Paying for peace

It seems simple on paper. If shareholders in Macquarie Airports (MAp), the listed airport investment vehicle managed by Macquarie Group, ever wanted to displace the manager, all they’d have to do is call a meeting, take a vote, and get a simple majority to agree to sever ties – as per the management agreement.

But as Trevor Gerber, lead independent director for one of MAp’s boards, told Infrastructure Investor, “while in theory this might be possible, in reality the position is much more complex”.

Indeed, several issues made a straightforward severance impossible, as Gerber and others discovered when contemplating such a move. Which is why, in late July, the firm announced that it would offer Macquarie A$345 million (€203 million; $289 million) in new shares to go away as manager, subject to a shareholder vote in September.

Macquarie currently owns 21 percent of the shares in MAp, which it cannot vote against the proposed severance consideration. But had shareholders decided to call a meeting and displace it by simple majority, things would have been much different: Macquarie would have been able to vote its shareholding in MAp against any proposal to displace it as manager. Assuming an average voter turnout of 50 percent, this would be equivalent to about a 40 percent voting block, according to Gerber.

More importantly, a web of contractual agreements means any change in the firm’s management could also have prompted a host of unpalatable events, such as MAp having to sell two of its core airport holdings, Brussels and Copenhagen, to the Macquarie European Infrastructure Fund, which has pre-emptive purchase rights on those investments.

“There was a risk that a change of manager could result in a change of control provisions in loan arrangements and pre-emption rights being triggered, resulting in significantly higher margins or possible early repayment of facilities,” Gerber explained.

Put more succinctly: “Macquarie cannot be removed as manager involuntarily,” says Martin Lawrence, head of research for Australia and New Zealand at risk and corporate governance consultancy RiskMetrics in Melbourne. “Well, you could, but it would be really, really messy,” he adds.

Small wonder, then, that MAp – as one Australian newspaper put it – was “willing to pay for peace”. Gerber says the A$345 million severance consideration takes into account the value of the management agreement using a number of valuation benchmarks, as well as Macquarie’s cooperation and assistance “to ensure that there is no disruption to MAp or its airport interests”.

That’s no small price for peace, especially if you consider that, since its listing on the Australian Stock Exchange in April 2002,  MAp has paid Macquarie a total of A$547 million in fees already, according to MAp’s own disclosure. The combined total of the severance consideration and the base and performance fees alone would be about 22 percent of MAp’s current market capitalisation.

Lawrence, who has combed through all of MAp’s financial statements since 2002, says that the total of all fees the firm has paid to Macquarie since listing is even higher and stands at nearly A$926 million. His sum includes A$531.8 million in performance and base fees, A$145.3 million in investment banking fees, A$25.7 million in cost recovery fees, A$216.3 million in fees related to MAp’s holdings in another Macquarie-managed unlisted airport investment fund, Macquarie Airports Group, and A$6.4 million in other fees, such as debt facility fees.

Gerber points out that there would have been fees payable for specific transactions regardless of whether Macquarie acted as investment banking adviser,  and regardless of whether management was internal or external. The board’s fee disclosures were meant to illustrate that MAp’s internalised cost base would be significantly lower – about $A30 million less per year – with the base and performance fees gone.

Gerber also says: “The alignment of interests between security holders and management will be reinforced and there is the potential to attract a broader range of investors.”

All well and good, but it leaves open a number of fundamental questions that shareholders will have to ponder as they decide whether to accept the management internalisation proposal.  Did MAp investors get good value out of having Macquarie as a manager? Will the A$1.2 billion-plus in fees have been worth the payback from investing in the securities in the first place?

For Macquarie, this question is important, too. Flip through any of its Annual General Meeting presentations and, undoubtedly, a page on the “Macquarie Model” will pop up. This year, “alignment of interests with shareholders” was bullet point number two on that page. With MAp parting ways because it felt that alignment of interests was not strong enough, is the firm really aligning interests,  or just looking out for its own benefit?

As with the management agreement, the issue seems simpler on paper.