Bye bye Babcock, Allco jackboots, ANZ failings, goodbye goodwill, Telstra tangle, Rich List, Madoff, Manningham, Westfield and biotech barney


January 14, 2009

Dear Mayne Reporters,

in this week's edition we've got a pile of juicy material, opening up with...

The process to expunge Babcock & Brown's name from history


At its peak, the Babcock & Brown name was attached to more than 10 different publically traded securities, which were collectively capitalised at more than $20 billion. I was unfortunate enough to have invested $500 into all of the ASX-listed versions.

With shares in the mothership suspended on Monday, there is a good prospect that they won't emerge to trade again.

Babcock, which now has former Westpac finance director Pat Handley as one of a handful of remaining directors, is clearly repeating the Allco situation of demanding an answer from its banks by suspending its shares. The banks have a big incentive to do some sort of debt-for-equity swap to keep Babcock alive because administration would terminate what's left of those lucrative management and advisory contracts with its various teetering listed funds. Let's hope they are saved because the Babcock & Brown AGM in May will be one to remember, topping even last year's heavy combat.

However, moves are already afoot at several funds to ditch Babcock as manager and rebrand. The scorecard on that front so far is as follows:

Babcock & Brown Communities: shareholders approved an effective Lend Lease takeover on December 31 which involved a $195 million capital injection, the sale of BNB's 12.5% stake and a name change to Lend Lease Primelife. Who would have thought Lend Lease would prefer to bring back the name associated with Ted Sent and Mick Gatto, rather than plough on with Babcock & Brown.

Babcock & Brown Wind:
management negotiated an internalisation proposal announced on December 18 with Babcock & Brown to be paid $40 million to go away. Once all is finalised by June 30, a name change is expected before the end of the year and BNB is not a substantial shareholder in BBW.

Babcock & Brown Capital: internalisation announced on November 10 involving $45 million in payments to buy out the management contract and advisory mandate which is expected to be voted on at an EGM before February 28. BNB retains an 8.6% stake worth about $20 million and the name change is expected later this year.

Everest Babcock & Brown: 99.94% of shares were voted in favour of the name change to Everest Financial Group at the EGM on December 23, although the ASX code remains EBB. Babcock & Browns ceased being a substantial shareholder with this notice on December 29 and the loss was hefty given the stock has plunged from almost $4 in July 2007 to less than 10c presently.

Everest Babcock & Brown Alternative Investment Trust (EBI): has also been going through various complicated restructures which see the residual listed vehicle controlled and managed by hostile offshore hedge funds whilst those more friendly towards Babcock & Brown have opted into an unlisted vehicle still managed by Everest, which will be progressively liquidated over the next couple of years. BNB sold almost 2 million EBI shares in December but retains 25 million which are expected to return more than $50 million through the liquidation based on the present NTA of about $2.50 although the stock price is wallowing down near $1.

That really only leaves what were the two biggest Australian funds, Babcock & Brown Power and Babcock & Brown Infrastructure, which are now trading at 9c and 12c respectively as they stagger under a joint debt load of more than $12 billion. There's not much point rebranding or switching manager when you are in crisis mode fending off the bankers.

The Macquarie Model of gouging listed funds was adopted by Babcock shortly after its 2004 float and eventually taken to the world. There is the New York-listed Babcock & Brown Air, which leases 63 aircraft and closed at $US6.50 last night, after trading in a range between $US18.85 and $US4.70 over the past year.

And don't forget the London-listed Babcock & Brown Public Partnerships, which recently released this list outlining its 10 biggest investments in global PPPs, including Victoria's $1 billion-plus Royal Children's Hospital redevelopment.

I'm tipping there won't be a single Babcock-branded listed vehicle left by the end of 2009, but there will be several rebranded listed funds, particularly the offshore operations which have much stronger balance sheets and less brand damage from the association with the discredited Australian mothership.

Banks deserve Clarke's kicking for jackboot behaviour at Allco

Former Allco CEO David Clarke has given two very interesting interviews recently to The AFR and Business Spectator, which produced a Stephen Bartholomeusz comment to accompany the Q&A.

