It’s the ultimate insult: a broking house abandoning coverage of a company in a “re-allocation of resources.” That’s what Goldman Sachs JBWere told clients that is it is doing with Babcock and Brown Power.
We have ceased coverage of Babcock & Brown Power in order to reallocate our resources. Accordingly, our recommendation, valuation, price target and earnings estimates are no longer in effect and should not be relied upon.
The news came within a day of Babcock and Brown Power revealing $452 million in write-downs on its Alinta power assets purchased last year ($411 million) and a $42 million loss on the sale of the Tamar power station project in Tasmania to the state government.
The Tamar project now ranks as one of the dud deals of infrastructure, along with the Cross City and the Lane Cove Tunnels in Sydney, both of which are broke. Babcock and Brown Power has so far spent $223 million on the project and will get $100 million from the Government. The $452 million loss is after accounting for a provision. The Tasmanian Government got a bargain: cheap power.
The Financial Times said, “You know things are going badly in the leveraged buyout world when an infrastructure fund returns a power station to state hands and calls in financial advisors.” Yet it’s amazing that so many people in the leveraged buyout and infrastructure gigs haven’t got that message.
Perhaps Goldman Sachs is dropping coverage because rival UBS got the gig advising the company (a bit late). Or perhaps they were not impressed with the drop in the price of the company’s securities from a 52 week high of $3.42 to 20.5 cents yesterday: a fall of more than 90%. Babcock and Brown Power closed at 25 cents (off 41% on the day) and can’t go much lower (under 20.5) without even more strongly suggesting that it is collapsing.
At 25 cents, the company was valued at $182 million. There’s no upside for a steady fee income in that, not when Babcock and Brown will clip an estimated $24 million in the June year for the privilege of managing the share price down by 90% or more.
However, Goldman’s rival, Merrill Lynch, remains optimistic about BBP and will continue coverage. It said this morning:
BBP looks unlikely to go under due to liquidity issues. BBP faces risk around its earnings outlook and broader capital restructure, as well as meeting near term funding issues. And credibility concerns will persist around this name for some time with the market likely to apply a BNB discount. We believe shareholders would prefer BNB to take BBP private. The presence of poison pills suggests that BBP would be difficult for a third party to acquire even at current prices. But with BNB having ~$5bn in uninvested FUM (relative to BBP’s market cap of $200m), we think shareholders would want BNB to execute on this.