Macbank Halo Is Slipping
Sydney Morning Herald
Saturday August 3, 2002
As this tall poppy grows so does the talk around town, writes Brian Robins.
Macquarie Bank chief executive Alan Moss's first attempt at public life failed.
As an Arts student at Sydney University in 1969, he stood for election to the Student Representative Council. He gained the early edge by chalking his name all over the campus but was swept away once preferences were distributed, although Irene Chee succeeded. The two married not too long afterwards, and Chee better known as Irene Moss is now an ICAC commissioner, after a stint as ombudsman. She was in the headlines last month with her decision that Rockdale deputy mayor Adam McCormick should face bribery charges.
Jim Spigelman, now the Chief Justice, was SRC president at the time.
Now, 30 years on, the stakes for Alan Moss are much, much greater. He and Macquarie Bank are in the public eye like never before and he can't afford any missteps.
After slapping down $5.6 billion for Sydney Airport a few weeks back Macquarie wanted to pay closer to $6 billion but its syndicate ran out of money the next few weeks will prove to be equally important to the bank. It is one of two groups short-listed for the western orbital road project the $1.25 billion link between Prestons and Seven Hills.
A win here would significantly extend its reach in this town but at the same time bring increased criticism of its growing influence over the city's infrastructure.
Moss reckons Macquarie is soaking up too much of the capital available in local financial markets. Perhaps, but equally the bank is seen by some as having too much of the city under its thumb toll roads, airports, broadcasting towers, funeral parlours, office buildings, industrial and commercial property, and shopping centres.
Then there is the work underway on financing steel proposals for Newcastle, on the Melbourne-Brisbane inland railway and the gas field it is developing in Queensland. And that's just Australia.
Offshore there are airports in the UK and Europe, and an electricity network in Canada. Plus just this week one of its funds plonked down $US50 million ($93 million) for some specialty aviation assets.
Comment and criticism have increased with the group's rising profile.
Radio broadcaster Alan Jones has had several swipes at Macquarie since the Sydney Airport purchase, arguing that it paid too much, that it controls too much of Sydney, and that it will hike charges willy-nilly.
The storm of criticism over the airport acquisition took place against the backdrop of the disastrous performance of its $1 billion Macquarie Airports public float the key investment vehicle in Sydney Airport which has triggered an air of crisis enveloping parts of the firm.
Public criticism comes as little surprise, but in financial circles, Macquarie's halo is slipping.
Macquarie Bank was always wary of sticker shock over the price paid for Sydney Airport. But the disaster that is Macquarie Airports its shares are languishing at less than half their issue price, with over $250 million of investor funds wiped out has hit confidence in the bank's ability to roll out a steady stream of big managed funds to hold these assets, and provide the bank with performance fees on the way through.
If Macquarie can't do the big deals as it has over the past few years, this puts a question mark over its growth prospects.
When finalising Sydney Airport, Macquarie was forced to scale down and sweeten conditions for the multi-million dollar infrastructure float, Macquarie Communications Infrastructure, which holds the ABC and SBS television transmission towers. Planned at $500 million, it was scaled back below $400 million.
Then there was the recent disaster of the Macquarie Nine Film and Television Fund. Seeking $62.5 million, it raised just short of $24 million. The first film, Bryan Brown's Dirty Deeds, has received decidedly mixed reviews and may struggle to cover its costs.
That's three blows on the trot.
These concerns translated into a savage sell-down of Macquarie Bank shares over the past few weeks. From the peak of $42 last year, the shares are down around a third.
As Macquarie battles its first serious dose of public scrutiny, there are question marks over its ability to handle it smoothly.
``It's natural and appropriate that we should be subject to public scrutiny," Moss soothes. ``Each stage of growth brings with it different challenges. Those challenges aren't necessarily harder; they're inevitably different.
``It's important for us to recognise that dialogue with the community is now more important, and we recognise that that's going to be a much more important part of our future."
The words flow smoothly, almost glibly, in a variation of the mea culpas Moss has been expressing about the issues enveloping the bank in recent weeks.
And the bank is a sitting duck, given that its top people are paid salaries similar to those of New York investment bankers even though they work in a regional market. It is known as the city's millionaire factory for the number of multi-millionaires among its staff. Moss himself, as managing director and chief executive of Macquarie Bank, was paid a bonus of more than $4 million last year.
From its formation as Hill Samuel Australia in 1970, Macquarie Bank has fostered a strong esprit de corp, of which high salaries and autonomy have been key elements. Unlike most investment banks, Macquarie has rarely suffered from big staff defections. Among the few were Ross Grant and Graeme Samuel, who set up their own shop, Grant Samuel.
