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Babcock considers buy-back of second satellite fund

The beleaguered Australian infrastructure specialist is reviewing Babcock & Brown Capital, a move that follows its purchase of another satellite fund’s management rights and highlights the difficulties the satellite fund model has faced in the wake of the global credit crisis.

Babcock & Brown may buy back the rights to another of its satellite funds. The Australian specialist fund manager has said it is conducting a management and ownership review of Babcock & Brown Capital, an Australian Stock Exchange-listed fund, whose primary investments are in telecommunications.
 
Though the review is still in its preliminary stages, a spokesperson for Babcock said that the firm is looking to discuss a management rights purchase arrangement with the directors of the fund. The firm entered into a 25-year management agreement with Babcock upon listing on the Australian Securities Exchange in 2005.
 
The move follows Babcock’s strategic review of another of its ASX-listed funds, Babcock & Brown Communities. The fund owns, operates and develops senior living communities in Australia and New Zealand. The results of the review included a price discovery process for the whole of Babcock & Brown Communities as well as the purchase of its management rights from Babcock for A$17.5 million ($15 million) and a debt reduction process.
 

Going forward, it [Babcock] is going to look more like more like a Carlyle or a Blackstone

Spokesperson for Babcock

The second strategic review highlights the difficulties that the business model of buying and bundling assets into publicly listed investment funds – pioneered by Babcock rival Macquarie Group – has faced in the wake of the global credit crisis. As with Macquarie, which has seen many of its listed funds trading below book value, Babcock's listed investment funds have been punished by investors.
 
Since the beginning of the year, Babcock & Brown Communities has fallen 51 percent, while Babcock & Brown Capital fell 31 percent over the same period. As a result, both have been trading below book value and in February Babcock and Brown Capital announced plans to buy back up to 50 percent of its stock “to reduce the discount to the underlying value of the company at which its shares are trading”. An additional off-market share buyback program would have commenced on Friday but was cancelled pending the outcome of the review.  
 
Both are managed by Babcock's Corporate & Structured Finance Division (CSF), which in June posted a half-year operating loss of nearly A$100 million. Aside from principal investment and advisory activities, CSF manages approximately A$13.7 billion in assets, of which Babcock & Brown Capital and Babcock and Brown Communities comprise A$6.7 billion and A$2.7 billion, respectively.
 
On 21 August, Babcock announced that CSF will be gradually wound down. The decision is part of a larger restructuring initiative aimed at refocusing the firm on its core businesses of infrastructure, real estate and operating leasing as well as evolving its activities into a more private equity-like asset management model.
 
“Going forward, it [Babcock] is going to look more like more like a Carlyle or a Blackstone or someone like that than like an investment bank. The main difference will be that we will still use the balance sheet to develop assets but won't use the balance sheet to make principal investments,” said a spokesperson for Babcock.
 
As PEO reported last week, other major restructuring changes included the departure of Babcock chairman Jim Babcock and chief executive Phil Green, who was replaced by former CFO Michael Larkin.
 
The spokesperson for the company would not comment on which of Babcock's 11 listed funds would undergo review next, cautioning that each one would be evaluated on a case-by-case basis. However, John Heagerty, a Sydney-based equity analyst at ABN-AMRO who covers Babcock, noted that ASX-listed Everest Babcock & Brown Alternative Investment Trust, in which Babcock owns a 28 percent stake, was a likely candidate for review.             
 
Babcock's shares ended Friday 2 percent higher, at A$2.48. Year-to-date, the shares are down 91 percent.