A guest post by Bernice
Modern capitalism is a very strange beast. Globalisation has seen the dizzy rise of international commodities moving across borders, both physically and virtually through futures trading; devolution of controls on wages & conditions; attempts at standardised regulation & reportage of performance. And the curiousness of capital’s counter-move to maximise profit by the increasing use of private equity to evade financial market scrutiny, governmental regulation & the pesky need for dividend payments.
The facilitators, the midwives of profit, are the merchant bankers. An international arena where Australian versions have been minnows. Until now. Praise ye all the rise of Macquarie Bank. From an income of $757 million in 1998 to $7.2 billion this year, Macquarie has moved from the conservative model of its parent Hill Samuel, to the Harvey Wallbanger caricature of comic greed, growth for growth’s sake. Its assets buying division, lead by Nicholas Moore, has been largely responsible for the bank’s spectacular growth & its emergence into the international monetary market through an assets buying spree including airports, tollways & utility suppliers such as London Water.
And yet. And yet. To take the next big leap into major player league, Macquarie must be able to access the big bucks in the US private equity market. As it attempted to court through the APA buyout of Qantas. Disastrously. I don’t doubt there’s a degree of closed shop about the American response to Macquarie, but there has also been reasoned disquiet about how poorly the bid seemed to have been managed. Disquiet too over the failed Alinta buyout. A majority of Macquarie’s profits comes from its fees in facilitating these transactions – the returns from its ownership of assets are rather underwhelming. And likely to slide south.
Owning airports might be a stealing candy from babies routine at present, but no one but the most stupid can do anything other than look at the long term fundamentals & shake their head in bewilderment. We have either just experienced peak oil or shall within the next three years. Flying aircraft profitably becomes extremely difficult with high fuel prices, & no one is even vaguely close to developing an alternative fuel to avgas with the necessary kilo joule output to propel hordes of humans in loud shirts on their quests to visit other countries’ MacDonalds.
Let alone the fact that emerging carriers from Asia in particular can run operations at a fraction of the costs of OECD based carriers – competition yes, & we can now look forward to flying into Kuala Lumpar for about $300 return as of September. But not via a Macquarie-owned facility. There’s a new hand being dealt at the landing fees negotiating table, and frankly Macquarie is going to have respond.
So the fundamentals of their asset portfolios, particularly hydrocarbon fuel transport infrastructure is a wee bit shaky, and they have just spectacularly stuffed up a major corporate takeover, involving the very people they need to impress and win over most in order to expand. And therefore secure their future profits. But you wouldn’t think there was a doubt in the world as far as the market response is concerned. A year ago, Macquarie had quite a bit of trouble raising $700 million in the face of suspicions at the fundamentals by institutional shareholders. Not now. Thursday saw $750 million in fundraising, with 8.62 million new shares, selling for $87, trading for $92.90 after trading suspension was lifted. Smiles all round as $100 is being confidently predicted per share & the $2 billion profit line looms.
Of course the market is all about perception. Smoke & mirrors. And just as easily disrupted. If the murmurings in the States about Macquarie are even vaguely true, then this latest piece of herd stampeding by the market has all the hallmarks of greed, arrogance and stupidity. And the $750 million just raised didn’t come from Eddie Macguire’s termination payment – it came from your super funds.
Or more worryingly, it may start to come from the ones that David Murray is in charge of. The Future Fund. Murray rushed to condemn the suggestion of political interference in the management of the fund at the ALP policy to spend some of the profits at upgrading broadband delivery. A continuing shambles that should have had Coonin’s head on a platter months ago & the Telstra board members put out to pasture. At an Australian Institute of Company Directors lunch in Sydney on Wednesday, Murray reiterated the Funds investment model which will begin operations on June 30th. “The trustees of the funds are the guardians of the future against the claims of the present. Board independence is absolutely crucial.” Rudd’s broadband plan was again argued against, saying that use of earnings for special projects would have “consequences on the portfolio…consequences on the cash flows.”
BUT he refused to rule out the Fund’s involvement in major private equity deals, arguing that “our main focus would be on value to the fund.” After having rejected suggestions that the monies flowing into the Future Fund was money not going into infrastructure projects, insisting that the monies received were from the surplus after Budget allocations had been made.
Surpluses generated by a resources boom, part of a cycle, not a goose & its golden eggs, and cycles have a habit of doing just that – cycling – up and down. And the failure of his political masters to adequately address infrastructure needs in everything from power generation, water provision & transport infrastructure able to allow Quarry Australia to ship vast chunks of this wide brown land into the furnaces of Asia, is a basic failure to provide the sort of fundamentals necessary to ensure the economic growth and response to a world which must address climate change if the wealth that is deemed necessary is going to continue to be generated. But putting monies into private equity deals with all of the problems of regulation, control and the high risk is OK. According to David Murray. Who, by the way is also now in charge of the $5 billion University Fund that the vice chancellors applauded like so many performing seals post budget.