Under joint heads Mark Johnson and David Clarke, Hill Samuel Australia outgrew the capacity of its UK parent to fund its rapid expansion. Through the long takeover boom of the 1970s, as corporate Australia was reorganised after booming inflation and falling tariffs, it moved from a specialist money market operator and corporate adviser to a fully fledged investment bank, taking advantage of successive waves of finance sector deregulation the opening up of the money market, floating of the Australian dollar and the like.
advantage of successive waves of finance sector deregulation the opening up of the money market, floating of the Australian dollar and the like.
Macquarie has prospered with its reputation for innovation, leading the way with the launch of the first of Australia's cash management trusts, for example, and remaining the leader of this sector, which now has $8.7 billion under management.
But it was not until the mid-1990s that Macquarie hit upon the management formula which gave it a major leg up: its focus on listed and unlisted investment funds. They give it an annuity flow of income, coupled with performance fees if certain benchmarks are met.
The Macquarie model evolved in the wake of the dizzying round of deals in the 1990s by Guy Hands at Nomura International the UK arm of the Japanese securities firm. He put together schemes mostly for a series of big property plays in the UK. They were headline grabbers, but it is not clear whether Nomura itself made any money from them.
Macquarie has bought big lumpy assets which demand constant fund raisings. It has prospered by being able to use multiple parts of its own services corporate advisory, underwriting and the like capturing most of the flow of fees in-house.
On a big deal, fees can total tens of millions of dollars. A steady deal flow is vital to keeping the wheels greased.
With the formula down pat, JP Morgan banking analyst Brian Johnson argues Macquarie is the Westfield Holdings of financial services. Just as Westfield has turned its shopping centres into an annuity income stream from its expanding number of centres, so does Macquarie with its investment funds.
But the local funds management community is finding it hard to keep up, and is tiring of the flow of deals and the way the cards are stacked in Macquarie's favour.
Johnson and Clarke are still executive directors, although Moss almost bristles when mention is made of the bank's good fortune to still have them around, quickly pointing out that they work only part time.
Moss, the son of Alfred Moss, a one-time financier, comes across as a retiring, cautious banker who chooses his words carefully. He seems miscast as the head of an investment bank, where egos typically run riot. Yet his lack of public persona belies the fact that he has built a massive investment facility without peer, either in Australia or globally elevating him to the ranks of the great managers in the country.
But if the Macquarie Bank business model is so great, where are the imitators?
``The world's investment banks are effectively dominated by New York," says Moss. ``The private infrastructure market just isn't available in the United States. The world's investment banks mostly operate on the basis of looking at the United States and trying to be successful in that market, and then export ideas from the US. And while there is often a perception that the US is very international, in some senses the US is quite resistant to innovation that originates from elsewhere. And that is particularly true in financial services."
Locally, some groups are on the trail, but they are latecomers in a market that is well picked over.
Record Investments, headed by Tony Berg, Macquarie Bank's former managing director, is targeting specialised funds, while Babcock and Brown, a niche investment bank, has launched its first infrastructure fund, with more to come. Babcock & Brown bought the Dalrymple Bay coal loader in Queensland, outbidding Macquarie significantly. That asset has been sold into a new listed fund, Prime Infrastructure.
As well, the scope for clever financing packages to swing deals is narrowing, removing another plank from the Macquarie armoury.
When Moss was appointed head of the bank in September 1992, outsiders were surprised. He replaced the suave Tony Berg, who went to try his hand at running an industrial company, Boral.
At the time, Moss had precious little profile outside the bank, and that has barely changed. Grey he may be Irene Moss's Who's Who listing contains more detail about her husband than his own listing. But he is soon to join that exclusive club of longstanding CEOs next month marks the start of his 10th year as head of Macquarie.
So what is his use-by date?
``I don't know. That's a judgement that others have to make really," says Moss. ``I think that's just something chief executives and boards have to assess."
He argues there is nothing unusual about the CEO of a top-tier company having been in the chair for 10 years. ``I know lots of CEOs of top-20 companies that have been there for longer."
And it is clear Moss has no plans to go anywhere any time soon. In the mid-1990s he joined the board of CSR, his only external directorship, but quit just over a year ago to focus on Macquarie, signalling a second wind in running the bank.
He may come across as almost devoid of personality insiders prefer to describe him as avuncular. But Moss is likely to go down as one of the great business builders of the past few decades.
On his watch, Moss has built a top-30 company (in fact two, if Macquarie Infrastructure Group is included) and spawned a host of top-100 candidates in Macquarie Office Trust and Macquarie Goodman Industrial Trust. Other property trusts within the group have bulked up as well.
Under Berg, Macquarie's prospects were pegged more closely to Australia. The bank wasn't seen as having the skills to export.
