Flying Into Spaghetti Junction
Sydney Morning Herald
Saturday September 14, 2002
Macquarie will need to be very patient for the sauce on its Italian deal, writes Brian Robins.
It's every investor's dream: take A Fistful of Dollars and, with a bit of deft footwork, turn that into A Few Dollars More.
But for Macquarie Bank, and its Macquarie Airports associate, the thrills and spills of the past few months have had all of the elements of The Good, The Bad and The Ugly in slow motion as the optimism of the $5.6 billion purchase of Sydney Airports soured in the wake of the failure of the $560 million rights issue, leaving a massive stock overhang, and losses for investors and underwriters alike.
All of Sergio Leone's spaghetti westerns were big on revenge not unlike financial markets in the past few months as they have pummelled Macquarie Airports's shares. This week, the shares were pushed to as low as just 13c a far cry from their $1 issue price just a few months back, and a loss for original investors of nearly $450 million, which has tarnished Macquarie Bank's reputation as well as bringing the potential to crimp its balance sheet flexibility for some time to come.
Plans to merge the listed Macquarie Airports with the unlisted Macquarie Airports Group are on indefinite hold, for example, with Macquarie Bank locked into a 10 per cent stake in each of these vehicles.
Macquarie Airports blames its woes on the investment community for not understanding its business, yet a close look at the purchase of Aeroporti di Roma, the Italian airport company, pinpoints the disconnect.
The dream of many investors is to make a big acquisition, by borrowing to the hilt, and dump the borrowings onto the balance sheet of the company you buy.
Then, you pull out as much cash as you can out of the business before bringing in outside investors. And when these new investors buy in, this gives you the chance to take even more money off the table.
So, at the end of the day, the original investors end up with a ``free carried interest", while maintaining control.
Miners do it all the time, ensuring all the big profits remain with the original investors.
And this is the deal done to Macquarie with its purchase of a big stake of Aeroporti di Roma, the Italian airport operator.
This year, Macquarie agreed to stump up $842 million (?470 million) for 45 per cent of Aeroporti di Roma. In effect, this 45 per cent of Aeroporti di Roma that Macquarie consortium is paying ?470 million for was the stake sold to Italian investors a few years back for ?307 million. (Of this, Macquarie Airports share is ?220 million [$382 million]).
Foreign investors have long been wary of putting money into Italy, not only for the difficult labour union and political climate. Rupert Murdoch, one of the savvier players around, is yet to see much of a return on his pay TV arm in Italy, Stream, which has racked up steady losses.
Macquarie's buy into Italy is profitable just but there is wariness about how fast earnings can grow. With Aeroporti di Roma trading at little better than break-even, it will take years yet to get its balance sheet back into some semblance of shape.
As with Sydney Airports, the vendor has made all of the near- term money, so the new investor will need to be very patient for its return.
Aeroporti di Roma was controlled by Alitalia, the state-owned airline, until 1995 when another state-controlled group, IRI, emerged with just over half the capital. In 1997, Aeroporti di Roma went public at ?5.68 a share, raising ?307 million through the sale of 45 per cent of the capital. Then, in 2000, a consortium of four local groups, the Leonardo Consortium, bought out IRI for ?1.3 billion, paying up to another ?1 billion for the publicly held shares.
Much of the borrowing for the purchase (?1.7 billion) was then transferred onto the Aeroporti di Roma balance sheet, as a similar level of funds was pulled out via a special dividend. Both transactions came even as planning on the sale of a large part of their holding was underway.
Initially, it was hoped to sell two parcels of about 20 per cent each to separate parties, but Macquarie was so keen on buying into the airport that, after putting together the business plan for the new owners of Aeroporti di Roma in 1999, the bank decided to put its money on the table, to get some of the return itself.
Five years after a 45 per cent slice of Aeroporti di Roma was sold to the public, Macquarie is paying ?173 million more for the same slice of the capital.
Yet it is buying considerably damaged assets, since in the intervening five years, Alitalia transferred its long-haul operations to Milan (a move which is gradually being reversed), while the Aeroporti di Roma balance sheet is groaning under a massive debt load. In 2000, the year the Leonardo consortium bought control of Aeroporti di Roma, the airport operator had gearing (the ratio of debt to equity) of just 4 per cent. Now, that gearing is over 70 per cent.
In effect, the very strong balance sheet of Aeroporti di Roma has been destroyed.
Macquarie argues that it is paying a multiple of Aeroporti di Roma's earnings before interest, tax, depreciation and amortisation (so-called EBITDA) of 14.3 times 2001 earnings, which will fall to 11.1 times this year's (forecast) earnings and 9.6 times forecast earnings for 2003.
Central to the Macquarie optimism on Aeroporti di Roma is the expectation that earnings of the Italian company will surge from $319.6 million (?172.6 million) in 2001 to as much as $474.1 million (?256 million) in 2003. But thanks to the huge borrowings now being carried by Aeroporti di Roma, the airport operator is barely earning a profit in the March quarter, it lost ?6.6 million, although in the June half that improved to a ?0.8 million profit. The cost of servicing the debt load is upwards of ?80 million a year, leaving little room to manoeuvre.
For 2002, Macquarie forecast Aeroporti di Roma would post EBITDA of $409.8 million (?221.3 million).
In the June half, EBITDA was ?90.9 million, signalling around ?200 million for the full year (the second half is a stronger performer) well short of the Macquarie forecast, particularly as US President George Bush continues to rattle the sabre about attacking Iraq.
Macquarie argues that even though Leonardo consortium still controls Aeroporti di Roma (with a 51 per cent stake), the bank has equal say on the key management committees, which will ensure that it can drive efficiency programs at the company.
But Standard & Poor's has a different take.
In the wake of Macquarie's buy into the Italian airport operator, it said Macquarie will be a minority shareholder providing additional expertise, but should exert limited influence on management and financial policies due to restrictions included in shareholder agreements.
© 2002 Sydney Morning Herald