Babcock battles, Austar AGM, new video and Rich List
February 2, 2010
Dear Mayne Reporters,
greetings from The Chifley Hotel in Kings Cross where the action from this morning's Everest Babcock & Brown and Austar meetings is being digested and we're limbering up for tomorrow's Babcock & Brown AGM at 10am.
New Rich List video
We're now above 1030 names and stacking them on quickly as more tips come in whilst web traffic keeps building. Indeed, our Rich List has been viewed almost 11,000 times and is easily the most popular feature on The Mayne Report website which has now cracked 200,000 page views since we launched last year.
Making Phil Green squirm at EBB AGM
Babcock CEO Phil Green was sitting at the end of the board table in the Heritage Room of the Intercontinental Hotel for this morning's AGM of EBB, Australia's biggest listed absolute return hedge fund. It wasn't long before he was front and centre after I suggested the Babcock association was tainting EBB, which might do better to cut and run from its 29% shareholder.
Chairman David Kent, who is stepping back to become non-executive chairman in a nod to good governance, defended Babcock but we then had an illuminating exchange about EBB's $20 million loan/investment on the $1.4 billion Royal Children's Hospital PPP in Victoria - a Babcock deal that appears to be going bad.
EBB's share price is tanking because it ended a long period of out-performance for investors and is now lagging, such that it won't generate any performance fees in the first half despite the current troubled environment supposedly being great for absolute return hedge funds. The underperformance has led to $400 million of the $3 billion in funds under management walking out the door so far this year and EBB chief executive Jeremy Reid found himself dumped from the BRW Rich List at the tender age of just 31 as his reported wealth plunged from $200 million to a measly $65 million.
I commiserated with the youngest ever man to be thrown out by BRW but his chairman suggested the magazine's wealth league ladder has been "historically inaccurate". At least Phil Green survived, although he took quite a haircut from $442 million to $289 million and isn't that much clearer of his great rival and Rich List debutante Allan Moss, who had to retire from Macquarie Bank before finally getting valued at $225 million.
Jeremy Reid won't be doing a Bondy and getting back on the list any time soon because EBB shareholders were told that its carrying value of goodwill - $330 million out of $340 million in net assets - was being reviewed and this would probably mean no dividends for 2008. Oh dear, sounds like we're on that slippery slope of underperformance, write downs, losses, redemptions and no dividends - any wonder the stock has tanked 80% since last July.
Babcock-related direct investments causing problems
The residual $2.6 billion of funds under management actually sits in Everest Babcock & Brown Alternative Investment Trust (EBI) and EBB is simply the manager which extracts fees. The EBI AGM was held on Thursday and lasted just 19 minutes with no questions from the floor but chairman Trevor Gerber, who also sits on the EBB board along with Macquarie Airports, would you believe, did confess that direct investments were holding back performance and causing concern.
This is what Gerber said on Thursday:
Direct investments currently make up 18% of the portfolio (excluding cash and foreign exchange gains). As part of our review process we are examining the appropriateness of an exposure to direct investments. We are aware that some investors may prefer for EBI to have a greater exposure to absolute return funds. The direct investments provide diversification and income benefits to the portfolio. It is expected that 50% of the current direct investment portfolio (by value) will be running off over the next 12 months. These cashflows are before the repayment of leverage against the portfolio. As these investments roll off, the Board will consider carefully the overall exposure of the portfolio to direct investments.
Exploring the Children's Hospital exposure
Given this big story in the Herald Sun on March 25 suggesting the Royal Children's Hospital financing might be close to collapse due to the downgrade of a credit insurer, this specific direct investment became quite a focus of discussion at today's EBB AGM. Chairman Kent first opined that it was a "performing asset" in that the interest was being paid, but then he let on that EBB was expecting repayment in full shortly and that the loan would be shifted to another Babcock vehicle.
This just highlights the whole problem with the Babcock model which has similar characteristics to Allco and MFS - the different parts of the empire do a lot of deals with each other but where is the alignment of interest, who is looking after who and can one part bring down the rest of the show? Babcock rescued its environment fund earlier this year and is now talking about doing the same for Babcock & Brown Power.
Just like Babcock & Brown Infrastructure shouldn't have lent Babcock & Brown $200 million (see last Mayne Report), it appears obvious that some other Babcock vehicle shouldn't have to pick up this struggling hospital exposure from EBI/EBB if it really is a dog.
