Executive Summary: November 02, 2009
By Scott Rochfort | smh.com.au | 02 November
Feeling the heat ... Bernie Brookes.
CBD
Brookes cracks whip in run to finishing post
On the last leg of its initial public offering, Myer Holdings pulled out its best store mannequins to fill its marquee at Melbourne's Flemington racecourse over the weekend.
Head Myer mannequin Bernie Brookes looked exhausted. But the expressions on the faces of the private equity owners of the department store chain looked as if they were satisfied they had managed to gouge enough for the float today.
Ben Gray, TPG's Australian boss, seemed happy in the stifling 33-degree heat. Maybe he was more interested in the winnings he will pick up from float day than Saturday's Derby Day.
There was some good news from the Myer tent for Asciano shareholders. Its managing director, Mark Rowsthorn, picked a few winners, meaning the ports operator may be due for a lucky break.
Since he scored an invite, it seems Asciano's rejection of a supposed bid from TPG this year did not generate any bad vibes.
Even Gray's old chum from the Airline Partners Australia consortium, Allco Equity Partners' former boss, Peter Yates, got in the tent.
The highlight of his day appeared to be when he had his picture taken with Myer's head spruiker, Jennifer Hawkins.
Just horse play
Bernie Brookes also seems to have had better luck listing department stores on the bourse than naming racehorses.
Bernie confided to CBD that the names Myer One and My Fashion did not pass muster with the racing powers that be for his two-year-old colt.
The horse he co-owns in a syndicate, which includes the pokie king Bruce Mathieson, is called Dusty Star.
Out of its first two starts, Dusty Star has managed a fourth (out of a field of five) and a fifth.
Elsewhere, Tabcorp's chief, Elmer Funke Kupper, expressed his delight in staying put in his tent, which was darkened, disorienting guests on the time of day.
Much like the pokie dens the company operates.
Smart numbers
There is always a bit of a reality gap when it comes to company reports.
Take the company that never got around to installing a smart card system for Sydney's decrepit public transport system, ERG, now called Videlli.
Videlli's accounts mention "key operational highlights" for the year ending June 30, including "successful achievement of a number of project milestones within its major Automate Fare Collection projects around the world, increased presence in the UK markets ... and continued favourable trading in each of its maintenance operations in Melbourne, Hong Kong and Singapore".
But reading on investors would have noted they no longer owned these promising operations. Videlli had sold them below book value – which accounted for the majority of its $20.4 million loss for the year on revenues totalling $221,000.
Its only remaining asset is a legal suit against the NSW Government – over the aborted Sydney smartcard contract – for about $200 million for which it has had to borrow money to fund.
Still, the loss was down from $103.3 million worth of red ink the previous year – which must be why the managing director, Steve Gallagher, and chief number cruncher James Carroll got a pay rise.
Carroll got $648,333 for the eight months he was on board last year, compared with $608,500 for the whole of the previous year.
Gallagher received $671,049 for the same eight months, up from $406,200 the previous year.
High up in its financial statement Videlli notes: "The group takes a proactive approach to risk management." Given that the company has so far racked up $720 million in accumulated losses, CBD wonders if long-suffering investors share this view.
Positive spin
The aspiring manager of the Multiplex Prime Property Fund has until now been shy on the performance of its other funds.
Four weeks ago Oaktree Capital Management and Grocon Investment Management lobbed a proposal to secure management control over the Multiplex fund.
Just before the proposal was lobbed, Grocon Property Fund released its annual accounts.
The Grocon Property Fund, which owns the Axa Asia Pacific building in Melbourne's Docklands precinct, revealed it had breached the loan to value ratio of a $155 million loan.
This was a result of the property having its valuation cut by $28 million to $212 million last month, resulting in the LVR breach of the NAB loan.
But the Grollo family-owned investment manager is now using the debt hiccup as a source of pride, given it tipped in an extra $3.6 million to keep the bank happy.
"Although it is extremely disappointing to see any reduction in the value of the property, the performance of this asset still represents a favourable outcome as compared with other assets in the market," explained Grocon's head of funds management, Bevan Towning, in a recent letter to unit holders.
On Friday, Towning told CBD that Grocon was still mulling whether to lodge a formal bid to secure management control of the BrisConnections of the property sector.
The Multiplex Prime Property Fund has seen its first instalment dip from $1 to 0.2c and has already faced a takeover bid from the corporate agitator Nick Bolton.
Towning appears to be one of the first property managers to put a positive spin on a loan breach. "As a manager of our property we were prepared to put in place a solution," he told CBD.
Got a tip? email srochfort@smh.com.au
Insider
Edited by Jamie Freed
Energy rivals in bid to short-circuit war
From the outset of the NSW power privatisation process, there have been suspicions that the bidders in the strongest position – AGL Energy and Origin Energy – were unlikely to want to bid against each other for the same electricity retailers.
