For fund manager who bet against Enron, Macquarie Bank is a 'sell'

May 27, 2007

By Christine Richard and Kevin Foley, International Herald Tribune

NEW YORK: Macquarie Bank shares are likely to fall because Australia's largest securities firm has been overpaying for assets, said Jim Chanos, a hedge fund manager who had predicted Enron's collapse.

The bank has been selling the assets at inflated values to funds that it manages, Chanos, the president of Kynikos Associates, told investors at a conference in New York last week. Sydney-based Macquarie led more than $30 billion of purchases of roads, power stations and other infrastructure in the past year.

Macquarie "doesn't care what it pays for assets and flips those assets to entities funded by other investors," Chanos said, referring to the more than 30 investment funds that Macquarie oversees. "This only works in a world of cheap credit and asset inflation."

Macquarie's chief executive officer, Allan Moss, has delivered a decade and a half of record annual profit and is stepping up expansion abroad, where income eclipsed that at home for the first time last year. Macquarie gets management fees from the funds it runs as well as revenue from advising them on acquisitions and selling them the assets that it purchases.

"Macquarie rejects Mr. Chanos's observations," the firm said in an e-mailed response sent by Alex Doughty, a spokesman in New York. "Macquarie Bank is not a private equity firm but a diversified financial institution operating in 24 countries."

Chanos, speaking during a May 23 presentation at the Ira W. Sohn Investment Research Conference, a charity event to raise funds for pediatric cancer, called the company's model "an inherently unstable platform" and said that he had a short position on the bank. He declined to comment further.

Short sellers sell borrowed shares in the hope of buying them later at a lower price and profiting. Chanos began to bet in late 2000 that Enron's shares would fall after reading a Wall Street Journal article that said the power and natural gas trader was reporting unrealized, noncash gains on deals that would not be booked for years, Barron's said in January 2002.

Shares of Macquarie Bank fell 7.9 percent last week, after rising more than 20 percent since the beginning of the year to a high of $97.10 on May 18.

Since listing in 1996, the bank and the publicly traded funds it manages have delivered more than $40 billion of wealth for shareholders, according to the statement sent by Doughty.

Macquarie said on May 15 that its annual profit rose 60 percent to 1.46 billion Australian dollars, or $1.2 billion, in the 12 months that ended on March 31, from 916 million dollars a year earlier. Base fees from managing funds, excluding any earned for beating benchmark indexes, rose more than 25 percent to almost 800 million dollars during the year.

Income from asset sales and equity investments jumped more than fourfold to 1.4 billion dollars. The bank sold two-thirds of its holding in Britain's Thames Water, its luggage trolley business Smart Carte and Stagecoach Group's London bus operation to funds it manages.

Macquarie said this month that two of its closely held funds raised more than $10 billion to buy infrastructure assets in Europe and North America, where Macquarie Infrastructure owns stakes in the Indiana Toll Road and Toronto's 407 ETR tollway.

"Macquarie approaches these acquisitions prudently," said Atul Lele, who helps manage $380 million at White Funds Management in Sydney, including Macquarie shares. "Evidence they are not willing to pay any price is that they've missed out on a number of assets, including London Stock Exchange."

On Feb. 20, Macquarie abandoned its £1.5 billion, or $2.98 billion, bid for the LSE, Europe's largest exchange by the value of the companies listed.

"It doesn't make sense for us to pay a price that's inconsistent with our model," Jim Craig, head of Macquarie Bank's European business, said at the time.

Macquarie led groups that bought RWE's Thames Water unit for £4.8 billion and an aircraft leasing business from GATX. In Australia, the bank failed in takeover bids for Qantas Airways, the nation's biggest carrier, and Alinta, the largest energy transmission firm.