The plot of the BrisConnections fiasco resembles that of a poorly written stage-play. A prose full of twists and turns, with no heroes, but plenty of villains.
This morning, the Supreme Court of Queensland rejected Macquarie Capital Advisers’ attempts to injunct the unit-holders meeting to wind-up and change the management of the toll-road company. The meeting was inspired by a ragged, fashionable young Melbourne entrepreneur, Nick Bolton who holds almost 20% of units in the Trust. But while it is tempting to fashion Bolton into the hero of the story, a young David, taking on the might of Goliath Macquarie Bank and the BrisConnections board, led by well-connected investment banker (and ASX director), Trevor Rowe, the reality is very different.
Unlike the Israelite king, Bolton is no hero. Educated at Melbourne’s elite Wesley College (a school famed for producing former Prime Ministers Robert Menzies and Harold Holt, but whose standards slipped somewhat since the institution become co-educational in 1977), Bolton later followed the route taken by the likes of Bill Gates and Facebook’s Mark Zuckerberg in failing to complete his university course, which in Bolton’s case was commerce and engineering.
Many assumed that Bolton (who owns several small IT companies), like housewife Fang He before him, acquired a large stake in the trust to attempt some sort of a “distribution arbitrage”. At one stage, BrisConnections shares were trading at less than one cent, while availing unit-holders to a 5.95 cent per-unit distribution. (In that scenario, a unit-holder could feasibly pocket the distribution on 31 December 2008, transfer it elsewhere and hope for the best or declare bankruptcy by the time the $1.00 per unit “call” was due in April).
The problem with that theory is that Bolton did not start acquiring his stake in BrisConnections until three weeks after it announced the distribution had been cut to 0.0005 cents per unit. (Bolton’s first Substantial Shareholder Notice was lodged on 25 November 2008, noting that Bolton’s company, Australian Style Investments, had acquired a 5% interest in the Trust the previous day).
It appears that Bolton’s motives were far loftier than a day-trader attempting to collect a distribution. As Fairfax’s Mark Hawthorne reported:
In a confidential strategy document emailed by Mr Bolton to Ernst & Young, ANZ, Deloitte and Lion Capital in early December, he details a plan to increase his holding in BrisConnections up to 49.9 per cent of the listed units.
“My plan was to recapitalise the company,” Mr Bolton said.
After being rejected by potential advisers to the takeover plan, Mr Bolton said he adjusted his strategy in late December and early January.
“It is not my current intent to consider a takeover,” Mr Bolton told the court. “I believe … winding up of the company is in the best interests of unit holders.”
Exactly what Bolton stood to gain from his moves remained a mystery (there is little point in re-capitalising a company which is not asset rich or cash-producing). However, some clues as to the young entrepreneur and fashion enthusiast’s motives were provided to the Weekend Financial Review on Saturday, when Jacqueline Maley reported that:
Bolton says he has been looking for an opportunity like BrisConnections for a while — companies in which he could take a large interest quickly and easily. He says his company was the under-bidder for suit maker Herringbone when it went into administration last year.
“I wanted to buy them because I loved the suits” he explains.
It appears therefore, that Bolton’s aims were little more than that of a green-mailer. (The term “Greenmail” became ubiquitous in the go-go 1980s, where corporate raiders like Sir James Goldsmith or T Boone Pickens would acquire a stake in a takeover target and demand a premium from the company for their minority shareholding).
Bolton seems to have bet that the project’s backer and co-underwriter, Macquarie Bank, would pay him a premium for his shares to prevent the project from collapsing. (The Financial Review speculated today that were BrisConnections to be privatised at 5 cents per unit, Bolton would stand to reap a $3.8 million profit on his $47,643 investment).
While his chances of successfully earning a windfall gain may have been marginal, Bolton’s gambit contained limited downside — aside from his somewhat dubious “put-option” structure with a family friend (in which he claimed to have agreed to have purchased an option to sell his interest in BrisConnections for a specified price), Bolton could simply declare bankruptcy if his ploy failed. The 27-year-old appears to have limited other assets.
Of course, Bolton is hardly the leading villain in the story. That title clearly belongs to Australia’s fallen (but still breathing) financial engineers at Macquarie Bank. While in financial terms, the entire BrisConnections fiasco is little more than a rounding error to the institution, symbolically, it represents far more. It signals the final death knell of the listed infrastructure model, a model which has already caused the devastation of Babcock & Brown and Allco, as well as billions of dollars of investor losses.
The more complicated the structure, the more Macquarie stood to make in fees, as Ian Verrender noted today, “Macquarie is desperate to keep BrisConnections alive. So far, it has taken $110 million in fees out of the company. If it can keep the carcass on life support, it will earn even more for organising $3.15 billion in debt finance from a banking syndicate.”
Had Macquarie not devised a partly-paid structure, or super-charged the initial distributions based on leverage, Bolton would never have been able to acquire such a significant equity stake in the entity. (Further, according to BrisConnections’ own Supplementary Memorandum, the float was badly over-priced, with the Trust claiming the net present value of all distributions is $1.77 per unit, compared with an equity cost of $3.00 per unit).
Meanwhile, the final player in the saga is BrisConnections chairman, Trevor Rowe, who not only sits on the board of major unit-holder, Queensland Investment Corporation, but is also a director of the ASX (an institution which has been heavily criticized for its failure to adequately police listed infrastructure satellites in recent years).