By Michael West
Apologies to readers for last week's expose on Rubicon and the ill-fated decision by the board of Allco to acquire the financial engineer late last year for $260 million. (It had been priced at $320 million-plus before Allco shares fell.)
We erred in not consulting the Grant Samuel "independent expert's'' report closely enough and have been put on the right track by a fine contact. The Rubicon owners - Gordon Fell, Mat Cooper, David Coe and Allco - actually pulled out a quick dividend of $13.5 million on top of their $63.7 million in cash as part of the deal. This would be labelled by the cognoscenti as a "clearing dividend''.
Cash out to the boys was in fact $77.2 million. Or was it? There is no detail of the actual contract in the GS report and since the deal was struck on December 31, but struck on June 30 numbers, neither the management fees for six months, nor the operating revenues of Rubicon, are disclosed.
You have to look long and hard but it seems that Rubicon may also have been in negative working capital territory when the deal was done, which is a shame because businesses generally require working capital to fund their operations. And it's pure supposition but banker NAB, which ironically pulled the pin last month, may have also been the provider of capital to the boys to run Rubicon.
And another thing: buried in the report (whose disclosed cost was $375,000) was $7 million in transaction fees. Wonder who got those? And why?
Stung by the defection of its key junk mail account, Coles, to rival Salmat, an emergency board meeting has been called at PMP for later this week.
In his release to the ASX last Thursday, CEO Brian Evans framed the loss as "PMP have (sic) declined approximately $8 million of catalogue printing working work from the Coles group ...'' PMP saw upside in concentrating on other opportunities, and so forth.
There is a bit more to the story, however, than the "business as usual'' rhetoric would suggest, even claims of malfeasance.
Delays and production problems in the printing business, including loss of volume to rivals, is merely one aspect. PMP has even had to resort to its rivals to pull off a couple of print jobs to avoid late delivery penalties and has invited consultants Booz Allen to crawl about the business - the outcome is believed to recommend a "back to basics'' program in manufacturing.
It does not help that most of the executive team has left for the competition, both print and distribution. But of more concern are the reasons behind the Coles decision. The PMP board was told about allegations of the service reports to Coles and other customers overstating delivery levels. Nothing has apparently been done about it yet, though there promises to be an abundance of work for the teeming brigades of lawyers and consultants who will be reporting to the board this week or next.
Joe - not his real name - shifted his pension to Storm Financial group at the behest of his advisor a year ago. Leverage and fees have wiped out 90% of his savings. Joe had been "Stormised'' as they call it, that is, his personal balance sheet had been "optimised'' to take advantage of the opportunity for great wealth in the rising stockmarket.
Storm is now in a storm of its own and has - fee-conscious to the nth-degree - advised its clients to sell shares but hang on to the debt. Not paying down their borrowings means more fees for Storm - on top of the 7% for the pleasure - and now pain - of being Stormised.
Challenger suspended its Storm indices a month ago and began selling down hundreds of millions in stock last. Colonial, which also runs indices for Storm, has gone to ground. And now Macquarie margin lending has reduced its LVR (loan to valuation ratio) on the Storm indices. The timeframe for suspension is a minimum of 60 days, but this level of default is being pursued by Macquarie Margin lending and in doing so could put leveraged property at risk.
It was late last year that Storm's founders Emmanuel and Julie Cassimatis were attempting to float their financial services group for $500 million.
They'd built a quick-fire advisory empire, swallowing a chain of small planning shops and racking up excellent gains for their clients by "Stormifying'' them, that is, gearing them up and telling them to buy the dips in the market.
It worked a treat for years, as the share market occasionally dipped then shot higher, but was always destined to come a cropper once the bear market arrived.
Now it's crunch time and the stories of pain abound - all of them off the record though as the already-battered clients are loath to lob into the public eye.
"We now find that it may be necessary to recommend that you switch up to 100% of your portfolio to cash ... it is strongly advised that these funds are not to be used to pay down debt,'' said the letter, a copy of which was obtained by BusinessDay.
Now that Babcock is fourth-fifths of the way down the tubes and US bond insurer FGIC has got the death wobbles it's worth contemplating whether Victoria will inherit the risk on the $1.4 billion Royal Children's Hospital in Melbourne.
FGIC, which is sinking under the weight of its RMBS (residential backed mortgage securities) and CDOs (collateralised debt obligations) has insured $1.1 billion worth of bonds to fund the project.
Then there's the financier Babcock & Brown whose equity is wiped out and now has a market cap of $114 million on debt of $10 billion in the parent alone.
Babcock sold its stake in the project - to itself - via a deal with BNB Public Partnerships - registered in Guernsey - which raised $91 million a few months ago.
It would appear that the Victorian taxpayers are close to owning the risk on a hospital development, with a retail complex, owned by an entity in the Channel Isles who parent has hit the skids.
Maybe the Government ought to have just issued its own bonds, with a nice state guarantee and consequent cheap funding cost because this looks like a PPP which has lost two of its Ps.
The implications of Babcock's demise for governments are brow-raising. Besides the mental hospital wing in a Sydney jail, PPPs and government-linked assets include:
- The controversial St Kilda triangle project in Melbourne
- Power stations and wind-farms (many of the latter now sold)
- More than $1 billion worth of British ports
- $150 million worth of NSW schools
- The transmission cable under San Francisco bay
- The Dalrymple Bay coal terminal in Mackay
- The WA gas retailing monopoly