Lovely buildings, I’m sure but hardly the stuff to improve a very mediocre tertiary section in terms of teaching performance. & its not as John Howard would have it, because the nasty Marxists still run Humanities in this country. Its because students have to sit in tutorials of 100, or lecture theatres which cannot accommodate the Cooks Tour Version of education, & sit in neighbouring rooms watching their lecturers on VDUs. But they can look forward to gleaming towers of VC pomposity across campuses. At least it ensures that the David Murrays & Alan Moss’s of the world can deliver rousing keynote addresses to the worth of Mammon in the style to which they have grown accustomed.
And it would seem that the grasp and greed that drives the market is now our national credo. I suspect we shall receive exactly what we deserve in return.
Cross-posted at Bernice Balconey’s Baloney.
Whoa! What have we here? Questions about how the FF is to be managed.
That’s an excellent introduction, Bernice, to we plebs who have sod-all knowledge about the market and whose eyes glaze with brightly coloured toffee at the mere mention of superannuation.
It seems, though, that some careful attention might need to be paid to Mr Murray and what he’s doing with our money.
And I thoroughly agree with your comments about higher ed. A few crumbs thrown at capital works to make up for years of neglect didn’t deserve the ticker-tape parades lavished on Dollar $weetie a couple of weeks back.
An interesting post, Bernice. But could you explain how financial market scrutiny and the pesky need for dividend payments reduce profits? Just asking…
BBB
It has always been thus, what has changed is the naive belief that in markets we should put total trust. But this is the way economics is taught these days and the spawns therefrom become the policymakers of tomorrow. We’ll all be rooned.
Anyway, Crikey has a blog now.
Echoing your sentiment Ken, it strikes me that while the dismal science of economics is meant to give understanding and provide the basis for good fiscal management, most of its practitioners are ideologically wedded to total trust in the free market.
Naughty, naughty Bernice. Allan Moss is a saint of Australian capitalism. Caroline told me so.
A tour-de-force Bernise and I was glad you interposed the issue of resource depletion, non-sustainability into the brief contemplation of Macquarie Bank’s record profit. You wonder if such a market savvy outfit is making hay while the sun shines – with perhaps an entirely different investment strategy to be unveiled when airports/airlines/tollways implode with peak oil panic.
My guess is that Alan Moss, David Clark et al will be looking at joint ventures with other venture capitalists and uni bosses to tap into the $5 billion Howard budget fund aimed at establishing institutes researching all sorts of non-fossil fuel issues – stem cells come to mind. They won’t mind the sense of redemption that the msm will heap on them for their noblisse oblige.
BBB – compliance & reportage costs are a significant part of publicly listed companies costs. Pop over to ASX supervision to get a basic intro into what the Australian regulators require. For corporations with international divisions, it all becomes much more complicated. & dividend payments are also a costly necessity in terms of shareholder registers, but more significantly, removing potential investment capital from the discretionary power of the board. You gotta give the mugs something to get them to stump the next time you offer a round of shares, but oh the pain oh the pain…..
Just to add to what Bernice said, it was said of Geoff Dixon at Qantas that he spent 20% of his time on shareholder liaison. If the private equity deal had gone through, the owners are represented on the board.
Private equity owned companies are said to have more focussed managements and far quicker decision-making.
On dividends, they load the firms up with debt, so that most of the profits go in paying the interest. Hence there is little left over for dividends, which of course would go directly to the private equity owners. Interest payments are tax deductible, so they pay little tax, although I think there are different arrangements if the company is foreign-owned and more than 70% geared.
There is also the problem of the Board of QANTAS allowing the company to have more than the legal maximum of 49% foreign ownership. It also reflects a lack of economic management on behalf of the Federal Government who approved the deal despite knowing the Foreign Investment limits were being exceeded. By how much the limits were exceeded nobody has explained yet, but it proves what the joke the Regulatory System has become under the Howard Regime.
steve, are you sure the foreign ownership limits of Qantas have been exceeded? There were allegations to that effect, but I didn’t hear that they had actually gone over.
The thing that interested me about the Qantas was the fact that some of the institutions, who invest our super, wouldn’t sell. Usually they would cough up pretty easily for a short term profit.
The same phenomenon has appeared in the bid for APN News & Media. It seems that Perpetual has a fair slice in the company and don’t want to sell. Two considerations have been given. One is that in spite of the current offer being the fifth the price is still too low.