Clarke's key point is that Australian banks tend to go in boots and all causing unnecessary destruction and dislocation to companies in distress.

Malcolm Turnbull has made similar points but the Rudd Government is showing no signs of addressing Australia's insolvency laws which give too much power to our already ridiculously powerful and gouging banking cartel.

For instance, before Allco Finance Group collapsed there was a proposal to redeem Allco's hybrid notes (ASX code AHUG), returning $65 million to the investors. Alas, Allco's receiver, egged on by the banks, came in and unliterally changed the proposal such that we got just $15 million, which equated to less than 12c in the dollar.

That's a straight $50 million that the secured lenders ripped off us investors in the Allco hybrids. Check out AHUG chairman Ian Tsicalas's explanation of this bank heist at the December 18 EGM.

Why isn't ANZ saving Oz Minerals?

Who can forget those full page newspaper advertisements placed by ANZ over the years trumpeting the way it had helped Owen Hegarty launch and grow Oxiana Resources from nothing to a multi-billion-dollar company?

So, where is ANZ during the hour of need for Oz Minerals, the company which emerged from the merger of Oxiana and Zinifex? Nowhere to be seen, it seems, even though the assets are clearly worth far more than the $1 billion in liabilities.

If foreign banks such as Society Generale really want to get out of their Oz Minerals exposures, then the Australian banks should be stepping up. Despite the board's incompetence we are dealing with a major Australian mining house that should be supported.

ANZ raised a whopping $4 billion through offshore, government guaranteed bond issues last week and some of these funds should be forwarded to Oz Minerals, if Oxiana really was the corporate client most suitable for a big advertising campaign about customer service and corporate support over the past 5 years.

And speaking of Oz Minerals, have a listen to this exchange from the 2006 Oxiana AGM when I politely asked whether a little bit of gold hedging would have been prudent. Not on your nelly, said chairman Barry Cusack, one of the most sackable NEDs in corporate Australia today.

Whilst plunging copper, zinc and nickel prices are what has really killed Oz Minerals, the philosophy of never hedging anything has proved to be a disaster.

How ironic that Pasminco went broke in 2001 after botching its hedging and then its successor company Oz Minerals could do the same in 2009 for refusing to do any hedging at the top of the resources bubble.

Like Babcock, let's just hope Oz Minerals survives because the AGM in May will be a ripper, especially given the outrage from when the board gave Owen Hegarty that $8.3 million golden goodbye after shareholders earlier voted down a proposed $10.7 million payout.

Taking an axe to goodwill

Bloomberg produced this terrific comment piece last week explaining the avalanche of goodwill and intangible write-downs that are coming to America's biggest companies.

Robert Gottliebsen was also onto this theme in Business Spectator after a big Goldman Sachs report predicted an avalanche of write-downs. This was a theme we were pursuing right through last year's AGM season, as was explained in the December 23 edition.

When Babcock & Brown flagged $2.6 billion-plus in writedowns that would create negative equity, we opined in last week's edition that regional pay-TV player Austar was the only other major listed company with negative book value.

Not true, your honour! Step forward Andrew Forrest's Fortescue Metals which released its 2008 annual report last September. Page 35 explains the $1.6 billion in negative book value due to a $3.4 billion revaluation of a subordinated loan note, which accrued interest based on the iron-ore production from Chichester.

Fortescue auditor GD O'Brien from boutique outfit BDO Kendall didn't insist on a going concern note, which is something we will see a lot of in February when the half year results avalanche unfolds.

So, the Fortescue board and auditor have produced accounts which claim the company is worth negative $1.6 billion when the current market capitalisation is $5.4 billion. That's only a $7 billion discrepancy, but at least it is conservative, unlike fellow Perth-based company Wesfarmers which today announced a ridiculously small $150 million write-down, although this is still subject to external audit.

Will Ernst & Young's signing partner Sean Van Gorp force some massive write-downs on February 19 given that he certified Wesfarmers had net assets worth $19.59 billion in August and the current market capitalisation is only $11.6 billion - an $8 billion discrepancy? Wesfarmers paid about $5 billion too much for Coles and should just come clean and admit it.

