Michael Pascoe writes:
The point at which a boom turns into a bubble can usually be identified only well after the event. But history could do well to have a close look at the final weeks of 2005 when trying to pin down that moment for what is loosely termed infrastructure investment.
Last week we had the record-breaking $11.3 billion Macquarie Bank splurge on a French motorway. So far this week there’s Babcock and Brown’s $1.8 billion purchase of a Portuguese wind and hydro energy firm and Macquarie Bank’s $1.2 billion purchase of a Taiwanese cable TV company. And that was just Monday.
What has some conservative investors most worried about this binge is the level of debt being built into the deals. For example, the French motorway, APRR, is nearly 90% geared by Macquarie.
Babcock and Brown’s purchase of Enersis is just as worrying. In theory B&B is paying 490 million euros for something that is forecast to make just 37.5 million euros before interest, tax, depreciation and amortisation.
It is foolish indeed to overlook the depreciation and amortisation of assets that make electricity, but the operation also has some 600 million euros in debt – which means it doesn’t actually make real bottom-line profit in any old-fashioned accounting sense.
While investors throw money at the deal makers who reap very rich fees on every turn, such deals will continue to be done. And at some stage history will pass its judgement on when it all began to go crazy.