Crikey

Babcock & Brown has now formally joined the critical list after shares in the financial engineer plunged another 13% in morning trade, bringing the two-day plunge to more than 20%.

The market was clearly underwhelmed by this update from the debt-laden Babcock & Brown Power which resumed trading this morning and plunged a stunning 41c to a record low of 89.5c.

The PR offensive continued as Babcock & Brown Infrastructure presented these slides to the big UBS conference today and the market was thoroughly underwhelmed as BBI shares dived 5.5c to 93.5c in morning trade.

Anything with Babcock in the name is getting flogged as short sellers, plus a general loss of confidence and fear of contagion spreads like wildfire.

Even the group’s own $2.6 billion hedge fund, Everest Babcock & Brown tumbled 6% to a record low of 45c in morning trade.

The contagion risk is explored in this report after the recent EBB AGM. Why did EBB lend $20 million to the troubled $1.4 billion Babcock-sponsored Royal Children’s Hospital PPP in Victoria and which Babcock fund would be flicked for the exposure as promised by the EBB board?

Babcock CEO Phil Green surely can’t keep claiming the headstock will post a $750 million net profit in 2008. He confessed at the recent AGM that Babcock’s investments in its various satellites were about $120 million under water but this has now rocketed to more than $200 million.

I can’t see the Babcock empire surviving in its current form because investment banks are essentially capitalised reputation which rely on investor confidence. The cold hard fact is that Phil Green’s empire has now presided over the loss of more than $3 billion by investors and is now suffering a capital strike. The critical question is just how rich the staff are, given they still own 43% of the company.

Institutions who took Babcock placements have overwhelmingly done their shirts. Here are just some examples:

• March 9, 2006: B&B staff sold 23.4 million shares at $17.25, raising $403 million. Now worth $187 million, so loss $216 million.
• December 11, 2006: B&B Power sells 359 million shares at $2.50, so investors who stumped up $897 million have lost $576 million.
• March 16, 2007: B&B staff sold 19 million shares at $25.20, raising $479 million for shares now worth $152 million. Total loss $327 million.
• March 1, 2007: B&B Infrastructure placed $422 million worth of stock at $1.80. Now worth about $219 million so loss $203 million.
• June 2007: B&B Communities raises $475 million at $1.15 a share as part of Primelife restructure. Investors down $300 million with stock hitting record low of 40.5c this morning.
• March 27, 2008: B&B raises $220 million at $13.65 to institutions who have already dropped $91 million.

Investors would normally fire boards who did this sort of thing but the sprawling empire and $20 billion-plus debt pile is protected by appalling governance in vehicles such as Babcock & Brown Power, as Risk Metrics research director Martin Lawrence explained on Business Spectator last night.

• Babcock was just like Allco and MFS as it borrowed too much, was obsessed with deal flow, overpaid for assets, took the governance low road and produced six current Rich Listers.
• The over-priced Alinta takeover year looks to be the biggest mistake, with the Varanus Island gas explosion coming at a moment of extreme vulnerability.

*Today’s Mayne Report video exposes the X-rated Austar AGM.