Jim Babcock raises a laugh in 2005
January 17, 2008
Robert Clow wrote this story in The Australian after the Babcock & Brown AGM in May 2005.
At last week's annual general meeting, shareholder activist Stephen Mayne urged him to declare whether he had any intention of stepping down as chairman, noting that Babcock owns over 21 million shares in the company he founded – worth over $241 million at yesterday's share price.
If he had that much money, Mayne suggested, he would probably be on a beach, not chairing an investment bank.
"I had not thought about it like that but you've got a great point," Babcock deadpanned, hauling his lanky frame out of the chairman's seat. "I am leaving now."
Investors responded with an appreciative chuckle before Babcock reaffirmed his long-term commitment to the company.
The light-hearted feel of the AGM was typical of a company that originated in San Francisco but migrated to Sydney when it floated last October – acknowledging how important the Australian business had become to the group.
Investors hope laid-back, creative B&B will be the next Macquarie. That is why they have bid the share price up from its $5 offer price to $11.45 yesterday.
Last week their confidence was rewarded when B&B announced it would beat its prospectus forecast earnings for 2005 by over 30 per cent – earning $180 million for the year.
"All of the businesses will outperform prospectus," managing director Phil Green said after the upgrade, though he singled out property and infrastructure as particularly strong.
B&B also has asset management, leasing and structured finance divisions.
B&B's financial year coincides with the calendar year and its earnings tend to be backloaded towards the last few months – so management is clearly highly confident to be issuing this kind of guidance so early. One reason for that could be what is not in the earnings forecast.
The $180 million includes no fee income from B&B's $1billion private equity cash box, Babcock & Brown Capital. So far none of the billion dollars has been invested, but Green said at the AGM that investing Babcock & Brown Capital will be the main focus of the investment bank's asset management division in the next year.
B&B has set itself a high hurdle for that fund by saying that it may invest the entire amount – possibly $3-4 billion on a leveraged basis – in one or two deals. But it is quite likely that B&B will find a home for some of its money in the next six months. Nor does B&B plan to book its entire gain from its European property portfolio.
B&B is planning to enter into a $1 billion joint venture with General Property Trust, which would then take over a portfolio of European property that B&B holds on its books.
GPT unitholders will get a chance to vote on the plan on Thursday and the vote is likely to be very tight. They are being asked to replace a portfolio of blue chip retail properties with a diversified portfolio that includes a number of 1950s apartments in a rust belt town in Germany.
Despite the fact that the B&B portfolio does not look particularly appealing, an independent expert put a value on it $60 million above what B&B paid for it.
At the moment the investment bank does not plan to book the whole profit, because it is anticipating realising only part of that value from entering into the GPT joint venture. But if GPT unitholders vote the plan down, Green said: "We already have institutional offers to participate in the portfolio or buy parts of it outright at prices above what GPT is prepared to pay."
Furthermore, he noted that the $2.5 million break fee that B&B would receive from GPT would cover most of the costs of the proposed deal and "any other costs would be well spent in readying that portfolio for syndication".
A nice thing about investing in a company that is more than 50 per cent owned by its executives – as B&B is – is you can be sure they are keeping a very close eye on risk management.
That does not mean that B&B is bullet-proof, however.
Two of Babcock's recently floated funds, the fund of hedge funds, Everest Babcock & Brown, and Babcock & Brown Capital are both trading at substantial discounts to their offering prices.
Like Macquarie, B&B looks to generate fees from packaging infrastructure and property assets and selling them to the market, but Green predicted that investors would not be put off by these setbacks.
Even if they were, B&B still seems to have a following of very loyal private investors willing to co-invest in its deals.
Long term Criterion believes that B&B is probably a stock to own, but now may not be the time to buy it.
At yesterday's price it was trading at a shade under 23 times next year's upgraded earnings. Even for a growth stock that seems generous.
Macquarie, by contrast, is trading at 15 to 16 times forward earnings and judging from its $823 million record result announced this month it is clearly also growing strongly.
If you have to own one, Macquarie is more attractive at these levels. If you want to own both, wait for the upgrade euphoria to wear off before buying B&B.
Those who already own it should HOLD on for what should ultimately be a pleasant ride.
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