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— Analysis —
He's been eager to impart that message to analysts and reporters, who approached his arrival with some skepticism. While predecessor Allan Moss was widely admired through his 12-year reign for his rigorous risk assessment, Moore is thought to bring more braggadocio to the task. But even if Macquarie insists it is not about to alter its stripes, the forces of change are upon it. For everyone, of course, the days of easy credit are over. For Macquarie, increased competition means it no longer bestrides the global infrastructure market with quite the same swagger that enabled it to become the world's biggest nongovernment investor in infrastructure.
Alarmingly, too, the specialist listed fund
model that Moore conceived, and which has served Macquarie so well for
the past decade, is nearing the end of the road.
The recent auction of the Pennsylvania Turnpike is a case in point. In late 2005, after Macquarie had bid $1.8 billion for the Chicago Skyway, more than three times as much as its nearest rival, Spanish toll-road operator Abertis Infraestructuras SA, Moore said that Macquarie simply understood the asset better and therefore could pay more money. When the Pennsylvania Turnpike came on the block this year, Abertis teamed with Citigroup Inc. to win the auction with a staggering offer of $12.8 billion. Macquarie's best price was $8.1 billion. "Macquarie was well out of the money, and they have now missed successive projects in Mexico and the U.S. [although] the bid demonstrates some M&A discipline," says Matthew Spence, an analyst at Merrill Lynch & Co. Here's the rub: While Macquarie has avoided huge subprime-related write-downs, its model does rely on continued growth in fees for management, performance and transactions from its myriad listed and unlisted funds. Moore takes over a bank that has just recorded a net profit of A$1.8 billion ($1.7 billion) in the fiscal year ended March 31, 2008, a 23% rise, but for the first time the bank suggests matching the result in 2009 will be difficult. That caution reflects uncertainty about its deal pipeline as well as the sustainability of its listed specialist fund model. The market prices of Macquarie and its best known imitator, Babcock & Brown Ltd. of Sydney, have fallen sharply since last year, as have those of their listed funds, and they have initiated share buybacks or asset sales to attempt to remedy the discounts of many of their funds to net asset backing. Macquarie's smaller Australian imitators, Allco Finance Group Ltd. and MFS Ltd., are effectively in creditors' hands. Skeptics of the specialist listed model are sounding their own alarms. RiskMetrics Group Inc. of New York in April released a report that critiqued the model's structure. "If you are a shareholder in Macquarie, this model has been very good for you," says the report's author, Melbourne analyst Martin Lawrence. "If you are a security holder of one of the vehicles, it is concerning at the very least." Lawrence adds that Macquarie has not launched a listed specialist fund in Australia since 2005, yet of the A$22.5 billion raised in the past year for its various funds, 85% came from the unlisted space, mostly wholesale investment funds. Of the A$1.2 billion Macquarie received in base and performance fees last financial year, nearly two-thirds came from unlisted sources. Market analysts and investors remain divided on Macquarie, whose own shares slumped to a low of A$44.50 in March, from a peak of nearly A$98 the previous May. They last traded around A$56. Brian Johnson, a Sydney-based J.P. Morgan analyst who has been one of the strongest supporters of the model, has a price target of more than A$110 on the stock. "We believe Macquarie offers compelling relative value, albeit it is difficult to identify a near term positive catalyst." Other investors are simply not interested. Paul Biddle, an analyst with Sydney-based Souls Funds Management Ltd., says his A$1.6 billion fund invests in all Australia's top 100 stocks, with the exception of Macquarie, Babcock & Brown and their associated entities. "It's all a bit too engineered," he says. "We don't see them as investment grade and we can't understand how the earnings are generated." |
In late May, Nicholas Moore debuted as CEO before his Macquarie Group Ltd. staff at a lavish, end-of-fiscal-year party. Addressing the crowd at Sydney's Entertainment Centre, he promised that little would change in the way Australia's largest investment bank would do business.
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