Looking at the gruesome scene evolving at Macquarie Airports Group is not altogether different from driving past a multi-car pile up on a highway -- you can't avert your eyes and you thank God that you weren’t in one of the cars. Those crash victims are much like unit holders in MAp, which has been managed by Macquarie since 2002. During that time, those unit holders have paid Macquarie more than $546 million. After realising that this doesn't represent outstanding value, there has been a push to remove Macquarie as manager -- to do that, Macquarie has sent unit holders a bill for another $345 million.
On one hand, your correspondent has about as much sympathy for someone who buys units in any satellite of an investment bank as he would for someone who uses an old syringe they found on a St Kilda beach to shoot-up. Aside from the fact that the Macquarie, Babcock, MFS or Allco satellites were managed externally by companies that existed to make lots of money for their employees, it is also hard to imagine how a trust -- that charges fees and is managed by an entirely different entity based on how big it is and that pays distributions from borrowings -- could be the most efficient way to own an asset.
Ridiculous structures aside, in Australia, directors are required to abide by the Corporations Act and the common law concept of directors' duties. This means that in theory, the highly paid independent directors of MAp have a fiduciary (which is a legal term for "really important") duty to MAp (and by implication, MAp’s minority security holders).
Last week, shortly before MAp shareholders were due to vote on the internalisation deal, a consortium called Global Airports threw a proverbial spanner in the works by launching a rival bid for the management rights of MAp. Global Airports is led by Mike Fitzpatrick (the AFL Commission chair, Rhodes Scholar and millionaire former owner of infrastructure company Hastings Fund Management, which has since been sold to Westpac). Global Airports also includes the former boss of Melbourne Airport, Chris Barlow. One would suspect Barlow is well qualified to run MAp -- Melbourne Airport is one of the most expensive in the world (it costs about 10 times as much to park your car for two hours at Melbourne Airport than Houston Airport). Global Airports is trying to have MAp delay its security holder vote on Macquarie’s internalisation proposal and also review loan documentation -- so far, with little luck.
The MAp directors, led by Trevor Gerber, quickly rejected Global Airports' offer, which involves a far lower payment (Fitzpatrick claims that the cost would be less than $20 million) but retains external management (admittedly not a bargain at a cost of about $11 million annually). Given $20 million is a less than $345 million, one would think that the independent directors of MAp would be falling over themselves to accept or at least consider the offer.
That is certainly not the case -- on September 14, MAp rejected the approach from Global Airports, claiming that the change-in-control consequences "are too uncertain and involve too many risks for security holders".
This is effectively the same reason that allowed MAp directors to recommend unit holders accept the $345 million fee demanded by Macquarie (remembering that MAp’s prospectus claimed that a mere majority vote would be able to remove Macquarie as the manager). Macquarie and its puppet directors noted that if MAp’s management changes, some its lenders will have the right to demand repayment of debt, which would be very costly (according to Macquarie anyway, no one other than the independent expert has actually seen the documents).
Aside from the fact that there is something inherently unsavory about Macquarie on one hand telling unit holders they can remove it, but soon after agreeing to financing terms that effectively entrench its position -- why were unit holders not given the option to reject these investments at the time, being told that making the investment will lead to Macquarie being un-sackable? It’s a bit like a small business hiring a manager, who then refuses to tell the owner of the business the bank account passwords when they try to fire him.
MAp also told Global Airports that "whilst the change of control implications are the primary issue, we thought it important to clarify our position with respect to MAp's management ... security holders have high regard for the MAp management team … security holders would require continuity of management." This would presumably be the same management team that last week announced that the sale of its remaining stake in Bristol airport at a 12.7% discount to what that it claimed the stake was worth three months ago.
One might suggest that the allegedly independent board of MAp is not especially removed from Macquarie. If they were, one suspects they would be falling over to try to negotiate with banks a deal that is preferable to the $345 million being paid to Macquarie. There is no evidence, publicly anyway, that the independent directors have so much as approached the banks to work out a deal, which may be in the best interests of security holders.
This may or may not be the case. The lead independent director of MAp, Trevor Gerber, is also a director of a joint venture that is partly owned by Macquarie (Gerber joined the board three days before Macquarie acquired its 49% interest). Until 2007, he was a director of Macquarie Prologis Management and was previously a director of yet another Macquarie satellite, Macquarie Countrywide Trust until 2003. Another independent director is former Labor politician, Michael Lee. Lee is also a director of the manager of DUET Group -- a joint venture between AMP Capital and Macquarie.
A third independent director is Jeffrey Conyers. Not only is Conyers deputy chairman of Macquarie Infrastructure, but MAp’s explanatory statement noted that Conyers would remain chairman of Macquarie Airports Limited should the Macquarie proposal be accepted (he may not keep his role should Global Airports takes over). Further Conyers is married to Ede Conyers, the CEO and 16% owner of ISIS Funds Management. Macquarie noted that another director, Sharon Beesley, is not deemed to be independent due to her role as a principle of ISIS.
The independent directors of MAp (even those who have links across the Macquarie empire) have a legally enshrined duty to ensure that they act in the best interests of the MAp at all times. Favouring an expensive Macquarie internalisation plan over all others (to the point where the directors are not even providing unit holders with complete information to make an informed decision) is arguably not in strict accordance with that duty.