Secondly, funds managers are concerned that there are not enough comparable companies in which to invest. Sure Perpetual have investments overseas, but they also have a number of large and quite successful Australian share funds, which have no charter to invest overseas.
The Airline Partners mob may have taken the institutional shareholders for granted.
Just a minor technical point, Anna. You say:
Avgas is the stuff that piston engined, propellor driven planes use. Little Cessnas and such. You could happily run your car on avgas, because it’s basically just a high grade of petrol.
Jet engined planes run on jet fuel, either “Jet A” or “Jet B”, both of which are more like kerosene than petrol. The point is, jet fuel ain’t called avgas.
Thanks SJ for the clarification – Jet A is the US version, but Jet A-1 seems to be the version used elsewhere, or Jet B for military purposes? We’re still dealing though with an industry able only to utilise a pteroleum based fuel staring down the barrel of shrinking supply and volatile prices.
And though its a bit of a side trail, I’m also curious as to why the market seems to blindly ignore the medium & long term politics of water privatisation & ownership. As water utilisation & pricing becomes more politically sensitive, I strongly suspect it is wishful thinking of a delusional magnitude on the part of the markets & companies owning water utilities to believe that governments wont at some point HAVE to legislate to regain control. For all the squawking this will bring about interference in the market, the problems we & the rest of the globe are facing about water & its associated downstream implications will, I suspect, be greater than any pressure the market can bring to bear.
For example – the Snowy Hydro scheme will, without significant snowfalls this winter, be as useful as a glass eye at a keyhole as regards backing up coal generation during peak usage. & indeed the lack of water is affecting coal-based electricity generators as in Queensland. Any privately owned part of that complex chain of supply who thinks they’re about to hit pay dirt should not be so hasty. And as for privately owned urban household water provision? Well there are these things called voters who magically appear like mushrooms every few years….
Brian, I have heard lots off huffing and puffing from Vaile and Costello typified here but never has QANTAS or the Government come out and said how for over they are and what they are going to do about it. They are over the foreign ownership limit but with the fast churn do to the bib have no idea how far over was the last I saw.
There were reports that foreign ownership had reached by the Friday night of the close of the offer 64%. But Qantas released a flim flammery claiming that that the volume of trade was such that accurate reportage would take several days. During which time, those offending shares were re-traded. None of which seems to have raised an eyebrow with any of the regulators, as long as it was ‘fixed’.
Which raises another set of questions about the manner in which Macquaire managed the whole thing – or mismanged it.
Steve and Bernice, there is still no evidence that the foreign ownership exceeded the limits. I really don’t know how such a limit can be administered, or what Qantas or Macquarie could do to stop a breach. Share registers are typically outsourced to third parties to manage. But I would think they simply hold the register after the fact and are not involved in a sale.
Shares are freely traded on the ASX, and no-one could stop Australian shareholders from selling shares. Is there a way of blocking overseas shareholders from buying, especially through subsidiaries located here?
The late acceptance of an American party’s shares should not have affected anything as it was selling into the bid. As such it should have helped.
Since two-party trading was still possible (wasn’t it?) I can’t see how anyone could have done anything to prevent an overshoot.
Bernice, I found your comments on Macquarie very interesting and I might get back to them later. Meanwhile on the Future Fund, David Murray’s job essentially is to set up another substantial fund management outfit to invest in the markets. I heard him say that private equity involvement may be part of their investment strategy, but only if they had the relevant expertise.
BTW Macquarie is quite careful about risk and I understand has a risk assessment outfit with over 220 people in it.
I’d expect Murray to run a conservative operation which, in the case of the Universities fund, needs to produce a steady flow of sustainable dividends. I understand that the $5 billion is expected by Treasury to yield 6%, or $300 million. In another thread Uncle Milton said 5% or $250m as a sustainable yield, which is what I would have said. But at that I would have anticipated that the fund would also grow faster than inflation.
This seems to be what Costello is expecting of it, because he spoke of three lots of $5 billion going in to make a fund of $20b (yielding $1.2b pa).
Anyway with this sort of expectation he wouldn’t want to invest in something that didn’t produce a buck from day one. He’d also want to be able to trade out of his investment if something better came along.
So I may be naive, but I’m not too worried about what Murray is going to do with our hard-earned.
I’d agree Murray is more likely to be conservative than a risk-taker but I’m more intrigued by the enormous hole in his logic insisting that investment in provision of revenue generating infrastructure is unacceptable political interference & therefore somehow risky, while involvement with private equity is not.