Whilst we can all argue about accounting standards, questions around whether future cash flows justify valuations and historical cost accounting - which sees a business like Woolworths capitalised at $33 billion whilst producing accounts showing net assets of just $6.23 billion - surely it is not too much to ask directors and auditors to at least attempt to explain any massive discrepancies between book and market value when signing off on the accounts each half.

Rio Tinto's lefty environment officer and a possible board tilt

We know that Rio Tinto is more progressive than most miners but its London-based environmental planning officer Tom Burke has really shown his true colours in this extraordinary Christmas letter to friends which fell off the back of a truck.

Check out Tom's full biography, as he's ex Friends of The Earth and has spent 30 years as a professional environmentalist before taking Rio's coin to try and change things from the inside.

Climate change is the least of Rio Tinto's problems at the moment as it battles that $65 billion debt pile and is almost making daily announcements slashing staff and canning expansion proposals.

The company will be holding its London AGM on April 15 and the Sydney AGM on April 20. In full activism mode, this would be a monty for a board tilt given the recent disasters and lack of boardroom accountability, but I've got to resolve whether that would be appropriate as the Centro Retail board situation remains fluid and there's an argument that a Manningham City Councillor shouldn't persist as a serial board candidate, even if it is just about putting pressure on certain situations.

The Rio Tinto platform is obvious - vote for change and a boardroom cleanout. It would probably also be worthwhile injecting a patriotic note by running on the need to move the head office from London to Melbourne or Perth, as was argued at last year's AGM in Brisbane, the audio of which breaks down as follows:

Chairman Skinner's audio promise
Why aren't you headquartered in Australia?
The four-pronged China question?
Why is the Rio chairman paid so much?
Undertakings to Canada over Alcan deal
Vote against Paul Skinner's re-election

Macquarie and the frozen redemptions club

Check out this list of frozen funds, because we've now added our friends from Macquarie Equinox, which really have shown the financial industry how not to do investor relations.

The main Macquarie Equinox announcement is online here, but the Millionaire Factory has delivered stuff all direct communication to angry investors. They even had the gall to apply the freeze retrospectively to investors who had lodged their withdrawal applications in the days leading up to the announcement.

Similarly, as an investor in the troubled Macquarie Fortress funds, I'm still waiting for that written apoligy which we asked for more than a year ago. It's time for Macquarie to get out of the bunker and properly communicate with clients when things go bad.

Paul Bendat's pokies campaign

The publisher of www.pokieact.org is a very unlikely activist called Paul Bendat, who we featured in this Crikey story last year. Here is Paul's response to some rather disturbing political leadership in Victoria:

Victorian Premier John Brumby made an extraordinary statement on Tuesday. It's hard to get around what the impact is upon pokie regulation let alone other issues that the Brumby government may have to deal with. Here's his statement: "At the end of the day that's what a government's obligation is to do in these areas - it's not to make moral judgments about what's right and what's wrong and how people spend their time - that's a matter for mature adults to determine - not for government. What is the responsibility of government though is to properly inform the community, give the information they require and if people do have a problem with gambling to help them get through it and that's exactly what we do."

The Premier avoids an essential point. Pokie gambling used to be an illegal activity and remains so in many jurisdictions around the world. It was the Kirner Labor Government that let this nasty genie out of it bottle. Having let it out, Brumby seems not to care about putting the genie back in the bottle.

Pokies are legal because the government made them legal. There would be no pokie gambling if the government did not license it. Prior to the 1990s there was no pokie gambling in Australia outside of NSW league clubs and certain casinos. The government determined the conditions to allow the pokie business to flourish not ordinary citizens.

Local councils fight against new pokie pubs and state government appointed agencies overrule them. There's the heroic fight of the Macedon Ranges Shire to stop pokies coming to the small town of Romsey that is still going after years of expenditure of a small council that can't afford the legal costs. The over ruling of ordinary people happened again with the Western Bulldog's Club Edgewater in Footscray where the building of a bistro seems to mean more to these failed appointees than the damage the pokies will cause. The whole issue is even more insane when you consider that the Brumby government encourages and subsidises rich AFL Clubs to build more pokie clubs.