Moss has been far more willing to take risks. International revenues are now a third of the total, although it is not clear whether this area is as profitable as the local arm. As it spreads its wings, the bank has built up nearly 1000 staff abroad (close to 200 in London and almost 100 in New York), nearly a fifth of the total.
By giving management more autonomy, Moss has built a global niche investment bank whose offshore presence holds much of the key to its prospects.
``We don't have a big chart on the wall that says this is exactly where Macquarie Bank is going to go," he says. ``We have business leaders. Their responsibility is not just to execute. Their responsibility is to make recommendations about our strategy as well.
``There's a range of initiatives in progress right around the organisation. I'm confident we will achieve growth, both domestic and internationally, but just which of the businesses will prove to be the fastest growing over the next few years ... will depend on the performance of those businesses."
The international arm has worked, although there are still doubts about the push into the retail investment market, which has consumed a lot of capital for little return.
Macquarie has run out of room to move in the domestic market. Over the past year, companies within the group have raised upwards of $6 billion. That's a massive appetite, accounting for about a quarter of all funds raised locally. Macquarie's cash demands have run well ahead of the Australian market's ability to keep up. Progress has been achieved in diversifying the investor base, with the entry of Ontario Teachers, Abbey National and the Pru as shareholders in Macquarie Airports Group, with Ontario also a large shareholder now in Macquarie Infrastructure Group. But it is not enough.
Intense work is now being done to boost Macquarie's international investment profile, given that foreign investors account for less than 20 per cent of the capital of Macquarie Bank itself and closer to 20 per cent of MIG.
``It is a relatively low number," Moss concedes. ``We need to spread the message more broadly, and that will be part of our next stage."
Its foreign shareholding level has barely changed since Macquarie listed on the Australian Stock Exchange in the mid-1990s, when Hill Samuel held 15 per cent which was on-sold to the Sultan of Brunei. The Sultan quit most of his stake in 1998, although he is still on the register.
``It's clear that it's appropriate for us to get more investors offshore," Moss says. ``We need to spread the message more broadly, and that will be part of our next stage. We have already begun work with international investors."
What about dual-listed company structures or American deposit receipt programs?
``They're all techniques that we would consider, but I don't think the financial technology is really what matters, it is the relationship with investors getting international investors comfortable with our business model," Moss says.
Building links with international investors tops the agenda, but getting them to put money into an Australian niche investment bank during a global bear market would test the best of them.
As well, Macquarie has sunk hundreds of millions of dollars into new trusts, such as its 10 per cent stake in Macquarie Airports Group, the unlisted Euro 600 million ($1.1 billion) investor in the same airports the listed Macquarie Airports is in.
And to quell investor unrest, Macquarie has had to take up shares in placements by its listed satellites Macquarie Airports and Macquarie Infrastructure, further tying up funds. That's easy to undo in a bull market, but not so easy in a bear market.
The difficulty is obvious if you consider Macquarie's 15 per cent stake in Altalink, a consortium which paid $C850 million for an electricity transmission network in Alberta, Canada. This asset is still on the bank's balance sheet a home is yet to be found for it.
With its spread of assets in Sydney, Macquarie is an increasingly easy target. But with the NSW Government in pre-election mode, this just may be decisive in swaying NSW Premier Bob Carr when it comes to approving the western orbital deal in September.
Here, a Macquarie-Transurban bid is up against a consortium including Thiess and Li Ka-Shing of Hong Kong, one of the world's richest men. Li was in one of the consortia which failed in the bid for Sydney Airports. He already owns a swag of assets in Australia, mostly in the power sector.
Final bids are due in the second half of the month, with a decision likely by mid-September at the latest. It's a big project, but without the complexities of the cross-city tunnel or the Eastern Distributor.
Macquarie missed out on the cross-city tunnel and the winning bidder for the western orbital link is likely to be the group with the best grip on its construction costs and capabilities, given that the project largely involves earthworks and paving. Financing techniques won't be so important.
If Macquarie wins the western orbital bid, it will be its first success since the Eastern Distributor in the mid-1990s.
Nicholas Moore, Macquarie's head of infrastructure investment, rankled the NSW Government in November 2000 when it launched its green paper on public-private partnerships (the vehicle to tap private investor funds for infrastructure spending). Moore roundly criticised the Government for its slowness in moving forward infrastructure spending.
Other bankers were profoundly embarrassed by his upfront stance at a public meeting.
Moore told the gathering that Macquarie was shifting its talent into Asia and Europe due to the lack of opportunity in NSW. In London, for example, the group is sifting through a number of prospective railway investment proposals.
Moore's brashness came long before he got Alan Jones offside, and it was the sort of upfront comment that just may sway NSW Premier Carr, irrespective of Alan Jones's outbursts.
© 2002 Sydney Morning Herald