Friday, January 09, 2009

Babcock & Brown Could Be Broken Up

The fate of Babcock & Brown (BNB on the Australian Stock Exchange) is in the hands of its creditors. Trading in BNB's shares has been halted as management talks with the firm's 25 banks about restructuring. Trading in the shares of BNB's separately listed subsidiaries continues. Babcock & Brown Infrastructure (BBI), which owns Bluewater Wind, closed at 13 cents (Australian), a bit higher than in December. Babcock & Brown Wind (BBW) is doing better, trading at 90 cents.
Earlier this week, BNB management announced that
the value of its assets had dropped sharply, and the firm’s balance sheet was now underwater.
MELBOURNE, Jan 7 (Reuters) - Australian investment firm Babcock and Brown Ltd (BNB.AX), which is in talks to refinance short-term debt, confirmed on Wednesday that its assets as of the end of last year were worth much less than its debt and equity.
Net assets would be negative because it was writing down the value of assets it had put up for sale.
Valuation of a distressed company is more art than science. The ratios and rules of thumb used to estimate the value of a firm become meaningless. The question of the value of BNB assets will be determined by the prices they can fetch in weak financial markets, by the willingness of its creditors to see their debt converted into equity, and by the difficult task of unwinding the complex network of BNB’s connections to its dozen subsidiaries.
The negative valuation may be a negotiating tactic to try to convince creditors that their best option will be to trade their nearly worthless loans for diluted shares that have slid from $33.84 to 13 cents in a year and a half.
At least the firm’s top managers still have jobs. Bloomberg News reports that
lenders favor keeping BNB’s management on the job for the purpose of unloading the company’s assets.
BNB did not collapse because its assets are no longer productive, though some like ports and aircraft leases have seen their revenues drop. (Its energy assets are still pumping out as much electricity as before the firm’s stock plunged.) The firm collapsed because of its over-leveraged business model. BNB is structured like a leveraged buyout, only without the buyout. The firm’s structure worked when capital was cheap and plentiful, but collapsed when the era of easy money came to an end.
It’s clear that BNB’s once formidable empire will be broken up, which means that Bluewater Wind may well have a new parent company sometime this year. The original plan was for BBI to own Bluewater during the construction of the offshore wind power project, which would be handed over to BBW after the wind farm became operational.
As I have said before, Babcock & Brown is in trouble because of its business model, and
not because of any trouble with the wind power project here in Delaware. The power purchase agreement with its guaranteed revenue stream is itself an asset, and will still be attractive to investors once it is separated from the BNB mess.

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