The Herald Sun described the hospital problem as follows:
The State Government faces a possible $1 billion bail-out of the new Royal Children's Hospital after a cloud was cast over the project's finances. The company being paid by the Government to build the new hospital borrowed $1.4 billion on the international market to fund the construction costs but is now being threatened by the US credit crunch. Problems with the project's finances have been identified by international ratings agency Standard & Poor's. It warned that the project had a risky financial structure and that taxpayers might have to pick up the bill if the consortium went under.
Chairman Kent claimed that EBB had knocked back many Babcock & Brown investment proposals and that Phil Green did not sit on the investment committee, so why on earth did an absolute return hedge fund lend money on a Babcock PPP just as the global credit crunch was cranking up?
When it came to Phil Green's re-election, I asked about Babcock's long-term commitment to EBB and he offered up the usual "no present intention to sell".
There was no specific answer to the question about Babcock's average entry price on its 71.1 million EBB shares but it must be a substantial loss given that EBB has plunged from almost $4 to just 50c in 10 months. Contrast that non-answer with this upbeat response Phil gave at the 2006 Babcock AGM about all these unbooked profits on its satellite investments. How the worm turns when you look at Babcock & Brown Power's present problems and tumbling share price.
Reflecting back on the 2006 Babcock AGM
I've been to the first three Babcock AGMs and 2006 was definitely the most illuminating. We've only just got hold of the audio and it makes for fascinating listening given the current problems faced by the financial engineers and the likely debate at tomorrow's AGM, which will centre around the debt troubles at Babcock & Brown Power, the $200 million loan from Babcock & Brown Infrastructure to the mother ship, the Tricom rescue, loan covenants, satellite management contracts, big discounts to NTA and various other issues.
The full edited exchanges from the 2006 Babcock AGM take about 20 minutes but the individual questions break down as follows. I particularly recommend questions 2, 4, 6, 7 and 9.
Q1: Okay, you've upgraded the profit forecast Phil but where is it coming from?
Q2: Profits on satellite fund investments
Q3: Is the $8 billion Eircom deal driving all this revenue?
Q4: Explaining the UBS relationship, Alinta and Phil's personal purchases of BBI shares
Q5: Valuing share options
Q6: Why not follow the Macquarie model on executive pay?
Q7: Conflicts and Babcock disclosure question for ASX director Michael Sharpe
Q8: Martin Rey's options - who can vote?
Q9: Question for the auditor about wildly inaccurate pay valuation figures
We'll have a full account of tomorrow's meeting, complete with edited audio highlights courtesy of the webcast, in subscriber inboxes by 2.30pm tomorrow.
Big protests from shareholders at the Austar AGM
EBB was all wrapped up by 9.50am and it was just a 10 minute walk from The Intercontinental to The Westin for the 10am start at the AGM of regional pay-TV company Austar.
Chairman Mike Fries, one of John Malone's Liberty Media executives, wasn't able to make it out from Colorado this year to represent the controlling 51.67% shareholder, so long-time CEO John Porter took the reins and did a good job presenting the positive turn-around story that is Austar.
Austar is to be commended for putting Porter up for election as this is not compulsory in Australia and many CEOs use the exemption. He only received 2 million votes against, but there was a big protest of 188.9 million shares against Liberty representative John Dick and even new independent Roger Amos copped 133.45 million votes against.
The issue here was that Amos was Austar's signing partner from auditor KPMG in 2006 and has joined the board just 25 months later. The convention is for a 24-month cooling off period so Austar was pushing the envelope.
I pointed out the great irony in that Amos was replacing Justin Gardiner, the last HIH director standing on any public company board and the man who used to audit the failed insurer before going on to chair the HIH board's audit committee.
It was the whole Arthur Anderson/HIH scenario which prompted the new audit independence laws coming out of the Royal Commission, yet here was Justin Gardiner being replaced by Austar's former audit partner. No wonder the shareholders revolted and sent a big protest vote against the new director and the Liberty man who endorsed such a weakening of independence.
Pay protest as well
One of the proxy advisory firms clearly recommended against the remuneration report because there were 102 million votes against. Strip out Liberty's 682 million shares and this represented almost 25% of the independent shares voted.
