Faulty Logic: MAp Director Explains Deal
Faulty Logic: MAp Director Explains Deal
A few hours after I posted Macquarie Pillages MAp One Last Time, a Macquarie representative was on the phone requesting a meeting. That wasn't too surprising. Macquarie Airports (MAp) CEO Kerrie Mather and I worked on the original Sydney Airport acquisition together, and we've had a good relationship ever since.
But the surprising (and encouraging) news was that lead independent director Trevor Gerber wanted to explain the situation from his point of view. After an hour on the phone, we even agreed on a couple of things.
Firstly, MAp will be better off without Macquarie Group as its manager. Not only would there be a substantial cost saving but, more importantly, the incentive to do deals that benefit the manager but not the owners of the fund would disappear.
Secondly, the deal being put to securityholders – buying the management rights from Macquarie for approximately $350m – is a vastly superior alternative to sticking with the existing management agreement forever.
From there, however, our opinions differed substantially. For mine, those aren’t the only two alternatives available to securityholders.
MAp can, with a simple 50% majority of securities, terminate the management agreement. The independent directors have considered this option but decided against it. Macquarie would, Gerber points out, be able to vote its existing 21% stake against the proposal and this, combined with the fact that many MAp securityholders are also Macquarie shareholders, would make it difficult to get the resolution passed. To that, I say it won’t hurt to give it a shot. More than 50% of MAp securities are held by institutional investors (excluding Macquarie) and the benefits are so blatantly obvious that they would be negligent not to vote, or worse, to vote against the proposal.
Secondly, Gerber pointed out that terminating the management contract would constitute a ‘change of control’ event in relation to some debt facilities at MAp’s European airports. In normal times, banks would simply OK the new owners, but in the current environment they’re likely to jump on any opportunity to get their money back. This represents a serious risk for MAp securityholders, but it still leaves them with a couple of options vastly superior to giving 6.4% of the group away.
The debt facilities mature in 2012 and 2015. Why not pay Macquarie $40m in base fees for the next few years and then terminate the management contract when the debt facilities need to be refinanced in any case? That would involve paying approximately $100m in fees instead of the $350m currently being offered.
MAp could also demerge Sydney Airport. It’s been done before. MIG spun off its Sydney toll road investments by way of an in specie distribution and I’d welcome this move were the management internalised or not. Sydney Airport alone is, in my opinion, worth the current security price.
So a demerger would serve to realise some of the underlying value from MAp’s excellent assets but it would also leave a much smaller MAp, which would mean fewer fees to the manager (using my valuations, Sydney Airport represents about 70% of the value of the total portfolio).
The ideal solution might be to pursue both strategies: demerge Sydney Airport now and terminate the management contract in a few years’ time. The fees paid to Macquarie under this scenario could be as low as $50m–$60m, a massive improvement on the $350m currently on the table.
MAp’s independent directors are to be applauded for getting the internalisation ball rolling. They’ve managed to come to an agreement with Macquarie that is an improvement on the status quo. But there are better options at hand and, at the very least, they should be used to ensure MAp’s owners end up with a larger share of the spoils.
Special thanks to Trevor for taking the time to explain some of MAp’s structural intricacies and the board’s rationale for the deal they’ve put forward. The more boards, and particularly independent directors, communicate with ordinary shareholders, the better.
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Steve,
Thanks for the update. This episode highlights a question that has been on my mind for some time: Given your background and ties with people in the financial/banking world, how do you manage your own conflict of interest? On one hand, you have every reason to maintain your personal relationship with your old friends and you don't want to upset them to much. On the other hand, you want to provide truly independent analysis in T.I.I.
The question I would put back to you Steve is that if $350 million is the wrong price then what is the right price? Your suggested solution to save part of the $350 million ignores some potentially large costs to MAP security holders. First there is the cost to MAP security holders associated with MQG protecting their position and as a MQG shareholder and not a Map shareholder I would be bitterly disappointed should they not do so, even at a cost to MQG – after all MIG is potentially next. Secondly any spin off involving the Sydney Airport from MAP now introduces additional cost structures and the cost of a new management team off setting some of your gain by leaving MAP in the first place. Meanwhile the residual MAP operation sits in a time warp while everyone waits for the debt structures to mature and most likely doesn’t create any value by getting on with adding value to existing and new airports. So you end up with two cost structures and nobody doing anything until the debt matures because only then the vote is effective. Years of opportunity can be wasted, especially in this time when assets could be added effectively. Your solution could be ultimately costly for the MAP holders beyond what you think you might be saving. I suggest MAP security holders have potentially more to lose than gain by going down your route.
It looks to me the independent directors have taken these issues into account and maybe the right price could be lower or maybe even higher – but either way I would have thought some game theory analysis leads to $350 being in the ball park of what works for everyone in a commercial environment.
Said like a true Macquarie shareholder, JJ. And yes, you are right to be worried about MIG.
