Crikey

The folly of having any dealings with Babcock and Brown, which has turned numerous stable businesses into basket cases, has been confirmed once and for all by the news that one of the country’s biggest property players has been brought to its knees.

The fate of GPT, which four years ago was one of the two giants of the Australian property sector, is a salutary lesson to those who actively promoted and supported the easy money regime and the rise of the Babcock and Browns, the Allcos, the Macquarie Bank approach to business, and the looting of sound, stable companies in search of high returns, high earnings and big payoffs for shareholders, advisers and managements.

It confirms that the criticisms of executive remuneration by Crikey over the years and the late comer, Kevin Rudd, have been spot on and should really include the huge fees the likes of lawyers, corporate advisers, investment banks, brokers and managements extracted from these deals over the years.

Westfield’s role in GPT’s fate should not be forgotten by historians. It was a self serving intervention that contributed to its eventual fate in a significant way. Westfield didn’t have to buy any GPT units in 2005 and vote down the Lend Lease deal.

GPT, which owns the best group of CBD office buildings, high class shopping centres and a top portfolio of tourism assets, should confirm later today that its European adventure with the Babcock and Brown gang, led by the discredited former CEO, Phil Green and other adventurers, has effectively gone bust, with $1.8 billion written off.

Reports this morning in the media tell the story. The group is looking to raise $1.6 billion, or around 60% of its market cap of $2.55 billion. It’s looking to raise through an issue of $300 million in new convertible notes and a $1.3 billion rights issue to existing holders that will see the Singapore Government’s investment arm, GIC, emerge as a substantial shareholder.

The recent, sharp fall in the value of the Australian dollar has strained GPT’s balance sheet to near breaking point. It needs to raise cash so as to avoid joining the likes of Centro and Allco in the hands of its banks.

CEO Nic Lyons is walking the plank, as is chairman Peter Joseph, the group’s security holders are facing a severe cut in distributions and therefore much needed income, and control will pass to the Singapore Government to save the group from implosion.

The SMH said that GPT has written off its $1.8 billion interest in a European joint venture with Babcock & Brown to zero on its balance sheet and more than halved its forecast distribution. The annual distribution will now stand at about 7.25c, down from 20c the previous year.

GIC is already a major player in Australian property controlling the QVB Building and Galleries Victoria in Sydney, 5% of Mirvac, a building in Melbourne and other high quality assets such as 50% of Westfield Parramatta in Sydney and the Chifley Tower, also in Sydney. It is one of the two investment arms of the Singapore Government, along with Temasek Holdings. They also control Optus, the power group, SPAust Net, has a stake in the failing ABC Learning. The medium sized property group, Australand is controlled by Singapore interests, Fraser Property is another Singapore owned property player.

While not surprising, given the way the price of the company’s securities have sunk from more than $5 each in February 2007, to $1.15 on Tuesday night, it’s still a scandal because it need not happen.

There was a nasty fight for control back in 2005 when Lend Lease tried to mount a takeover (GPT had once been a Lend Lease satellite fund, but had grown to value its independence) but Nick Lyons, Peter Joseph and the board resisted. they didn’t want to go back to the old firm. Westfield played in the shares, bought a strategic 6.5%-plus stake and effectively frustrated the Lend Lease bid, and then sold. Westfield ended up with some first class shopping centre assets as a result.

That was in September 2005. In an interview with Alan Kohler on Inside Business on the ABC, Nic Lyons was Mr Enthusiasm for the B&B deal”

NIC LYONS: We have a target to invest about $5.5 billion by the end of next year. We have transacted so far about $1.1 billion. As you say, we have about $1.5 billion worth of opportunities that we are currently in various stages of negotiation. These opportunities are largely in Europe, which is where we’ve got the focus of our attention. They range right across ranges of residential, retail and industrial assets, showing very good returns. So, as a result of that, we’re very confident of being able to deliver on our forecasts in our explanatory memorandum and have the pipeline filled by the end of next year.

ALAN KOHLER: Another player in your separation from Lend Lease was Westfield, and they bought about a 5 per cent stake. They scooped up two, maybe three, of your shopping centres and then sold their stake for quite a handy profit this week. So they did very well out of all that - or at least Westfield seems to have - what about GPT?

NIC LYONS: You really can’t look at this transaction in its individual components because there are parts of the transaction that people won’t like, there were parts of the transaction that we didn’t like, but we looked at it as a total transaction that we believed created real value for our unit holders. And I think the fact that GPT is now trading pretty consistently around the $4 mark, whereas before the original Lend Lease proposal back in May of last year it was trading at $3.05, is evidence that this transaction has created real value.

That is the real joke. At around $4 a share, GPT would have been valued at $8 billion: now it will be $2.5 billion, based on Tuesday’s close of $1.15.

Mr Lyons joins a long line of departures among his peers in the listed property sector, such as Andrew Scott at Centro, Greg Paramor from Mirvac, the soon-to-depart Greg Clarke from Lend Lease and Valad Property’s Stephen Day, who stepped down as chief executive due to health concerns.