MAp's high fees, low transparency

May 22, 2008

Michael West, The Sydney Morning Herald

Far from its registered office at 35 Crow Lane, East Broadway Paget, Hamilton, Bermuda, Macquarie Airports had its AGM in Sydney on Thursday.

The usual bewilderment was professed from the executive and from the chair as to why MAp is so cheap; cheap that is in the light of its net asset backing of $5 per unit. The stock closed at $3.15.

We can help with this one.

One: agency costs. The market has twigged to the fact that every cent in available capital that is not nailed down will either be swapped for debt, or snipped by Macquarie Group and associates.

We couldn't make it to the meeting, thanks to a coincidental visit to MAp's jewel in its crown, Sydney Airport, where we managed to avoid a departure drop-off fine and only got hit for a $4 luggage trolley, as you do (on a good day when you can escape the parking lot).

However, shareholder activist Stephen Mayne gave chairman Max Moore-Wilton a good work-out on governance issues, according to his Mayne Report. Mayne had picked up a little ripper that had escaped everybody's attention, that is a cool $147.4 million fee ripped out of MAp associate company MAG after the sale of Birmingham Airport (almost 30% of the Birmingham sale price).

Two: thanks to the spaghetti mud-map of entities  such as MAp, MAG, MAL, MAT1, MAT2, MCFEL and MAML (there's a few to start with)  nobody understands the company except the people who crafted it. Retail shareholders own it on blind faith that airports are solid cash-churning monopolies and MAp knocks out its 7% yield (partly from capital).

Yet institutions are underweight, as a fund managers would be hard pressed explaining to their boss how the structure actually worked.

Three: the management agreements are secret. The ASX has them but opts not to publish them. Wonder why? The 35% discount to NTA would be addressed if a predator bobbed along, took a stake, called a meeting and sought to have Macquarie ousted as manager for taking too much in baksheesh. Sadly for unitholders, this won't happen thanks to the management agreement being protected information.

In the US, management agreements have to be disclosed, so US infrastructure stock Macquarie Infrastructure Partners (MIP) has disclosed, replete with monster termination fee to the bank.

Four: high leverage, related party transactions and complex externally-managed fund models are not in vogue right now.

And five: although MAp and Macquarie in general have proven the worth of their valuations on the whole (to date), the MAp valuation plays a key part in the model in that assets are revalued up every six months or year, and refinanced so another fee can be extracted.

Macquarie has done a brilliant job driving growth at Sydney Airport and keeping costs tight. Max Moore Wilton said yesterday the thing could fetch more than $11 billion. They paid $5.6 billion and have probably taken out what it owed them - around $1.5 billion - in fees in five years. Spectacular stuff. The parent might have been shellacked 16% in three days but these are the reasons the performance of the head stock has been superior to the satellites.

It has got to the point where the satellites will never trade at NTA because everybody suspects the mothership will skim out every loose dollar. The satellites are however propped up by their yield. So, as long as Macquarie management can keep the high-wire leveraged act going without tipping over investors should continue to get their yield and the stocks should be underpinned.

It's the same deal with roads group Macquarie Infrastructure (MIG) and Macquarie Communications Group (MCG) and other listed plays. Conflict of interest is always, in the end, a problem. In the case of the Macquarie model the conflict is related party transactions in spades.

At the Group's full-year profits press conference earlier this week, new CEO Nick Moore batted off this question: can you tell us about the lawsuit brought against MIG by its former investment partner Ontario Teachers Fund?

The hollow answer came that we would have to approach MIG on that issue. Moore is a long-term director of MIG, he even invented the once-flagship fund and now heads up the company that controls it. In the case of MAp, Moore's investment banking 2IC Michael Carapiet is on the board. Moore recently left the board. The MAp telephone rings in to head office at 1 Martin Place, Sydney.

MAp chief Kerry Mather has done a fine job with the underlying assets, with the group's airport acquisitions and divestments but one would imagine she would be hard-pressed telling Moore and co, sorry boys, we're going to change the fee structure so it is in interests of MAp shareholders rather than the bank.

In fact, stripping out the big fee from the associated Airports Group to the head stock and normalising the 5% tax rate back to 24% would have put a fair dent in Macquarie's second-half earnings. The head stock has dropped 16% since its result on Tuesday, mostly on the realisation that the growth is gone for at least the next year and brokers pulled back their forecasts.

Can this pace of fees proceed? That $147 million performance fee was probably included in the overall $400 million performance fee figure in the result - a figure that looked good under the circumstances - but when you consider that future growth is supposed to come from rolling out wholesale funds overseas, so far the wholesale funds are not contributing a lot.