MAp revises severance payment to Macquarie

The A$345m will now be paid in cash instead of Macquarie Airports stock if a revised management internalisation agreement is approved by shareholders. Shareholders can sever ties with Macquarie at no cost, but MAp directors have argued that doing so would trigger unfavourable contractual provisions.

Australian airport investor Macquarie Airports (MAp) is set to make an A$345 million (€203 million; $289 million) cash payment to its external manager, Macquarie Capital, if shareholders approve a revised management internalisation proposal agreed to today by the two firms.

MAp had previously agreed to end Macquarie’s management contract and bring management in-house in exchange for A$345 million, payable in 150 million newly-issued MAp shares. The shares would have taken Macquarie’s ownership stake in MAp from about 21 percent to 27 percent, thereby diluting existing shareholders’ interests in the firm.

Trevor Gerber, chairman of the Independent Board Committee of MAp’s management company, said in a statement that the decision to change the payment structure resulted from feedback from MAp shareholders. The shareholders “indicated a desire to have the opportunity to participate in a capital raising rather than Macquarie having the sole right to take up all 150 million securities,” Gerber said, adding that “the revised proposal provides this opportunity whilst also ensuring that MAp remains in a strong financial position”.

To fund the cash payment, MAp will launch a 1-for-11 share entitlement offer to its existing shareholders at a price of A$2.30 per security.

MAp said the A$345 million payment is representative of the net present value of all the incremental earnings resulting from the elimination of Macquarie’s management fees. Since MAp’s listing in 2002, the firm has paid A$547 million to Macquarie in base and performance fees, according to previous fee disclosures made by MAp. Including investment banking fees, transaction-specific fees and other fees, RiskMetrics, a corporate governance advisory firm, has estimated that MAp’s total fees paid to Macquarie since 2002 top A$925 million.

Under the terms of MAp’s management agreement, MAp’s shareholders are allowed to displace Macquarie as manager free of charge by calling a shareholder meeting getting a simple majority to agree to a severance proposal.

However, were such a proposal to pass, it would trigger a number of unfavourable events for MAp, such as having to re-negotiate debt facilities for some of its key assets and having to offer them for sale to other Macquarie-managed funds. For example, the Macquarie European Infrastructure Fund has pre-emptive purchase rights on MAp’s interests in Brussels and Copenhagen Airports, which it may exercise if Macquarie is displaced as manager.

As a result, MAp favours making making a severance payment to Macquarie. “MAp needs the co-operation of Macquarie and its managed funds to avoid triggering change of control and pre-emptive rights clauses in debt facilities and shareholder arrangements, in particular, the Brussels and Copenhagen airports’ debt facilities”, the firm said in a statement.

MAp’s independent directors believe that the proposed A$345 million severance payment is a “reasonable” amount. It represents a pre-tax earnings multiple of 10.7 times, MAp said, or 6.6 times if performance fees of A$20 million per year are assumed to be paid to Macquarie.

The firm recently announced earnings before interest, tax, depreciation and amortisation of A$397 million for the six months ending 30 June 2009, versus A$467 million for the same period last year. The firm’s net asset backing per security, or the value of all its assets divided by its outstanding shares, stood at A$4.30 as of 30 June, versus A$4.57 a year earlier.

The internalisation proposal is aimed at closing the gap between Macquarie’s net asset backing per security and the value of those securities on the public market.

MAp’s Australian Stock Exchange-listed shares rallied 7.4 percent, ending the day on A$2.60.

MAp’s shareholders are to vote on the management internalisation proposal at a special general meeting next month.