Two roads to Damascus

Two siblings within the Babcock & Brown family have announced separate strategies for achieving the same objective – a narrowing of the significant discrepancy between their market values and what they believe they are worth.

The fact that both Babcock & Brown Wind Partners (BBW) and Babcock & Brown Capital (BCM) announced their strategies on the same day suggests that the broader Babcock group has decided to take the initiative in trying to force the market to reappraise its value rather than risk being tainted by the general suspicion of complex and leveraged corporate structures.

The approaches adopted by BBW and BCM are different, even if the objectives are broadly the same. BBW plans to sell some assets, while BCM plans to buy back some shares. In fact it plans to buy back quite a lot of its own shares – up to half its capital base.

BBW shares, which traded at close $2 for large parts of last year, have been trading below $1.50 recently. That irks BBW, given that the market for renewable energy assets, and wind energy assets in particular, has been buoyant and asset prices have continued to rise.

BBW believes the gap between its market value and the value implied by recent transactions is so substantial – it believes its portfolio could be worth at least twice the price implied by the market – that it needs to do something structural to close it. It also believes that at current share prices it is unlikely it could find and fund value-accretive deals to add to its portfolio.

With B&B, a co-investor in some of its assets, it plans to sell some of its European wind farm interests, including its 50 per cent interest in 30 wind farms in Portugal that it acquired from B&B (which owns the half 50 per cent) only last year. B&B has other European wind farms that it may add to the sale.

The intent is clear. BBW wants a sale price that demonstrates to the market the latent value in the rest of its portfolio. The sub-text is also clear. In this environment even B&B is struggling to find and fund deals that make sense.

BCM is doing it differently because it can, and also because with only two core assets it doesn't have the option of slicing off a bit of its portfolio to demonstrate the value of the rest. Its main assets are a 57 per cent interest in Irish telco, eircom, which is performing well and an Israeli directories business, Golden Pages, which is also on a growth trajectory. It also has $460 million in cash.

Having already been targeted once by London hedge fund Pendvest Capital, which wanted to sell off its assets, return capital and sack B&B as manager, BCM would be very conscious that its cash store would, in the context of the fall in its share price from a high of $5.65 last year to around $4, make it vulnerable to further agitation.

More to the point, it believes, based on analyst consensus valuations, that its portfolio has at least $6.30 a share of value in it.

An option to realise that value would be to sell the two assets, wind up BCM and return all that cash to shareholders. It is reluctant to do that because it believes there is considerable growth yet to come from eircom and Golden Pages, particularly eircom. It's also reluctant because, as a listed private equity player that financed those acquisitions well before the credit crunch developed, BCM has a very attractive and valuable funding structure in place to leverage the returns it can generate from the assets.

What is doesn't have is access to similar structures in future. The credit bubble has burst. In the telecommunications space in which BCM is positioned, the targets tend to be very large. BCM looked at a very large acquisition but in the post-bubble environment leveraged funding is either not available or prohibitively expensive and is likely to remain so for quite some time. Its $460 million isn't much good to shareholders if it can't be deployed.

BCM came to the obvious conclusion for a company with a lot of cash, a depressed share price relative to book value and underlying value and nothing to spend the cash on – it decided the most value accretive deal for its shareholders was to buy its own shares. It will spend at least $310 million on the buy-back, keeping $150 million to fund incremental growth in eircom and Golden Pages.

When those investments reach their probable maturity in another three or four years, BCM won't have the pipeline of other assets flowing behind to give it some sort of reason for being that it originally envisaged and for which the cash was earmarked.

At that point, presumably, BCM either gets wound up or starts afresh, perhaps in an environment more conducive to leveraged deals.