A few hours after I posted Macquarie Pillages MAp One Last Time, a Macquarie representative was on the phone requesting a meeting. That wasn’t too surprising. Macquarie Airports (MAp) CEO Kerrie Mather and I worked on the original Sydney Airport acquisition together, and we’ve had a good relationship ever since.
But the surprising (and encouraging) news was that lead independent director Trevor Gerber wanted to explain the situation from his point of view. After an hour on the phone, we even agreed on a couple of things.
Firstly, MAp will be better off without Macquarie Group as its manager. Not only would there be a substantial cost saving but, more importantly, the incentive to do deals that benefit the manager but not the owners of the fund would disappear.
Secondly, the deal being put to securityholders – buying the management rights from Macquarie for approximately $350m – is a vastly superior alternative to sticking with the existing management agreement forever.
From there, however, our opinions differed substantially. For mine, those aren’t the only two alternatives available to securityholders.
MAp can, with a simple 50% majority of securities, terminate the management agreement. The independent directors have considered this option but decided against it. Macquarie would, Gerber points out, be able to vote its existing 21% stake against the proposal and this, combined with the fact that many MAp securityholders are also Macquarie shareholders, would make it difficult to get the resolution passed. To that, I say it won’t hurt to give it a shot. More than 50% of MAp securities are held by institutional investors (excluding Macquarie) and the benefits are so blatantly obvious that they would be negligent not to vote, or worse, to vote against the proposal.
Secondly, Gerber pointed out that terminating the management contract would constitute a ‘change of control’ event in relation to some debt facilities at MAp’s European airports. In normal times, banks would simply OK the new owners, but in the current environment they’re likely to jump on any opportunity to get their money back. This represents a serious risk for MAp securityholders, but it still leaves them with a couple of options vastly superior to giving 6.4% of the group away.
The debt facilities mature in 2012 and 2015. Why not pay Macquarie $40m in base fees for the next few years and then terminate the management contract when the debt facilities need to be refinanced in any case? That would involve paying approximately $100m in fees instead of the $350m currently being offered.
MAp could also demerge Sydney Airport. It’s been done before. MIG spun off its Sydney toll road investments by way of an in specie distribution and I’d welcome this move were the management internalised or not. Sydney Airport alone is, in my opinion, worth the current security price.
So a demerger would serve to realise some of the underlying value from MAp’s excellent assets but it would also leave a much smaller MAp, which would mean fewer fees to the manager (using my valuations, Sydney Airport represents about 70% of the value of the total portfolio).
The ideal solution might be to pursue both strategies: demerge Sydney Airport now and terminate the management contract in a few years’ time. The fees paid to Macquarie under this scenario could be as low as $50m–$60m, a massive improvement on the $350m currently on the table.
MAp’s independent directors are to be applauded for getting the internalisation ball rolling. They’ve managed to come to an agreement with Macquarie that is an improvement on the status quo. But there are better options at hand and, at the very least, they should be used to ensure MAp’s owners end up with a larger share of the spoils.
Special thanks to Trevor for taking the time to explain some of MAp’s structural intricacies and the board’s rationale for the deal they’ve put forward. The more boards, and particularly independent directors, communicate with ordinary shareholders, the better.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.