Another day, another bid approach from an Australian company for a significant asset in the British Isles. But this time, it was not Macquarie Bank and the London Stock Exchange but Babcock & Brown’s approach for Eircom, Ireland’s dominant telecommunications company.
Macquarie’s nearest competitor in Australia – which this week announced it had raised its Eircom stake to 18 per cent and had made a preliminary takeover offer for the Irish group – may only have 640 staff, compared with Macquarie’s 6,800 employees, and about one-fifth of its A$110bn (US$81bn) in assets. But Babcock has raised its profile significantly since it listed on the Australian Stock Exchange in October 2004, with a string of infrastructure, property and utilities deals in Australia, the US and Europe.
A year ago, Babcock had assets and funds under management of A$11.1bn. By December 31, that had nearly doubled to A$21.7bn, with its listed funds managing A$8.1bn, up from A$3.2bn in 2004.
Recent acquisitions, which have ranged from wind farms in southern Europe to railway tracks in West Australia, ensure it has a strong flow of deals and assets in the pipeline.
Formed in San Francisco in 1977, Babcock established a solid global presence as a private partnership on the back of its expertise in structured finance advice.
But in the past five years the financial services group has followed Macquarie’s lead and adapted its business model to take advantage of Australia’s massive pool of funds created by compulsory retirement savings, expanding aggressively into public-private financing, real estate and infrastructure assets.
“We opted [to list] in Australia because the market understood and supported our business model,” says Rob Topfer, Babcock’s global head of corporate finance.
The largest chunk of Babcock’s revenues comes from property investment and re-development. However, like Macquarie, the firm earns a growing part of its income from buying assets and depositing them in its listed funds, which are focused on infrastructure, renewable energy, Japanese real estate, environmental investments and diversified capital.
Of Babcock’s net revenue of A$833m last year, fees from its assets and funds under management generated A$260m, nearly double the revenue they produced in 2004.
The similarities between the two groups in the specialist infrastructure and property area have prompted Macquarie to refer to its rival as “Mini-me”.
But there are some differences, according to Brett Le Meseurier, banking analyst with investment group Wilson HTM. He says it is “misleading” to categorise B&B “as a mini-Macquarie as there are many Macquarie activities that Babcock won’t or doesn’t do”.
While Macquarie uses its own broking house to distribute stock to private and institutional investors, B&B, which has no broking arm, relies on its foundation investors – mostly high-net worth individuals – and to keep them happy, maintains higher stakes than Macquarie in its deals.
“B&B is less of a trading firm and more of a developer and tends to look at greenfields projects unlike Macquarie,” says Mr Le Meseurier. “It’s a different approach.”
According to Mr Topfer, while some of Macquarie’s infrastructure funds rely on asset revaluations to fund dividend payments, Babcock focuses on acquiring assets with strong current cash flows.
Babcock’s shares have more than tripled in price since the company staged one of the most successful share market debuts in Australia’s history. Its stock rose 60 per cent on the opening day of trade.
This week Babcock announced a near doubling of its annual profit to A$251.6m in its first year as a listed company. It also announced a 73 per cent surge in its bonus pool to A$267m, giving staff plenty of incentive to outperform the bank’s forecast earnings per share growth of 20 per cent in 2006. But Babcock’s remuneration structure has been criticised by some brokers, who are concerned it could undermine its ability to generate returns to shareholders. In 2005, bonuses accounted for more than half of the company’s net revenue.
However, Mr Le Meseurier believes Babcock’s results are sustainable. “Looking forward, it has a much higher growth rate than Macquarie because of its business model, which focuses on development, and because it is recently listed and has access to that capital,” he says.
While Babcock chief executive Phil Green this week said he saw massive scope for US investment as “private replaces public investment in infrastructure”, the company also looks set to retain its focus on assets across the Atlantic.
“Europe now generates a third of our earnings,” says Mr Topfer. “I expect that ratio to grow much bigger over the next few years.”
Babcock is interested in Eircom because it is one of the few remaining telecommunications companies that still dominate their local market, he says.
“The Irish economy is relatively small and the telecoms sector is unlikely to get competition at the network level.”
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