But Sydney Airport already has its own perfectly capable management team and we already pay their salaries. The additional cost would be zero. Which is exactly the reason we don't need to pay Macquarie a fortune in fees.
You have more Macquarie in your blood then me Steve. Actually that explains you wanting this deal for nearly free (actually I'm joking as it is a good trait to have).
MAP security holders might have the moral high ground on this one but nobody likes uncertainty so where is the commercial incentive (let alone personal) for independant directors to take on MQG to save maybe $100-150 million or 5 to 8 cents per security. Surely we wouldn't be having this debate if the break fee was $200-$250 million, so the price is squeezed a little so some complain but not enough to make the majority really care. My point is the price is set by gamesmanship not fairness - all in the name of commercialism.
I have been debating this on Hot copper and even there the only parties who say its fair is in fact MQG shareholders. I think that there is another point and that is that in the present circumstances its not easy for the interests of the manager to vary from those of the unit holders because the world has put a halt on gearing and that in itself will stop the bolting on of more assets. In addition its about time the directors did their duty and where questioned on why they would just agree to whatever the manger said.
Its far cheaper to atke the alternatives than just to pay up.
I think that shareholder need to be encouraged to actively vote and in a recent spat at one of the other listed company the vote at an EGM was over 72% of all shares.
I agree its worth a not just a shot but a campaign.
They say in politics if you don't vote or make yourself aware of the issues you get the government you deserve. Investors need to start looking into the backgrounds of people they appoint to look after their wealth.
Below is some commentrary I recently recevied by fund manager Brook Asset Management (NZ) - they raise some interesting points, particularly in regards to MAPs foreign ownership restrictions.
"MAp has announced its intention to sever ties with Macquarie Group. (This follows the recently completed sale of Macquarie Communications Infrastructure Group to Canada Pension Plan.) MAp will acquire and internalise the management contract from Macquarie through the issuance of 150 million new shares at $2.30, implying $345 million in value for the rights.
Suffice to say, we, and the market, are modestly disappointed that MAp couldn’t ultimately derive a plan that addresses all security holder issues including Macquarie Group’s ongoing ownership and foreign ownership restrictions at Sydney Airport. We consider that the decision to issue scrip in lieu of a cash settlement with Macquarie reflects the independent directors’ conservatism; there
is a reasonable expectation that beyond cash earmarked for debt reduction at Copenhagen there is a likely requirement for further deleveraging at Brussels and at Sydney. It also neatly addresses the looming issue of breaching the 40% foreign ownership cap at Sydney Airport once the defeased TICKET’s securities are redeemed at year-end.
We would have preferred a cash settlement on two counts: 1) the scrip issue creates uncertainty as to how much Macquarie have ultimately been paid for the management contract and dilutes existing shareholders, and 2) it increases the overhang where Macquarie will increase its ownership interest from 21% to 27.3%. To the extent that Macquarie are a likely seller of this stake, it will need to be placed to domestic investors, virtually in its entirety, given the foreign ownership restrictions at Sydney Airport (noted above). Dealing with Macquarie’s stake will be a key share price driver in our view."
I find it amazing that after the backlash from shareholders with regards to the proposed payout to Macquarie to internalise the management of MAp, the directors of MAp have rewrapped the same excessive payment and expect shareholders to suddenly change their opinion of the deal. IMO whether you pay in shares or cash if you are paying too much you are paying too much.
I agree with Brendon but it seems that as usual this has addressed the concerns of some institutions and they don't mind taking up the equity at what now looks like a cheap price in order to dispose of MQG. They are not looking to whether there are alternatives.
In fact if you read the report particulary the expert report from KPMG they dont even consider the option of delaying the decision until the earlier of the GFC abating and the major refinicing. They have therefore totally ignored this option. In My opinion they have done this under the caveat of:
"Further, we note that an important part of the information base used in forming our opinion is comprised of the
opinions and judgements of management. "
These are the parties currently employed my MQG to run the show and given that they will be employed directly they dont have a real cost in the payment to MQG as its being costed to existing equity.
In addition they use the management fee paid for 2008 as the base. They have not taken into account by how much it will have fallen this year.
In addition to this they talk about the pre emptive rights that other shareholders will have in Bristol, copenhagen and Brussels. Please exercise your pre-emptive rights we would gladly get rid of this bolt-on subsets. They however see this as a negative , I doubt that anyone would logically have followed their pre-emptive rights for those assets.
basically they boil it down to having to have MQG co-operation. At this time its true in a few years it may not be. The timing is everything.
So I will vote no knowing full well that in reality everyone including the person interested in this contract MQG will be entitled to vote its equity in favour anyway. This is the real issue if you are interested in a contract than it should be the disinterested quorum that has a vote and you shouldn't be allowed to vary this this should be entrenched in the corporations act.
Anyway just take up your rights if you believe in this one.
Steve was interviewed on ABC Lateline Business last night regarding Macquarie Airports. Here is a link to the transcript and video
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