.
It is not unusual for sharemarket floats to be duds. But when it involves hundreds of millions of dollars at the big end of town, then bankers and fund managers sit up and take notice.
And when the assets involved include Sydney Airport, this puts it firmly on the radar of politicians and talkshow radio jockeys as well, with Macquarie Bank coming under scrutiny in a way it has never been before.
The heat this week was triggered by Deutsche Bank, one of the losing bidders for Sydney Airports, which argued that the asset was not worth what Macquarie paid.
Deutsche reckons shares issued by Macquarie Airports at $1 are worth only 7c saying in effect that investors had been hoodwinked out of almost $500 million.
Macquarie argued it bought well, while pointing to the testing state of markets in recent weeks.
``Given the state of the Australian market, given the state of world equity markets, the size of the MAP capital raising has tested the capacity of the Australian market," Macquarie Bank's managing director and chief executive, Allan Moss, said yesterday.
``I think time will help with that issue. But nevertheless, we can't just rely on the passage of time. We have to explain why we are so confident about the airport."
The Macquarie-led consortium paid $5.6 billion for Sydney Airports, an EBITDA [earnings before interest, tax and depreciation] of 15 times next year's earnings.
It puts the internal rate of return at 20, indicating that the return will vastly exceed the cost of funds.
Others argue these numbers are way too high, that the IRR should be closer to 15, and the EBITDA multiple 11 or 12 times, given the facts that Sydney Airports has been around for decades and cannot expect a huge earnings surge.
The debate may seem arcane, but Deutsche, by taking an EBITDA multiple of 11 times, slapped a 7c a unit value on Macquarie Airports.
Deutsche's valuation carries with it an element of mischief, as it was an under-bidder for Sydney Airport. Its consortium was willing to pay $5 billion.
And, as Deutsche in Australia was arguing down the value of Sydney Airport, analysts with Deutsche in Spain happily placed a much higher valuation on the airport.
Ferrovial, the Spanish group with a 20 per cent stake in Sydney Airports, uses a multiple of 15 times forecast EBITDA when valuing the asset and an IRR of 16-20 times, a little below Macquarie Airports IRR of 20 times.
One of Deutsche's Spain analysts called Ferrovial a ``buy" on the Sydney Airports exposure, due to the underlying strength of the asset, while signing off on its valuation assumptions.
Deutsche is willing to support more aggressive estimates when it comes to MIG, because it has big growth assets in the pipeline which will give earnings an extra fillip over the next few years.
Primary among these is the Birmingham (UK) tollway, which could boost earnings by a quarter.
Macquarie Airports has no such uplift. The airports it has bought into Sydney, Rome, Bristol and Birmingham have all been around for years. All are mature assets with no prospect of a quick earnings lift.
But when Macquarie buys an airport, it establishes a strategy team, under its control, whereby it injects its expertise in how to run an airport to the new asset.
This may not result in a one-off lift to earnings, but it does set the scene for fairly robust earnings growth, at least in the initial years of asset ownership.
Paying too much for an infrastructure asset can cripple balance sheets of the owner. Just look at the Victorian power industry, which is going through its second round of ownership changes since its privatisation last decade, as the original buyers concede that they paid far too much for assets on which they are unable to generate a return.
The woes of Macquarie Airports threatens to pressure Macquarie Bank's infrastructure focus as its global edge in investment banking.
And the disaster that has enveloped Macquarie Airports, with shares issued at $1 now valued in the sharemarket at only around 40c, has ensnared Macquarie Bank, putting its share price on the skids.
MIG, the group's tollroads operator, is now valued at much, much more than Macquarie Bank, the group's engine.
For its part, Macquarie argues it has to ``sell" the Sydney Airports deal a lot better.
Local securities analysts don't understand the asset class, Moss says, with sentiment affected by the view that Macquarie over-paid, due to gossip of what rival bidders were willing to pay.
He argues that rivals were constrained in what they could pay for Sydney Airports because Macquarie had already tied up most of the equity available in the local market.
The overseas partners in the Macquarie consortium did their own due diligence on the transaction, which supported the $5.6 billion valuation, he argues.
For investors in Macquarie Airports, and also for Macquarie Bank, which has been hurt by the turmoil, the fact that no cash is retained in these investment vehicles mean that when purchases come along, they soak up big licks of capital, and invariably big share issues.
This has been the case with MIG, and also at Macquarie Airports, with a quick 3-for-4 rights issue before they had time to pay the second instalment on the initial shares issues.
© 2002 Sydney Morning Herald