If John Brumby sees that the choice to use dangerous entertainment should be to "mature adults" to decide what's right and wrong then should we look forward to him to lifting penalties on drinking and driving. Of course that's ridiculous, but, both driving and drinking are legally licensed adult activities and we don't leave people to make this "mature adult" decision. The vastness of pokie revenue has made governments blind to the consequences of the greed of pokie operators luring children into their pokie places and creating a new generation of pokie addicts. When business shows that it has no morals; it calls for a moral judgement by government.

The Victorian and other state governments did make a moral judgement in allowing pokie gambling. They made the wrong judgement. Wayne Goss, former premier of Queensland, admited his mistake in letting the pokie genie out of the bottle. John Brumby can show true leadership with a humble admission of a wrong judgement about allowing pokies into Victoria. He could accompany his admission of government wrongdoing with an apology for all the harm pokies have caused. This would be a good beginning and would gain him the overwhelming approval of the 70% of his Victorian electorate who disapprove of pokie gambling.

Progen board almost taken down at EGM


Unfortunately the world's biggest small share portfolio includes two struggling biotech players, Avexa and Progen, which have embarked on an interesting adventure with a proposed merger unveiled on December 22, shortly before a planned Progen shareholder coup almost came off.

Last week's Progen EGM was hardly a ringing endorsement for the current board with 35–40% of the vote opting to kick out each of the individual board members – the over 40% title went to current CEO Justus Homburg. Check out the results here, because there haven't been too many other EGM protests of this size.

This saga is an interesting combination of shareholder activism, last rites of Aussie biotech and the pros and cons of a graceful shut down of a company that has not succeeded. What's wrong with returning shareholders' money if something has not come off as planned? As we have continually pointed out, if companies are trading at fractions of their book values, and the valuations are to be believed, why wouldn't they be wound up?

In this case the Progen book value is cash in the bank so no story there, but it seems the management will burn everyone's dough before admitting defeat.

Bernie Madoff's brother Peter


Check out this cracking feature in The Wall Street Journal about Bernie Madoff's brother Peter. It's hard to believe that he wasn't complicit, although the key question that remains unanswered is precisely when the Ponzi scheme started. And don't forget this package of media appearances regarding the scandal.

A Current Affair's Telstra hatchet job and more tales of poor service


Last Friday marked the 20th anniversary of your correspondent's first day in journalism as the finance cadet on Rupert Murdoch's Sun News Pictorial, which became the Herald Sun in September 1990.

And what a fitting way to celebrate such a milestone than to participate in this A Current Affair hatchet job on Telstra about poor service and board junkets to Las Vegas. It was a cheap shot but sometimes you've just got to do these things.

What made this fitting for the 20 years in journalism anniversary was that one of the other 28 cadets - which is thought to be an Australian record for any media company - who started with the Herald & Weekly Times that day was none other than Andrew Butcher, who is now Sol Trujillo's chief spindoctor at Telstra.

Butch, who spoke at my 21st held at the venerable Bulleen Tennis Club in Magnificent Manningham, later went on to be Rupert Murdoch's New York-based spindoctor for several years until returning to Australia 13 months ago.

A reunion at that old favourite journalistic drinking hole, The Phoenix on Flinders St, is being organised for the 28 cadets who started on January 9, 1989, in part to establish just how many are still in the game and how many crossed to the dark side of spindoctoring, like Butch did.

And speaking of poor Telstra service, check out this sizzling complaint to Federal Communications Minister Stephen Conroy from Dr Stephen Smith, one of Australia's foremost consumer advocates and historians:

Dear Telstra Minister,

In early November 2008, now three months ago, Telstra replaced email MYBIGPOND with MYCONNECT. They sought no customer permission to make this substantive software change. The result for thousands of Australian consumers has been a major systemic breakdown and intermittent access to their Telstra email accounts. See this
Fairfax blog.