Porter conceded that the proxy advisers preferred net profit to cash flow for the long-term incentive plan and there is a view out there that both Foxtel and Austar are now being run like utilities for cash. Whilst Porter didn't make the BRW Rich List, I told the meeting his 16 million Austar shares put him on ours and then asked how committed he was into the future given he'd served more than 10 years and made more than enough to retire.
He replied by pointing to his new 4-year contract and enthusiasm to keep growing Austar, which really probably should merge with Foxtel at some time, if the Murdoch/Telstra/Packer camp can ever agree a price with John Malone.
Ripping into Labor's media policies
The good thing about a long-serving American executive is that they tend to speak their minds. When I asked about Labor's media policy and the on-going protection of free-to-air television, Porter let fly saying that Australian's free-to-air networks were the most protected in the world and this made no sense given they were owned by two private equity firms and a Canadian broadcasting company. This sort of overlooked the fact that James Packer's Consolidated Media Holdings retains 25% of Nine and Kerry Stokes still owns a fully diluted 22% of Seven. Porter also said that the noises coming out of Labor suggested this outrageous protection, such as the anti-syphoning legislation with major sports broadcasts and all the free spectrum, looks likely to continue.
The free-to-airs have hired Rudd's great mate Wayne Goss to lead their lobbying efforts and asked which Labor mate Austar and Foxtel had countered with, the pay-TV company could only point to Nick Greiner - a former Liberal politician who won't be much use with wall-to-wall Labor governments.
I complained about the Goss appointment in Crikey earlier this month and the best response the free-to-air lobby could come up with was that he'd quit the board of Therese Rein's Ingeus group last year. Well that's all right then, is it?
The Federal opposition is clearly too scared to pursue this for fear of upsetting the TV networks and there didn't appear to be any journalists at today's Austar AGM, so John Porter's damning comments will probably go unreported in the mainstream media. It can be a lonely experience arguing for the governance high ground in Australia.
Another big protest against Exxon-Mobil
Finally today, check out this story from the Houston Chronicle about yesterday's Exxon-Mobil AGM where a proposal by activist legend Bob Monks to split the chairman and CEO role was supported by 40% of shares votes.
These oil heavies have thick hides because this proposal has been put up for seven straight years and still Exxon won't yield, even though long-time executive chairman Lee Raymond only retired a couple of years ago.
That's all for now.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
greetings from The Chifley Hotel in Kings Cross where the action from this morning's Everest Babcock & Brown and Austar meetings is being digested and we're limbering up for tomorrow's Babcock & Brown AGM at 10am.
New Rich List video
We're now above 1030 names and stacking them on quickly as more tips come in whilst web traffic keeps building. Indeed, our Rich List has been viewed almost 11,000 times and is easily the most popular feature on The Mayne Report website which has now cracked 200,000 page views since we launched last year.
Making Phil Green squirm at EBB AGM
Babcock CEO Phil Green was sitting at the end of the board table in the Heritage Room of the Intercontinental Hotel for this morning's AGM of EBB, Australia's biggest listed absolute return hedge fund. It wasn't long before he was front and centre after I suggested the Babcock association was tainting EBB, which might do better to cut and run from its 29% shareholder.
Chairman David Kent, who is stepping back to become non-executive chairman in a nod to good governance, defended Babcock but we then had an illuminating exchange about EBB's $20 million loan/investment on the $1.4 billion Royal Children's Hospital PPP in Victoria - a Babcock deal that appears to be going bad.
EBB's share price is tanking because it ended a long period of out-performance for investors and is now lagging, such that it won't generate any performance fees in the first half despite the current troubled environment supposedly being great for absolute return hedge funds. The underperformance has led to $400 million of the $3 billion in funds under management walking out the door so far this year and EBB chief executive Jeremy Reid found himself dumped from the BRW Rich List at the tender age of just 31 as his reported wealth plunged from $200 million to a measly $65 million.
I commiserated with the youngest ever man to be thrown out by BRW but his chairman suggested the magazine's wealth league ladder has been "historically inaccurate". At least Phil Green survived, although he took quite a haircut from $442 million to $289 million and isn't that much clearer of his great rival and Rich List debutante Allan Moss, who had to retire from Macquarie Bank before finally getting valued at $225 million.
Jeremy Reid won't be doing a Bondy and getting back on the list any time soon because EBB shareholders were told that its carrying value of goodwill - $330 million out of $340 million in net assets - was being reviewed and this would probably mean no dividends for 2008. Oh dear, sounds like we're on that slippery slope of underperformance, write downs, losses, redemptions and no dividends - any wonder the stock has tanked 80% since last July.
