Babcock shares dive as new boss takes over

August 22, 2008

Mathew Murphy, The Age

MICHAEL Larkin believes he can bring Babcock & Brown back from the brink as he replaces Phil Green as chief executive and embarks on a massive overhaul of operations.

Investors were not so confident. Shares in B&B plunged to a record low of $2.22, shedding $1.23, almost 36% of their value.

The slump came as the B&B group announced that net profit for the June half-year had fallen from $250 million to $175 million, in line with its recent guidance of a loss of 25-40%.

Profit in B&B Ltd dropped 24% to $151 million from $200 million.

As expected, Mr Green and B&B founder and chairman Jim Babcock stepped down from their roles following a subcommittee meeting early yesterday. They will remain on the board. Mr Larkin, B&B's chief financial officer, and deputy chairman Elizabeth Nosworthy will fill their roles.

B&B confirmed that its outlook for the full year would not exceed the 2007 net earnings result of $643 million.

Mr Larkin said that while the strategic review, led by financial advisers Deutsche Bank and Goldman Sachs, was still a way off, B&B would begin reducing its risk profile by deleveraging and operating a more transparent balance sheet, focusing on its infrastructure, real estate and operating leasing businesses, and beginning its fire sale of assets.

About 400 people, a quarter of its workforce, will be sacked to cut costs by 20%.

Also gone is B&B's dividend, which has been abandoned as the company strives to pay down debt.

Babcock & Brown Wind Partners got things rolling yesterday, agreeing to sell its Spanish assets to Formento de Construcciones y Contratas, for a profit before costs of about $266 million.

"The corporate and structured finance division will also be gradually wound down," Mr Larkin said. "Other assets and businesses not within the key areas of focus will be kept under review and divested or wound down as appropriate to maximise shareholder value."

He said that B&B's forecast of $643 million for this calendar year depended on the sale of assets and its cost reduction program.

"This is a scorecard to judge us against," Mr Larkin said. "For our shareholders we would like to think that some of the measures today, and the clear direction we are taking, should be the first step down the path of restoring some confidence."

The tightening of global credit markets and questions about B&B's investment model, which relies heavily on debt, are given as the main reasons for the company's capitulation.

"The volatile global market conditions have made and continue to make business conditions uncertain and forecasting in the short term difficult," Mr Larkin said. "We believe that the changes to the business … will better equip Babcock & Brown to operate in the current market environment, to build on its leading position in its key markets and position itself for ongoing earnings growth in future years."

Mr Larkin will replace Mr Green on an annual base salary of $365,000, reviewed annually.