Alinta dissects Macquarie plan

Energy company Alinta Ltd and Macquarie Bank Ltd have often been accused of using financial engineering and extravagant fees to boost their earnings, so it was striking last week when Alinta turned on its one-time corporate adviser.

Alinta’s directors, led by chairman John Akehurst, released a detailed critique of the Macquarie Bank consortium’s bid for Alinta, which had been rejected one week earlier in favour of a $7.5 billion proposal by Babcock & Brown Ltd and Singapore Power International Ltd.

The critique provided a rare, detailed insight into the kind of financial engineering that is seen as symptomatic of the current overheated private equity boom.

According to Alinta’s directors, the Macquarie consortium, which included former Alinta chairman John Poynton and members of his management buyout team, structured a deal that exposed Macquarie to little risk but most of the upside growth in earnings.

The directors noted that, of the total funding for the upfront payment to Alinta shareholders, Macquarie was proposing to fund less than 3 per cent itself, with the remaining 97 per cent coming from re-gearing or repackaging of Alinta shareholders’ existing assets.

The directors also noted that, under the consortium’s proposal, Macquarie planned to pay $298 million over four years for various assets that were valued by Alinta at $1.1 billion.

One of the major issues for the directors was that, under the consortium’s proposal, most of Alinta’s shareholders would end up with shares in a newly created infrastructure company, which would buy many of Alinta’s existing assets.

For several reasons the directors questioned the value that would be attributed to the infrastructure company.

The company would not include some of Alinta’s key growth assets, which would be acquired by a separate company owned by Macquarie.

The Macquarie company would pay $298 million over four years for these assets; the directors noted that these deferred payments were valued by the consortium as though they were recurring operational cash flow of the infrastructure company rather than capital receipts.

In addition, 85 per cent of future earnings growth from the infrastructure company’s “higher growth assets” was to be paid to Macquarie through a 99-year sales agreement.

“This significantly limited the potential for future growth in cash flow and distributions for (the) infra-struc-ture company,” Alinta’s directors said.

In the debate over Alinta, Macquarie Bank has emphasised that Alinta shareholders could elect to receive $13.95 in cash instead of shares in the infrastructure company.

However, in materials provided to underwriters, Macquarie stated that more than 70 per cent of Alinta shareholders were expected to end up with the default option – i.e. shares in the infrastructure company.

Babcock & Brown, which has also been accused of using extravagant fees to boost its earnings, has fine-tuned its own proposal to try and win support.

Its proposal involves a payment of $8.50 in cash for each Alinta share plus units in three existing B&B funds.

B&B ordinarily would be entitled to charge origination and management fees to each of the funds from March 30, when it signed a scheme agreement with Alinta.

However, it has agreed to waive these fees until the acquisition is completed, likely to be in late July or early August.

It has also agreed, in response to feedback, to pay cash to Alinta shareholders who would receive small parcels of shares in the various funds.

The debate over ownership of Alinta has obscured focus from the likely carve-up of Alinta’s assets, assuming the B&B consortium is successful.

Alinta’s change of ownership gives Sydney company AGL an option to acquire Alinta’s WA retail assets and its four cogeneration power stations. AGL has made it clear in the past that it wants to acquire these assets but first it has to agree on a price with B&B.

Separately, Singapore Power’s listed Australian subsidiary SP AusNet Ltd – whose directors include former Western Power managing director Tony Iannello – will be given first right to purchase the Alinta assets that its parent company is entitled to acquire.