Babcock-related direct investments causing problems
The residual $2.6 billion of funds under management actually sits in Everest Babcock & Brown Alternative Investment Trust (EBI) and EBB is simply the manager which extracts fees. The EBI AGM was held on Thursday and lasted just 19 minutes with no questions from the floor but chairman Trevor Gerber, who also sits on the EBB board along with Macquarie Airports, would you believe, did confess that direct investments were holding back performance and causing concern.
This is what Gerber said on Thursday:
Direct investments currently make up 18% of the portfolio (excluding cash and foreign exchange gains). As part of our review process we are examining the appropriateness of an exposure to direct investments. We are aware that some investors may prefer for EBI to have a greater exposure to absolute return funds. The direct investments provide diversification and income benefits to the portfolio. It is expected that 50% of the current direct investment portfolio (by value) will be running off over the next 12 months. These cashflows are before the repayment of leverage against the portfolio. As these investments roll off, the Board will consider carefully the overall exposure of the portfolio to direct investments.
Exploring the Children's Hospital exposure
Given this big story in the Herald Sun on March 25 suggesting the Royal Children's Hospital financing might be close to collapse due to the downgrade of a credit insurer, this specific direct investment became quite a focus of discussion at today's EBB AGM. Chairman Kent first opined that it was a "performing asset" in that the interest was being paid, but then he let on that EBB was expecting repayment in full shortly and that the loan would be shifted to another Babcock vehicle.
This just highlights the whole problem with the Babcock model which has similar characteristics to Allco and MFS - the different parts of the empire do a lot of deals with each other but where is the alignment of interest, who is looking after who and can one part bring down the rest of the show? Babcock rescued its environment fund earlier this year and is now talking about doing the same for Babcock & Brown Power.
Just like Babcock & Brown Infrastructure shouldn't have lent Babcock & Brown $200 million (see last Mayne Report), it appears obvious that some other Babcock vehicle shouldn't have to pick up this struggling hospital exposure from EBI/EBB if it really is a dog.
The Herald Sun described the hospital problem as follows:
The State Government faces a possible $1 billion bail-out of the new Royal Children's Hospital after a cloud was cast over the project's finances. The company being paid by the Government to build the new hospital borrowed $1.4 billion on the international market to fund the construction costs but is now being threatened by the US credit crunch. Problems with the project's finances have been identified by international ratings agency Standard & Poor's. It warned that the project had a risky financial structure and that taxpayers might have to pick up the bill if the consortium went under.
Chairman Kent claimed that EBB had knocked back many Babcock & Brown investment proposals and that Phil Green did not sit on the investment committee, so why on earth did an absolute return hedge fund lend money on a Babcock PPP just as the global credit crunch was cranking up?
When it came to Phil Green's re-election, I asked about Babcock's long-term commitment to EBB and he offered up the usual "no present intention to sell".
There was no specific answer to the question about Babcock's average entry price on its 71.1 million EBB shares but it must be a substantial loss given that EBB has plunged from almost $4 to just 50c in 10 months. Contrast that non-answer with this upbeat response Phil gave at the 2006 Babcock AGM about all these unbooked profits on its satellite investments. How the worm turns when you look at Babcock & Brown Power's present problems and tumbling share price.
Reflecting back on the 2006 Babcock AGM
I've been to the first three Babcock AGMs and 2006 was definitely the most illuminating. We've only just got hold of the audio and it makes for fascinating listening given the current problems faced by the financial engineers and the likely debate at tomorrow's AGM, which will centre around the debt troubles at Babcock & Brown Power, the $200 million loan from Babcock & Brown Infrastructure to the mother ship, the Tricom rescue, loan covenants, satellite management contracts, big discounts to NTA and various other issues.
The full edited exchanges from the 2006 Babcock AGM take about 20 minutes but the individual questions break down as follows. I particularly recommend questions 2, 4, 6, 7 and 9.
Q1: Okay, you've upgraded the profit forecast Phil but where is it coming from?
Q2: Profits on satellite fund investments
Q3: Is the $8 billion Eircom deal driving all this revenue?
Q4: Explaining the UBS relationship, Alinta and Phil's personal purchases of BBI shares
Q5: Valuing share options
Q6: Why not follow the Macquarie model on executive pay?