The thinking was that a bidding war between the pair would serve only to increase the price each would have to shell out per asset.
In light of that theory, it is interesting that AGL's managing director, Michael Fraser, said last week his company was unlikely to bid for EnergyAustralia, but would bid for the other nine assets for sale, including all of the generation trading rights.
Fraser cited likely concerns from the competition regulator as the reason for staying out of the EnergyAustralia race.
That explanation is intriguing in light of NSW's decision to split EnergyAustralia's gas and electricity divisions to help get around those very issues and increase pricing tension.
Most observers thought AGL could face substantial competition hurdles in the gas arena, but not in electricity.
The market was very surprised that Fraser would publicly rule in or out a bid for any of the assets at this stage.
Expressions of interest in the sales process run by Lazard and Credit Suisse are not due until November 18.
Fraser's decision to send an early signal to the market – and particularly to competitors like Origin – that AGL was not interested in EnergyAustralia has therefore raised more than a few eyebrows.
The NSW Government insists there are plenty of likely bidders for all of the assets and has even threatened to float Integral Energy to create a new entrant in the market.
However, there is plenty of market scepticism that the initial interest will translate into binding bids from parties other than AGL and Origin, with the possible exception of TRUenergy.
Origin was always viewed as the most likely buyer of EnergyAustralia, and that sentiment appears unlikely to change now that AGL has ruled itself out of the running and, in doing so, reduced a good deal of pricing tension.
In turn, some may now expect Origin will not lodge particularly competitive bids, if any, for Integral and/or Country Energy, and that AGL will emerge as the winner of one of those retailers.
Rio rethinks
It seems Rio Tinto's last-minute about-face on its investment deal with Chinalco is not the only strategy it has re-examined of late.
As soon as Rio bought Alcan in 2007, it had moved to refocus itself on three core metals: iron ore, aluminium and copper.
That left many wondering where its significant coal, uranium, diamonds and industrial minerals divisions remained in its strategy.
But now, under the same management team no less, Rio on Friday said it had decided its focus on just three metals had proven too limiting.
Instead, it has taken a cue from BHP Billiton and decided that the quality of the mineral deposit is more important than what type of metal it may contain.
Therefore, it now seems more committed to keeping its smaller divisions in place, with the exception of its US coal business that will be floated as Cloud Peak Energy.
It is also willing to consider small and medium bolt-on acquisitions, even though its primary concern remains reducing the $US22.3 billion ($24.3 billion) of remaining debt on its balance sheet so that it can regain a single-A credit rating.
In the meantime, Rio and BHP remain in preliminary talks with regulators about their planned iron ore joint venture.
In contrast to BHP, which said the recent move to scrap a joint marketing agreement covering spot iron ore sales was meant to appease customers, Rio admitted the regulators were also an important consideration.
Upside action
The marketing of the recent spate of private equity floats, including Myer and Kathmandu, has understandably focused on the remaining growth potential in the business – that is, the upside for investors who take up the offering.
There has been a degree of scepticism about whether too many costs were ripped out under private equity and whether the promised growth is likely to eventuate, but the opening of new stores and potential sales growth have been good selling points.
In that context, analysts, investors and potential trade buyers are understandably poring over the recently-released annual report of Queensland Rail to obtain information on the growth potential of that business, which is being divested by the Queensland Government.
QR is said to have a likely enterprise value of about $7 billion, and many close to the sales process think a float – possibly including the Abbot Point coal terminal – is more likely than a trade sale.
The amount of detail provided in QR's report this year was more limited than in previous years, but it did show that the tonnage of coal hauled had grown by 2 per cent despite the global financial crisis and that QR National Coal's revenue was $1.3 billion.
However, a UBS analyst, Simon Mitchell, noted that the division was earning roughly half of the profits per tonne expected of rival Asciano's new Queensland division, and therefore showed "material turnaround potential".
That's exactly the sort of phrase potential investors like to hear. The Queensland Government has appointed Merrill Lynch, RBS and Rothschild as the advisers for the asset sales process, but Merrill Lynch is taking the lead on QR and Abbot Point.
coping studies outlining many potential options for the sale or float of all of the assets – including a recommendation of the preferred outcome – are likely to be handed to the Government by the end of the month.
For its part, the Government could announce its preferred plan by December. Abbot Point may still be sold separately in a process likely to attract interest from the current operator, Xstrata Coal.
Officially, the sales process is expected to take three to five years, but there is an expectation that much of it could be completed by next year if the market continues to remain fairly strong.
jfreed@smh.com.au
First published by Smh.com.au on November 02 2009
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