Fee gouging under the pump at Babcock & Brown Infrastructure AGM

February 2, 2010

Dear Mayne Reporters,

This will have to be a relatively quick update from Sydney Airport after the torrid three-hour Babcock & Brown Infrastructure AGM this afternoon as the plane is about to start boarding.

First up, here are the edited audio highlights as they unfolded in chronological order:

1. Opening salvo on all these outrageous fees being gouged by Babcock & Brown as BBI shareholders lose billions.

2. Explain this $40m or 10% fee on the US deal and why didn't we stop borrowing and buying in 2007-08?

3. Putting the auditor on the spot and what happens if BNB or BBI goes into receivership?

4. Will write-downs cause a breach of the debt covenants on the $8.6 billion outstanding?

5. Rallying the shareholders to vote down the remuneration report from the floor.

6. Getting former Queensland Treasurer turned independent BBI chairman David Hamill to explain his full Babcock relationship

The bottom line is that Babcock & Brown helped themselves to about $140 million in fees in 2007-08 and BBI shareholders have watched the share price plunge by 85% in 2008 as more than $3 billion of value evaporated.

We now have a company claiming to have net assets or shareholder equity of $3 billion when the market reckons the figure is closer to $450 million, especially after this morning's announcement that the already reduced 2.5c distribution will now be canned indefinitely. BBI shares plunged 6.5c to 19c on the back of that particularly gloomy revelation.

Chairman David Hamill and CEO Jeff Kendrew filibustered for the opening 55 minutes with excessively detailed presentations and then it was on with more than a dozen different shareholders getting up to let rip.

Sure, yesterday's announcement that 50% of the Powerco business had been sold to QIC for an enterprise value of $2.05 billion was a reasonable outcome that exceeded book value, but the big issue today was how Babcock and the independent directors kept on chasing debt-funded acquisitions through the credit crunch, to the point where we're now embarking on a fire sale.

There was no less than 6 different acquisitions totalling $2.5 billion in 2007-08 and only one of them, the US gas pipeline business, actually delivered a profit back to shareholders.

Borrowing big at the top of an asset bubble to buy loss-making assets is a sure fire way to go broke and that is precisely what could yet happen to BBI.

At least Hamill disclosed that the Powerco fee to Babcock and Deutsche Bank would only be $12 million, which looks positively cheap compared with the $40 million fee paid on the $400 million deal in February to buy 25% of this US gas pipeline business.

The remuneration report was defeated from the floor and ended up facing an against vote of about 30% which seemed a touch on the low side given the fee heist which has now been toned down under some new governance arrangements.

However, when you take out the shares owned by Babcock & Brown, Peter Hofbauer, Phil Green and Jim Babcock, the against vote was a lot closer to 50%.

Gotta fly but there'll be more tomorrow, including an account of the Seek AGM in Melbourne which will be chaired by James Packer.

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.