Michael WestLet the buyer bewareFebruary 26, 2011A classic case...

Michael West

Let the buyer beware
February 26, 2011

A classic case of profiteering from retail shareholders is the saga of Alinta Energy. The drama is still being played out among private equity vultures and hedge funds pecking over its carrion remains.

It is a sorry tale, yet nonetheless an entertaining one if not consumed via press release. Here was a power station company whose share price reached $3.74 at its zenith in early 2007. Shareholders now face an offer of 10? a share as part of a complex debt-for-equity swap proposal, with a vote coming up next month.

Making this offer is none other than TPG. This is the private equity mob which kindly brought us the Myer float - a deal which paid for itself in year one after TPG sold the flagship Bourke Street store for $600 million, helped themselves to a capital return, swapping out the cash for debt.
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That's Private Equity 101. Where the flair really kicked in was flogging the company, minus its best asset, at the apogee of the retail cycle to fully-grown fund managers just as the government's big stimulus was about to come off.

And rolling out world famous investment specialist Jen Hawkins for the retail crowd was a special touch. Later, they whipped the proceeds out of the country into a tax haven before the Tax Office could get them.

The point is that, if TPG is selling, don't be the buyer. And vice-versa.

Which brings us to the disclosure materials lodged with the ASX this week. Alinta directors have decided to water down the usual requirement that the vote for the scheme be passed by 75 per cent of shareholders. Just 50 per cent is needed for this little beauty.

To paraphrase the proposal: "You should really accept this 10? a share or we'll go belly up and you'll be lucky to get 3.3? out of it." You can bet the boys from TPG aren't there for 10? though.

And nowhere in the information kit does it reveal that, if the banks pull the plug on this whole escapade, then Alinta directors face two years filling out forms for the administrators and battening down the hatches.

It's like a scene from Get Smart. TPG has a gun to directors' heads and directors, in turn, have a gun to unit holders' heads. What if unit holders want more than 10??

Alinta's smaller investors - who get diluted out of the picture by this latest TPG pitch - have had a white-knuckle ride if ever there was one. It all began with the privatisation of some West Australian power assets. In league with Macquarie as the corporate adviser, Alinta's ebullient chief executive Bob Browning led the vanguard of the neo-infrastructure revolution.

Traditionally, companies have had their management inside. Not good enough for Bob and friends, they made up a management company to have the management outside, so it could charge the company for what it should be doing as part of the normal job. It grew, it spat out fees to advisers. It did scrip deals like there was no tomorrow. It even made a takeover bid for AGL, a company three times its size.

Worse, Bob and the chairman John Poynton, along with the Macquarie, were busted trying to pull off a leveraged buyout of their own company.

To top it all off, along came Babcock & Brown and locked Macquarie into a bidding duel. Babcock won, but couldn't afford to pay, so it slotted unit holders of all its satellite companies with Alinta's power station assets and, a little over a year later, slid down the tube itself. And now the vultures circle. Should they wrest control with a fancy El Cheapo deal, they will gut it, tart it up and flog it once again to the guardians of our superannuation, with fees for all along the way.

Such is the life cycle of the privateer. No one can begrudge them making a dollar. Caveat emptor and all that. What is amazing is how they keep coming back to the market every cycle and doing the fund managers over every time.

Perhaps because the share price discounts are so pronounced in retail, the privateers have a passion for retail plays. Some seven out of the top 10 specialty tenants in the Westfield retail business either have been, or are, private equity owned - a factor which, incidentally, won't help the shopping centre giant with its rental income over the next couple of years as it battles the incursion from online shopping.

While retailers are protected to some extent by the Australian economy, fired up by the resources boom, they are also vulnerable to the change in consumer behaviour thanks to what appears to be a slow but sure evolution towards online shopping.

RedGroup, the book seller, is the latest private equity asset to bite the dust and surely sent a shiver down many a retailing spine.

Meanwhile, the Alinta financial results have just been handed down. The operating result, once again is below guidance - this time guidance provided just two weeks ago. There is a $500 million impairment charge and a $128 million hit for marking derivatives to market. All up, an $855 million loss.

To blame, it said, was a poor performance by Alinta's retail energy business in Western Australia. It is such a poor result, that given the directors' desire to see the sale proposal proceed, it may have come at an opportune time.