Brisconnections tanks with conflicts and spin everywhere

February 2, 2010

Dear Mayne Reporters,

I've given Macquarie a big spanking today after the $1.2 billion BrisConnections float tanked spectacularly this morning and a whole series of outrageous conflicts of interest were revealed that also leave many in the financial press with egg on their face.

Click through for the full spray as we've joined all the dots together and pointed the finger at various parties.

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.

BrisConnections: a Macquarie spin and conflicts fiasco

The BrisConnections float has tanked spectacularly today folks and don't say you weren't warned in the June 25 edition of The Mayne Report with the following:

The gloom is everywhere and I'll go he if Macquarie can get away its optimistic $1.2 billion BrisConnection float. Check out the prospectus and the press release that went out yesterday. This one looks like the UEComm float of 2000, the last over-hyped dotcom offering that cost investors, including me, more than $500 million.

Why would investors touch an overgeared infrastructure play that was borrowing to pay distributions? The first $1 installment hit a low of 43c this morning and I just picked up 1150 units at 44c. The high was 73c.

The media has a lot to answer for on this disaster, especially The AFR, which employs Lisa Carapiet, daughter of Michael Carapiet, the Macquarie executive who drove the aggressive bid for the $5 billion worth of rollroads in Brisbane.

The word is that the losing bid was miles below on the traffic forecasts and it is amazing that the financial press has not compared the traffic forecasts to the listed Rivercity Motorway, which connects with this road. The Brisconnect Product Disclosure Statement split their forecasts to obfuscate the relative numbers a little bit, but it is pretty easy to put them back together.

The Australian ran this article by Adele Ferguson on July 27 suggesting the BrisConnections float was going to be a target for short sellers, which looked like a typical controlled release given the underwriters are holding most of the stock and are not going to release it into the short market. This seemed like a great way to have an excuse for the pending listing price crash. The Herald Sun also ran this article in May suggesting the shares were going to "soar" and The AFR kept spruiking how tight retail demand was going to be.

The truth in the cold light of day is that retail punters only took 12% and a majority of the stock was left with the underwriters, who already have enough problems on their hands given the global credit crunch.

Macquarie and The AFR seemed to be in some sort of parallel universe as if to suggest the credit crisis didn't exist and it was kosher to offer an over-geared infrastructure investment vehicle which was borrowing to pay distributions through the construction phase.

However, Macquarie and its listed offshoot, Macquarie Infrastructure Group, were wise for not keeping this integrated road project on their balance sheets, but the bank's brand will be hit with investors who did back the float. It's hard to think of a worse IPO for the bank, but for some reason shares in the Millionaire Factory are up marginally today, even though its pristine record on Australian tollroad deals appears over.

Trevor Rowe's huge conflict of interest

The Queensland Government has played a strange game by vesting more than $1 billion of cash and land into the BrisConnections project and then backing it through the Queensland Investment Corporation which appears to be the largest independent institutional investor with 25 million shares or 6.41%.

Having supposedly laid off the risk and financing of the project, it seems odd for the QIC to then inject $25 million which is already showing a loss of $13 million on the first day.

Like all the other investors, QIC will have to stump up more cash when the second and third $1 installments are due in 9 months and 18 months time respectively.

BrisConnections chairman Trevor Rowe is also the chairman of QIC which is not a good look and fellow BrisConnections director John Allpass is a former director of Macquarie Bank and also sits on the QIC board.

If the market really tanks, we could face the bizarre situation of shares in BrisConnections having zero value in the lead up to the second installment, although the promised 14% yield through the 2009 financial year should avoid this fate.

The spin coming out of BrisConnections today was pretty heroic. Try this line for size;

The BrisConnections IPO was fully subscribed, with the offer well supported by leading domestic and international institutional investors and approximately 12% of the offer being allocated to retail investors. The offer was fully underwritten by Macquarie Capital Advisers Limited, Credit Suisse (Australia) Limited, Deutsche Bank AG and J.P Morgan Australia Limited. Macquarie Capital Advisers Limited acted as sole bookrunner.

Hmmm, fully subscribed, eh. Check out the top 20 shareholders.

The largest shareholder is JP Morgan Nominees with 12% and the second biggest shareholder is a certain Belike Nominees which has 41.8 million shares or 10.72%. Belike is a Macquarie Bank vehicle which popped up during the silly game that Asciano played with Brambles and has played numous Macquarie roles as this Google search attests.

In addition to that, Macquarie Investment Holdings No 2 Pty Ltd is the fourth biggest shareholder with 28.3 million shares or 7.25% and Macquarie Financial Services has 20.6 million shares or 5.27%.

Throw in Macquarie's "Alpha Opportunities" fund with 1.4% and its "Australian Long Short Equities" fund with 1.2% and that totals almost 26% parked in some sort of Macquarie vehicle.

Given that the investors were budgeted to deliver more than $100 million in fees to Macquarie for packaging this effort, you have to ask yourself about the screaming conflicts of interest that come with investors in Macquarie controlled funds backing this dud float.

The Millionaires Factory needs to explain how this 26% or $100 million investment splits between the bank's own money and the third party funds it controls.

Once again, it seems like a case of the financial engineers making a fortune packaging up complex structures, whilst the investors get dudded.

Sorry for holding back so much today, but that's all for now.

Do ya best, Stephen Mayne