Today, I have been unable to log on at all and cannot access any of my emails. This puts to one side the reduction in speed, the increase in the number windows needed to be opened to gain access and the repeated collapse of the account when access is possible. I am trapped as my email account ‘naylorsmith@bigpond.com' is my major window to friends here and overseas. It is a nightmare to change.

My efforts to seek help through Telstra ‘technical support' and the TIO have been universal failures. Both demonstrate a triumph of (slow) process over problem solving skill. Time spent waiting to speak to call centres in the Phillipines and other places north have just added to the frustration.


The outrageous thing about all this is the lack of good faith by Telstra. They know they have a major systemic problem but is there any explanation on the website? No! Does the TIO have an explanation of the problem on their website? NO! So much for effective ADR and JFKS ‘consumer right' of keeping consumers informed.

To my mind this is the start of another ‘COTS” saga that bedevilled the former Telecom and was a catalyst for the TIO. What an irony that the TIO is now part of a similar problem.

Suffice to say that after three months of waiting for someone to explain what and when the software problem will be fixed I now have to migrate to another ISP and go through the performance of advising all and sundry. There will be a claim for compensation.

I know that you and the Consumer Affairs Minister have no direct power to intervene but you should be aware of he failure that exists in the regulatory and ADR arenas that do fall under your remits.

Happy new year
Dr Simon Smith

Austar offer - get with the webcasting program and we'll leave you alone in AGM

There will be less travelling for AGMs in 2009 so the push is on to increase the amount of webcasting and we've started today with this slightly cheeky email to Austar company secretary and general counsel Deanne Weir:

Hi Deanne,

as mentioned at last year's AGM, it would be great if Austar could get with the program and webcast its AGM like the majority of ASX100 companies now do.

This is especially relevant for a broadcasting company such as Austar, which understands the power of the medium so well.

Could you please advise the date and time of this year's AGM, which I'm looking forward to.

If you do webcast the event, I'll happily stay in Melbourne and just watch proceedings. If not, I'll have to fly to Sydney to attend but would prefer to avoid the cost and inconvenience of doing that in these difficult times.

Looking forward to your reply.

Best wishes
Stephen Mayne
Austar shareholder

This strategy is a bit like the 2005 Gunns board tilt. Ask for the tiniest concession in exchange for either not running for a board or attending an AGM. Even Gunns chairman John Gay was prepared to put himself up for election each three years like every other Australian chairman rather than face a board tilt every year until he yielded.

When Manningham meets Westfield

Sitting on Manningham Council continues to be an interesting and busy experience and yesterday we spent five hours getting briefed on the big Doncaster Hill project, which involves a series of developments and civic works around Westfield's massively expanded Doncaster Shoppingtown.

Manningham is now the proud host of Westfield's signature shopping centre in Melbourne, which has proved so popular that there have been some tricky issues around parking, especially on big days such as the Boxing Day sales.

The problem of hot shopper demand has been exacerbated by Westfield's decision to introduce ticketing machines and boom gates for cars which enter the centre, and those that stay longer than three hours get slugged.

Whilst council hasn't resolved anything formally, my personal view is that Westfield should just ditch the paid parking model and make it free. Westfield are famously tough when dealing with everyone from tenants to councils to unions, so it would be interesting to see how Frank Lowy handled a little bit of AGM action on this issue.

We've had five rounds with Frank over the years, but only one board tilt back in 2000, which generated this story in The Australian.

Check out the full package of Westfield AGM highlights from over the years as we contemplate what, if anything, should happen this year when Westfield shareholders gather in Sydney in May.

Updating The Mayne Report Rich List

The chaos on global asset markets has wiped out more wealth than any other time in modern history.

The Mayne Report Rich List was easily our most popular article on the site last year with almost 27,000 unique visits, so we've taken the time to start updating it to reflect the huge changes.

Over coming editions you'll get lists of those who've fallen off, plus stories on the dwindling group of Australians who are worth more than our cut off of $10 million. There will also be tales about the billionaires' club which is now back under 20 after almost reaching 50 at the top of the boom.

That's all for now.

Do ya best, Stephen Mayne

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