Babcock & Brown leaders’ disgraceful exit: Kohler

The way that Jim Babcock and Phil Green were seen off by their colleagues at Babcock & Brown yesterday with congratulations and thanks was simply nauseating.

Either they created a business with no brakes or reverse gear and are therefore to blame for it hitting the wall, or it’s not their fault, in which case they should not quit and leave everyone else to clean up the mess.

Both of them have pulled hundreds of millions of dollars out of Babcock & Brown over the years, and to cut and run now is an appalling act.

If they are being sacked for incompetence, that’s a different matter – but those left to fix the prang should say so, and not cravenly thank them.

What we got was: “Jim Babcock is to be congratulated for his vision and insight that has created a global company with a unique and mutually respectful culture and a strong focus on performance. The board and the company thank Jim for his 31 years of service…” (But he is staying on the board.)

And: “Everyone at Babcock & Brown thanks Phil for his enormous contribution to the development and success of Babcock & Brown over so many years. We recognise in particular his leadership and vision in building the business since the float in 2004. Phil is greatly admired by his board colleagues, by employees across the Babcock & Brown world and by many shareholders and co-investors.”

Is he really admired by shareholders and co-investors now? I doubt it.

Here is what Peter Hofbauer, the new head of infrastructure at Babcock, said yesterday when Tony Boyd asked him, in our interview, to describe the new investment philosophy at Babcock & Brown.

“Well, I think that the philosophy is already, in some respects, embedded in the group, in some of our core areas. It is about a disciplined approach of investing in assets and sectors that we have deep understanding of and core competencies…”

As opposed to undisciplined investing in things they didn’t understand?

In my view, the team at Babcock & Brown refashioned and perfected the Macquarie method of legalised daylight robbery; skimming excessive fees from the management of highly leveraged assets, superficially acquired, and then rewarding themselves generously for having thought of this wheeze and persuading investors to buy it (which was, admittedly, a great achievement).

The difference with Macquarie is largely one of degree. Macquarie has been less superficial and more careful about acquisition, has relatively less debt and they pay themselves less. Macquarie also has a more stringent system of accountability and internal compliance. At times like this those details matter, although as Nicholas Moore is showing, Macquarie must change its ways as well.

Now Babcock & Brown is in liquidation mode and the main banker, Deutsche, is inside the tent as adviser to protect its interests, along with Goldman Sachs.

Peter Hofbauer told Tony Boyd yesterday that the “headstock”, Babcock & Brown, would have to sell about $2 billion in assets to get gearing down to 30% within 18 months.

Some real estate has already sold, but it seems most of the other assets are long term contracts to manage the satellite funds as well as shares in those funds.

But can those things be sold when the funds themselves must also sell assets and get their gearing down?

The key task for former CFO and new CEO, Michael Larkin, along with Deutsche and the other banks, is to try to preserve asset value in the headstock – which exists to service and receive fees from the satellite funds – while those satellite funds separately and now independently go about their own (hopefully) orderly partial liquidations.

The collapse in the market prices of all members of the group, and the increase in the general discount rate, which lowers asset valuations across the board while leaving the value of debt intact, makes this task very difficult.

The good news is that even though the B&B share price fell another 35% yesterday and has now fallen 90% this year, some people are buying Babcock & Brown in the belief that equity exists in the group and that Larkin and his new chair Elizabeth Nosworthy will pull this off.

Let’s hope they do.

This article first appeared on Business Spectator