buyout !!!, page-4

A good article in todays paper that really nails the situation for what it is. A fat and dodgy management company, seemingly happy to provide insider trading profits to the well connected, while looking no further than preserving it's parasitic fee feed. This conflict of interest between "responsible" management entities and shareholders is the reason shares will always trade at a discount to NTA.

goodluck

Hastings Fund Management sat on a proposal from TCW

Bryan Frith | June 02, 2009
Article from: The Australian
THE price of stapled securities in Hastings Diversified Utilities Fund (HDF) soared by 25 per cent last week.

It now transpires that during that time the RE (responsible entity) Hastings Fund Management was sitting on a proposal from the major US fund manager TCW, but said nothing until late Friday, when it said it received, and rejected, a "highly conditional, non-binding proposal" from an undisclosed party.

HDF has received two speeding tickets from the ASX over the past three months in relation to sharp falls in the prices of its securities, plus follow-up questions in relation to its response to the initial query.

Curiously, the ASX did not question HDF over last week's price surge, although the extent of the rise should have triggered a query.

However, the discovery that HDF had sat on the proposal for a week before saying anything, and that during that time the price of the fund's securities rose sharply, should prompt the ASX to look into the matter to determine whether it considers the fund has complied with its continuous disclosure obligations to "immediately" release material price-sensitive information, and, if not, whether to make a referral to the corporate regulator, ASIC.

As it is, TCW outed HDF by publicly releasing the details of its proposal. As a result, HDF belatedly released the details, but followed up by declaring that it didn't intend to engage further with TCW on the proposal.

TCW gave the written proposal to HFM on Monday last week and it was rejected on Friday morning.

The TCW proposal envisaged a scheme of arrangement, which meant that it would have required the approval of HDF security holders.

HFM's rejection means that the RE, rather than the securityholders, has determined the outcome and the securityholders do not get to have a say in the matter. Moreover, it seems clear that, had it not been for TCW, the unitholders would never have learned the details of the proposal.

That's unfortunate as the RE, which is wholly owned by Westpac, arguably has a conflict of interest in relation to the TCW proposal.

HDF on Friday said that the proposal was to acquire 100 per cent of Epic Energy, which owns the Moomba to Adelaide gas pipeline system and is one of the fund's major assets. The other major asset is 50 per cent of the British water utility, South East Water. The other 50 per cent is owned by Utilities Trust of Australia, which is also managed by HFM.

In fact, the proposal was much more than HDF held it out to be -- TCW claims that it was a "whole of fund" solution which, among other things, would relieve the refinancing pressure on the fund by repaying $190 million of short-term debt, remove the need for raising $650 million to $900 million to finance needed pipeline expansion for Epic and enable a cash return to unitholders of $144 million, or 68c per security.

In particular, what HDF did not tell unitholders was that TCW's proposal involved the elimination of external fee leakage by internalising the management of HDF. That would have meant the removal of HFM as the RE, and the consequent loss of management and performance fees.

Those fees are not inconsequential. HFM received a base fee of $6.1 million in 2008, $7.4 million in 2007 and $5.7 million in 2006. Moreover, it was entitled to an incentive fee of $18.4 million for 2008 for outperforming the S&P/ASX 200 industrial accumulation index. Fees since the fund was floated in 2004 total $57 million, including the performance fee.

The performance fee was to be paid through the issue of HDF securities at a minimum of $2.56 a security (7.2 million securities), but it has been deferred (not waived) because of a collapse in the price of HDF securities in recent months.

From a high of $2.70 in September last year the price fell to a low of 35c in March, but had recovered to 97c by March 22 (the last sale before TCW presented its written proposal to HDF). Last week the price surged by 24.5c to $1.215c -- a gain of 25 per cent.

ASX queried on February 16 after the security price had dropped from $1.97 to $1.66 over a five-day period. HDF said it knew of no explanation but there might have been speculation an equity raising might be needed to fund Epic's funding requirements and to remain within South East Water's debt covenants.

On March 5, HDF was again queried after the security price had fallen further, from $1.40 to 70c. Again HDF knew of no explanation but on the same day announced that the 2008 distribution would be cut from the previous guidance of 28.5c a security to 12c a security; that the fund was in negotiations with its bankers (Westpac and ANZ) to extend an $80 million corporate facility that matures in August; and intended to mature its $100 million TAPS hybrid securities which mature in June 2010 (HFM is also the manager of the TAPS Trust and received a $1 million fee last year).

TCW claims that its proposal values HDF securities at $2.15, but that assumes a value of $1.47 an HDF security after the divestment of Epic, which is the HDF board valuation of South East Water (the major remaining asset) as at December 31. But it must be doubtful whether HDF would trade at its asset backing after the disposal.

TCW's actual offer is $300 million cash, or $1.41 per security, which represents an enterprise value for Epic of $685 million and implies an EBITDA multiple of 10.1 times.

TCW says its proposal is compelling and eliminates the significant funding issue facing HDF -- at least $840 million over the next 12 to 24 months, or four times the fund's market capitalisation, and excludes South East Water's capital expenditure program and debt refinancing of at least $1.39 billion over the next 5 years.

HFM has been conducting a formal process since March to explore the divestment of some or all of Epic, to ease its debt problems. The RE said yesterday it had received considerable interest and indicative bids were due in mid-June.

The RE claimed that TCW's proposal significantly undervalued Epic, was subject to material and unattractive conditions and to progress it would have required the existing Epic sale process to be abandoned. TCW had rejected "repeated" requests (since last Friday?) to participate in that process.

TCW contends that misrepresents the position. Its proposal involved a scheme of arrangement that would require an implementation agreement and that conditions would not apply until that was completed, and, in any case, are normal conditions for such an agreement, with HDF able to accept a superior proposal.

There was nothing to prevent HDF running its sale process in tandem with preparing to put a scheme to securityholders and deciding to proceed with whichever process produced the superior outcome.

Now that HFM has rejected TCW's proposal, the onus will be upon it to produce a superior outcome from its sale process. If it cannot, it might come under pressure to ask TCW to reinstate its proposal in order that the securityholders can consider it.