Q7: Conflicts and Babcock disclosure question for ASX director Michael Sharpe
Q8: Martin Rey's options - who can vote?
Q9: Question for the auditor about wildly inaccurate pay valuation figures
We'll have a full account of tomorrow's meeting, complete with edited audio highlights courtesy of the webcast, in subscriber inboxes by 2.30pm tomorrow.
Big protests from shareholders at the Austar AGM
EBB was all wrapped up by 9.50am and it was just a 10 minute walk from The Intercontinental to The Westin for the 10am start at the AGM of regional pay-TV company Austar.
Chairman Mike Fries, one of John Malone's Liberty Media executives, wasn't able to make it out from Colorado this year to represent the controlling 51.67% shareholder, so long-time CEO John Porter took the reins and did a good job presenting the positive turn-around story that is Austar.
Austar is to be commended for putting Porter up for election as this is not compulsory in Australia and many CEOs use the exemption. He only received 2 million votes against, but there was a big protest of 188.9 million shares against Liberty representative John Dick and even new independent Roger Amos copped 133.45 million votes against.
The issue here was that Amos was Austar's signing partner from auditor KPMG in 2006 and has joined the board just 25 months later. The convention is for a 24-month cooling off period so Austar was pushing the envelope.
I pointed out the great irony in that Amos was replacing Justin Gardiner, the last HIH director standing on any public company board and the man who used to audit the failed insurer before going on to chair the HIH board's audit committee.
It was the whole Arthur Anderson/HIH scenario which prompted the new audit independence laws coming out of the Royal Commission, yet here was Justin Gardiner being replaced by Austar's former audit partner. No wonder the shareholders revolted and sent a big protest vote against the new director and the Liberty man who endorsed such a weakening of independence.
Pay protest as well
One of the proxy advisory firms clearly recommended against the remuneration report because there were 102 million votes against. Strip out Liberty's 682 million shares and this represented almost 25% of the independent shares voted.
Porter conceded that the proxy advisers preferred net profit to cash flow for the long-term incentive plan and there is a view out there that both Foxtel and Austar are now being run like utilities for cash. Whilst Porter didn't make the BRW Rich List, I told the meeting his 16 million Austar shares put him on ours and then asked how committed he was into the future given he'd served more than 10 years and made more than enough to retire.
He replied by pointing to his new 4-year contract and enthusiasm to keep growing Austar, which really probably should merge with Foxtel at some time, if the Murdoch/Telstra/Packer camp can ever agree a price with John Malone.
Ripping into Labor's media policies
The good thing about a long-serving American executive is that they tend to speak their minds. When I asked about Labor's media policy and the on-going protection of free-to-air television, Porter let fly saying that Australian's free-to-air networks were the most protected in the world and this made no sense given they were owned by two private equity firms and a Canadian broadcasting company. This sort of overlooked the fact that James Packer's Consolidated Media Holdings retains 25% of Nine and Kerry Stokes still owns a fully diluted 22% of Seven. Porter also said that the noises coming out of Labor suggested this outrageous protection, such as the anti-syphoning legislation with major sports broadcasts and all the free spectrum, looks likely to continue.
The free-to-airs have hired Rudd's great mate Wayne Goss to lead their lobbying efforts and asked which Labor mate Austar and Foxtel had countered with, the pay-TV company could only point to Nick Greiner - a former Liberal politician who won't be much use with wall-to-wall Labor governments.
I complained about the Goss appointment in Crikey earlier this month and the best response the free-to-air lobby could come up with was that he'd quit the board of Therese Rein's Ingeus group last year. Well that's all right then, is it?
The Federal opposition is clearly too scared to pursue this for fear of upsetting the TV networks and there didn't appear to be any journalists at today's Austar AGM, so John Porter's damning comments will probably go unreported in the mainstream media. It can be a lonely experience arguing for the governance high ground in Australia.
Another big protest against Exxon-Mobil
Finally today, check out this story from the Houston Chronicle about yesterday's Exxon-Mobil AGM where a proposal by activist legend Bob Monks to split the chairman and CEO role was supported by 40% of shares votes.
These oil heavies have thick hides because this proposal has been put up for seven straight years and still Exxon won't yield, even though long-time executive chairman Lee Raymond only retired a couple of years ago.
That's all for now.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.