Bryan Frith | April 09, 2008
BABCOCK & Brown's decision to participate in a recapitalisation of the troubled sharebroker Tricom Securities is a case of enlightened self-interest.
Babcock wants to recover the funds it has already advanced Tricom, and considers that ensuring the broker is adequately capitalised will assist in that process. That's a financial issue.
Also, Tricom's remaining lending book includes stock in a bunch of Babcock satellites, and it doesn't want Tricom to be forced to dump them on the market.
If that were to happen it wouldn't really hurt Babcock, but investors who have invested in those satellites would not be so fortunate. That's a reputational issue.
Plus, Babcock doesn't want Tricom to degenerate into an Opes-style fiasco, which is a public relations nightmare for its major lender ANZ. If Tricom can manage the run-out of its securities lending book, enabling clients to get out, that will reflect better on Babcock and ANZ.
Babcock is already a secured creditor of Tricom to the tune of $35 million. It has now agreed to underwrite $5 million of additional funding in a recapitalisation package that will inject $27.5 million into the sharebroker.
Private investors will put in $10million of new equity, Tricom management $5 million, ANZ $7.5 million and Babcock $5 million.
That will take Babcock's total exposure to $40 million, but it says that has already been reduced to $37.5 million as a result of Tricom's continuing orderly winding down of its securities lending book.
The rescue package replaces Bell Financial Group's proposal to acquire the broker. Bell proposed to inject $50 million into Tricom but wanted the two major lenders, Babcock and ANZ, to take a haircut. It died because Babcock refused to write down its exposure to $20 million. When Tricom got into difficulties Babcock had a bunch of stock with the broker, mostly stakes in a number of companies in which the investment bank had a potential interest, and some margin loans against other stock, probably including some Babcock satellites.
Babcock realised that if Tricom collapsed it would become an unsecured creditor. To avoid that, it took back the stock from the broker in return for a $35 million capital injection, which converted it into a secured creditor, ranking after ANZ, which has the first-ranking security.
As secured creditors, ANZ and Babcock get first crack at Tricom's assets should the broker go under. In that scenario, the securities lending clients would become unsecured creditors. But as part of the recapitalisation, ANZ and Babcock have entered into a standstill agreement.
In effect they have agreed to move back in the queue to allow those clients to be paid out ahead of them through the run-down of Tricom's book.
ANZ and Babcock obviously believe that there will be enough left over, including from the sale of non-core assets of Tricom, to get them full repayment.
If all works to plan, then Tricom will survive. ANZ and Babcock want something for letting that happen and so they have obtained an option to acquire up to 25 per cent of Tricom over three years.
However, Tricom management has the right to inject additional capital through the introduction of a third party with broking expertise, and if that were to happen, it would dilute ANZ and Babcock's potential equity interests. Prior to the expiry of their equity options, ANZ and Babcock will remain secured lenders to Tricom.
If Babcock does take equity in Tricom it's unlikely to be long-term. Sharebroking is peripheral for the investment bank, which has relationships with a number of sharebrokers. An equity stake in one could produce an unnecessary conflict of interest.
AFTER months of trying to stave off a takeover bid from Maryborough Sugar Factory in favour of mergers with other millers, the board of Mulgrave Central Mill is poised to capitulate.
Mulgrave and Bundaberg originally favoured a proposal from Bundaberg Sugar, owned by Belgian group Suciere, which in turn is controlled by brothers Olivier and Paul Lippens.
Under that proposal a new company, TQ Sugar, would be formed, which would be 60 per cent controlled by Bundaberg and listed on Newcastle's National Stock Exchange.
Independent expert Grant Thornton valued Mulgrave in a range of $43.2-47.3 million, including a control premium of 30 per cent, and it valued the Bundaberg proposal in a range of $49.5-56.2 million.
Maryborough proposed a rival scheme of arrangement, valuing Mulgrave at $56 million, but the target directors wouldn't put it to the shareholders. So Maryborough announced a novel deal, linked to a scheme of arrangement, valuing Mulgrave at $60 million.
While that was clearly the higher offer, the Mulgrave board continued to favour the Bundaberg merger and proposed to put it to the shareholders without even bothering to tell them details of the revised Maryborough proposal, and without seeking Grant Thornton's opinion of that offer. But ASIC had a word to Mulgrave and the shareholders' meeting was adjourned indefinitely.
The Bundaberg proposal was subsequently abandoned, but then the Mulgrave board held out the prospect of a three-way deal between Mulgrave, Bundaberg's northern mills and another northern miller, Tully Sugar.
That was back in December, but Maryborough yesterday announced it had been holding discussions with Mulgrave, and said it hoped for an agreement under which Mulgrave would recommend the Maryborough offer. If that happened, Maryborough would seek the consent of ASIC to vary the offer. Whether that means a change to the offer terms is unclear, although Maryborough may be reluctant to alter the overall terms. But the offer at present is complicated, because of Mulgrave's capital structure.
Mulgrave was once a co-operative but converted to an unlisted public company, which means that it's covered by the Corporations Act.
Mulgrave has two classes of share -- A and B. Only growers can own shares and both classes are tied to the growers' cane allocation. But the A shares are allocated in relation to the amount of the holder's cane allocation whereas the B shares are issued on the basis of only 1 share per farm.
Thus there are 1.5 million A shares and only 150 B shares, yet the B shares account for 35-45 per cent of the cane treated by Mulgrave. Both classes have the same voting rights, one per share, although there is a voting cap of 200,000 shares for the A class shares.
Under the Corporations Act all off-market bids for voting shares must be the same. But to offer the same price for both classes of shares would vastly undervalue the B shares. Commercially a straight takeover offer would have been virtually impossible.
One solution would have been to convert the B shares to A shares and bid for the enlarged capital, and that's what was proposed with the initial Bundaberg offer. But that needed, and didn't get, the co-operation of the Mulgrave board.
So Maryborough announced a takeover bid for the A shares, in cash and shares or all shares, which valued those shares at $31.66 a share, and a scheme of arrangement for the B shares, again cash and shares or all shares, which valued those shares at an average of $76,666 a share.
If Mulgrave and Maryborough can finally agree on an offer, perhaps it may be possible to simplify matters and convert the B shares to enable one offer for all of the shares; alternatively perhaps a scheme could be agreed for both classes of shares.
bfrith@acenet.com.au