By Michael Pascoe
Just when you think Macquarie’s broken model of gouging infrastructure investors is winding down, the Millionaires Factory pulls another doozy from the wreckage of Macquarie Infrastructure Group as it proposes splitting it in two.
Macquarie, a company that owes its existence to protection by the Australian taxpayer, has no shame. Having delivered stunning underperformance running MIG while paying itself a fortune through all the usual Macquarie fee channels, it now has the cheek to propose resetting the performance bonus clock at the bottom of the cycle.
If MIG stumbled on under its current structure, given the billions in underperformance racked up, I can’t imagine Macquarie seeing a performance fee in my lifetime and perhaps not my children’s.
But reset the clock on ‘‘Active MIG’’ (a euphemism for ‘‘Debt-laden MIG’’, as opposed to ‘‘Mature MIG’’, aka ‘‘Solvent MIG’’, in the proposed split-up of the current MIG) at the bottom of the cycle and there’s a rather nice chance that the 20 per cent grab of outperformance could very well be on again.
And that is on top of an increased base fee, never mind nine figures in various fees, charges, postage and petties for splitting MIG and allowing the extremely low-maintenance Mature MIG to be finally free of the gougers.
It’s the usual story. The usual “independent” directors have negotiated this sweetheart deal helped by the usual prime suspect, Grant Samuel, fresh from its Macquarie Airports triumph, and the oddly protected investment bank Millionaires’ Factory rolls in the profits.
Given MIG’s dismal performance – the share price started its long decline in the first half of 2007, beating the GFC rush – a foolish soul might have thought the people responsible would feel some responsibility for fixing the ship without extending and potentially increasing the fee gouge. But it would indeed be a fool to think that of Macquarie.
Today’s announced memorandum of understanding between MIG (ie Macquarie) and Macquarie (ie Macquarie) will split the toll-road operation into separate solvent and debt-laden entities.
“Mature” MIG will consist of the rich M-7 Westlink in Sydney and Toronto’s 407 ETR. The Mature MIG management basically consists of collecting the tolls and there’s no way of justifying the existing fee structure for Macquarie’s external management.
Nonetheless, Macquarie’s going to cop a fee of 1 per cent of the post-restructure market capitalisation of Mature MIG, plus another fee of $50 million “for its role in doing all things necessary to implement the restructure including provision of transition services”. I’d bet there will be plenty of other fees as well, but we’ll let that go by because it’s the other part that is more interesting.
“Active” MIG is the rest of the toll road empire, eight operations on three continents. Says Macquarie: “These assets require substantial operational and financial management to maximise value to security holders.”
Well they’re right about that, especially the financial management bit given the state of the business. Apparently, Active MIG isn’t capable of being internally managed because of the financial stress it is under after being managed by Macquarie and therefore needs to continue to be managed by Macquarie.
And without the Mature MIG easy money and the smaller market cap of the new entity, Macquarie wants a whole new fee structure for the privilege.
The current MIG base fee is 1.25 per cent of the first $3 billion of market cap and 1 per cent thereafter. With the market cap set to fall, the base fee will be hiked to 2 per cent of the first $1 billion, 1.25 per cent between $1 billion and $3 billion and 1 per cent thereafter.
But it’s the 20 per cent outperformance fee that is gob-smacking. “The basis for the calculation of the out-performance fee be revised such that the starting point will be reset to the market price upon listing of Active MIG against the S&P/ASX300 Industrials Accumulation Index.”
Resetting goal posts for bonuses is something that shareholders tend not to like. That’s been made obvious in remuneration report votes, but the MIG “independent” directors and Grant Samuel are happy to go along with it anyway.
The architects of this latest fee grab have included a bribe for investors to go along with it – a 10 cent return of surplus capital after the restructure. And the next thing they’ll do is provide an “independent expert” report to say it’s all fair and reasonable. It just keeps coming.