Pass the smelling salts. The independent directors of Macquarie Infrastructure Group stood up to the mothership Macquarie and thrashed out a half-decent deal on behalf of MIG’s smaller investors.
This, of course, is what non-executive directors are supposed to do – apart from fronting a few board meetings and quaffing some fine claret. Still, MIG will pay Macquarie roughly $80 million to internalise the management rights to its suite of global toll roads – a far sight better than the $345 million ”freedom fee” in the Macquarie Airports deal, not to mention the $41 million parting gouge for the poorly performing minnow Macquarie Media.
By all accounts, MIG’s negotiating team of Paul McClintock, David Mortimer and David Walsh put up a fight and were even prepared to sack Macquarie as manager before a compromise was struck.
The feeble capitulation of the Macquarie Airports board no doubt steeled their resolve. And although there remain a couple of eyebrow-raisers in the MIG deal – namely the wiping out of the performance deficit and the increase in the management fee for ”Bad MIG” – the deal should pass.
There is another caveat. The scheme booklet for the demerger of the toll-roads group into Good MIG (official title Mature MIG) and Bad MIG (Active MIG) may well contain the usual devils in the detail. However, as the mothership needs to get this deal closed to book its next profit by March 31, there should be nothing so nasty as to upset the entire transaction.
Yes, $80 million in fees for a spot of advice and some services is still highway robbery, considering how pathetically the grand-daddy of the Macquarie constellation of satellites has performed, but it sees off an array of potentially vexing consequences had Macquarie been sacked. Chief among these were the pre-emptive rights over the toll road assets.
In particular, the pre-emptive with Spanish partner Cintra over MIG’s trophy asset, the Canadian 407, would have proved a tickler.
For Macquarie, it’s back to the future. The mothership sees off its satellites, the most dazzling source of profits in the history of Australian investment banking, to face a world of more volatile earnings streams and trading on what seems – in view of the uncertain outlook for 2011 – a pretty ritzy earnings multiple.
This year’s profits, however, are virtually in the can and, more importantly, the freedom fees comprise more than one-third of the distributable profit pool as the management rights to the satellites are valued at zero in the accounts. Pure profit.
Racking up these freedom fees, there is the $345 million from MAp and the putative $80 million from MIG, $41 million (more than 20 years of MMG base fees) from Macquarie Media, $17 million from Macquarie Leisure, $100 million from the Canadian takeover of Macquarie Communication and some rats and mice.
There’s $583 million to be going on with, albeit in a one-off drop.
Under the demerger of MIG, Good MIG will have no Macquarie management. The fee is a one-off 1 per cent of market cap for advice and a $50 million kiss-off in return for the management team, their accrued profit share and entitlements, and ”support services”.
One per cent is a respectable deal. Whenever you shake hands with a merchant banker you are lucky to get out of it for 1 per cent.
The quantum hinges on Good MIG’s market cap after the demerger, so we can assume $3 billion and so a $30 million fee.
The Bad MIG component may cause more consternation. On directors’ valuations – which have failed to prove a reliable guide to the stock price for many years – Bad MIG is geared to 86 per cent.
It seems Macquarie wanted nothing to do with Bad MIG but was forced as part of the negotiations with McClintock et al to stick about. Since Bad MIG needed management badly, Macquarie committed to stay and was therefore able to argue for a higher fee, that is, 2 per cent of market cap ongoing. Indicative market cap is $1.4 billion.
Let’s say Bad MIG trades at $1 billion: that’s $20 million in fees. As management has the incentive to perform by making Bad MIG less bad and getting its stock price up, 2 per cent would seem reasonable. They call it Bad MIG, by the way, because it houses the dud assets.
Macquarie forked out some bizarre prices in the boom years. One, a concession on a road in Indiana, prompted the state governor to remark: ”It was the best deal since Manhattan was sold for beads.”
The other controversial element in the Bad MIG deal is that the deficit for poor performance will now be wiped clean. Again, this delivers an incentive for Macquarie to manage the thing properly. And the new structure is far more sensible.
No longer will we see the price of MIG magically bob up twice a year when it comes to the performance fee calculation period. Now the payment will be contingent on sustained performance over two years.
Overall, the proposal represents a fairly clean break for MIG’s beleaguered army of investors. And for Macquarie, too. Moreover, it locks in this year’s profits and provides breathing space for its bankers to get out and spend that $20 billion or so in sovereign-guaranteed funds raised this year to generate the next round of profits – and bonuses. Thank you, Kevin Rudd. Thank you, taxpayer.