I also agree that the controls on foreign ownership in a takeover such as Qantas work better in theory than practice, but I still love to know what continguency plans Macquarie had if one of the major Aust institutions had sold direct to the US private equity partners, pushing the final OS figures above the legal 49%. Or were they assuming that a little pressure brought to bear upon the regulators would have made this awkward little fact disappear? Still chortling over Clause 11.1…
& a yield of $300 million is better than a poke with the big stick, but spread across – what – rough count of at least 31 tertiary institutions, that’s $10 million a year each. If the yield is met. And isn’t the monies restricted to funding capital investment? Which in the case of say USyd would be swallowed up desperately needed maintenance on buildings. Death by falling sandstone in some parts of the Quad at present…
Brian, Don’t forget that the bid was reviewed by both the Foreign Investment Review Board and the ACCC – I think if they were doing their job then surely an overshoot above the 49% legal limit is what they are there to prohibit I would have thought.
Steve, I think share registers of publicly listed companies are open to anyone although I’ve never tried to look. In Australia, as I said, the registry is usually held by a third party. The best known is Computershare itself a publicly listed Aussie international with operations in the US, Canada, the UK, India, Honkers, Japan and elsewhere and going gangbusters right now.
They are also share registry software suppliers and should have the analytical software to work out things like foreign ownership.
The problem was that less than 50% of the public shareholdings were sold into the takeover body, the APA consortium. I don’t see how Macquarie can control whether too many of the Australian shareholders sold to overseas buyers instead of selling to APA. (They would make less profit, but may have thought the deal was going to fall over.) That transaction takes place on the ASX and is handled by the brokers acting for the buyers and sellers, who see that the money changes hands (that happens directly with your bank account) and I’m sure their software automatically updates the registry service eg. Computershare. A couple of weeks later the buyers and sellers get a bit of paper from the registry service confirming how many are “on” or “off” their holdings.
I expect FIRB and ACCC could call for reports post the event in a fluid situation.
I suppose that is all as clear as mud. My knowledge is limited. You’d have to be a couple of steps closer to the action to know. But sometimes I think statements from the likes of Vaile are meant to pretend they are doing something when they are not. Meanwhile if the rules are breached I’m not at all sure who to blame.
Can I just add to that and say that I think the registry service would need to alert the ASX when 50% is reached, who would need to notify all brokers, who would be registered to operate with them, not to accept orders from o/seas buyers. In a takeover situation, where people are selling into a private equity vehicle, the foreign component of that vehicle is a constant and would be part of the calculation. But if Australians sell into the private equity vehicle and o/seas owners don’t, and this upsets the equation, I don’t see that anyone can do a damn thing about it.
Later, the bid having failed, there would be an embargo on foreign buying until the whole thing was sorted out.
I’ve never been part of a failed bid, but if it fails I guess you get your shares back again, in which case the balance would correct itself.
Let me say that I don’t think any of this is a big deal.
It is the reason that the FIRB exists to stop this circumstance happening. I don’t think that during the term of the Howard Regime that they have stopped a takeover of anything by any one for any reason.
The whole process seems to be totally corrupted. If by not stopping a takeover the company which is restricted to 49% Foreign ownership goes over this limit then the Government and its agencies has allowed an illegal act.
This is not what good governance is meant to achieve as an outcome of their regulatory system. If regulators are allowing companies to break the law then how can they force companies to not break the law. Insanity rules.
Leading by good example has to be one of the strengths of Regulatory authorities or else the whole system becomes a perverse and corrupt joke.
That is exactly what happened in this case, it should have been rejected and wasn’t and the Company overshot the law. Another reason for the Howard Government to be voted out as being out of touch and not doing their job well.
Under compliance issues note the following:
prosecute persons and companies who fail to comply with conditions attached to any approval given under the foreign investment legislation.
Steve, when I said it was no big deal, I meant that any temporary overshooting in the flurry of the takeover shake-out was no big deal because it would be corrected sooner rather than later.
The only takeover knocked back that I recall was the notable case of Shell trying to buy Woodside back in 2001. I can’t remember the offered price but it would have been around the $14 mark. Since then Woodside has peaked at just under $50 in April last year and is now about $42.
Economists generally were shocked that we would impede the free flow of capital. But it would have been a steal at the price. There is also a possibility that Shell would have warehoused the developments that have since taken place, or some of them.
Under the US FTA nothing worth less than $600 million is looked at. Many interesting firms that have plenty of growth potential are worth less than $600m. In many cases the hard work has been done and the payoff is soon to come.
The research on takeovers indicates that they are usually negative for earnings in the short and medium terms. Long term there are so many variables you can’t really tell.
The view before the Government went bad.
There was also this from Costello in March this year.