nice deal - for mqg, page-60

I cannot advise anyone nor do I wish to but based upon the comments of others I will set out what my position is and my opinions and action taken.

There was a question about structure etc so this may be boring for some but here goes:

MAP has a number of airport assets and as such in reality IMO the only one that really adds value is Sydney airport. The rest are interesting but really are bit players. They are selling out of Japan airport terminals for a gross amount of $260m.

If you look up the presentation for dec 08 it gives all the details but in reality the big issue is that after they exit JAT then they are left with interests in Bristol, Copenhagen, Brussels. The key issue however is that these assets really are not going to dominate as Sydney constitutes around 55% of the full value of MAP. They are also not the flagship airports in the area and really Bristol is a small regional airport. The real problem is that whilst MAP may only own 35.5% of Bristol Macquarie funds jointly own 100% so in fact they would almost have to act in concert to deal with these assets or do a deal with another Macquarie fund. This is a difficult road and right now may well not be the time to unload. Macquarie has kept stating that the Asset backing to the MAP instrument is A$4.70. However the market does not agree with this. In reality I think its fair comment that the Macquarie satellite model is now considered not appropriate and that within the process the management contracts are just an expensive structure. Whilst MAP itself is unwinding its own borrowings (Tickets) the underlying assets have significant gearing so in the past this has been ignored but seeing as financiers are more conservative and are seeking less leverage MAP has not escaped this process. In fact what has happened is that instead of doing a share unit buyback MAP had to divert these excess funds to paying down some of Sydney's debt that would be building up as a result of capital expenditure on the airport. The rating agencies are also more wary and this seems to suggest that highly geared assets will in the future have to have more underlying equity to retain their credit rating. A drop in credit rating will normally lead to a higher borrowing cost. So all of these will over time influence the return that MAP unit holders get. In the past you used debt just to ramp up the return that the unit holders saw. This in my opinion also allowed the merchant bankers to get a highly inflated management fee as the net returns still looked good. Now that the free ride has gone the management companies are still getting this return. Also these management fees are based upon the gross assets so the incentive is to bolt on more and more assets and to ignore the impact of the gearing as the gearing risk is the unit holders but the increased management fees are the Merchant bankers management companies. So the Macquarie model goes out of the window because the Macquarie name will not get it past the scrutiny of the rating agencies and in fact its unlikely that the yields , after they extract their management fees, will be attractive enough to attract investors. The brisconnections issue may well have also added to the demise of the Macquarie model as investors have found to their cost what happens when you buy a partly paid unit.

However the issue at hand is that MAP has paid a fee for management to MQG and that it averages $44m. However this year as the sale of some assets etc it will drop according to my calculations to around $30/$32M. MQG is proposing to extort 5% of the units for a cancellation that can be effected without paying them anything. The issue being that firing them can trigger certain loans to be called based upon this. No-one has however even discussed this with bankers as in reality it should enhance their security but it will certainly trigger a renegotiation on interest rates as the market has hardened. So you dont want that however there are many options that the independent directors have not considered:

1. Do nothing and await the credit markets stabilisation in 3 years time then fire them only costing you the fee for 3 years whereas they are seeking almost 10years upfront.
2. Spin off Sydney airport into a seperate entity and dont appoint Macquarie as management. thereby reducing MAP to its offshore entities and pay MQG to manage those.
3. Sit down and play hard ball with MQG and as they hold 22% its unlikely you cannot beat them down substantially.
4. Negiotiate with the banks that have triggers and see which is the cheaper option.

A combination of the above also makes sense. So in reality given that this MQG proposal has been widely commented on not the least of which was Sky Business friday/saturday and other commentators as outrageous. I believe that the consultants advisor's and independent directors are all aware that this is not seen as a reasonable deal and as such it will have to be revised.

So what is a good idea is internalising management but not at the cost of 5%.

That MAP is in play and having to consider very carefully its future is certain and that the management of the MAP unit will also want to secure their future which is now no longer linked to MQG will all contribute to an environment in which something will happen. If a bit more risk taking were to stay in the market as everyone says is beginning to happen again MAP could narrow the gap to its underlying value but practically $4.70 isnt the number as MQG says you owe them 5% for gouging the management contract already. So maybe its backed by $4.25 not 4.70.

What the punters are saying is that in other sales like this the premium to market price has been large so maybe its $3.50 fair value. MAP has also had to lower its distributions to match its income and in the future as it will have to contribute capital to any project will probably have to drop it even lower as a percentage of income. This would make a much safer investment but will create negativity within those who have been relying on its income.

I personally like the Sydney airport and think the others are just distractions. So I would like to see the break-up of the assets and get MQG out of the way and make the focus where it should have been anyway but don't pay them any more than 2.5%.

I don't know what the real asset (Sydney) is worth but do know it drops dollops of cash each year. I would like to hang in on this.

As regards where do you hold your investment. MQG has so many other income streams and plays that given that this model seems to be broken I decided that the decisions are mutually exclusive. Do I want to invest in a merchant banker that's survived and will do well in the future. I in fcat chose to invest in Investec PLC on the LSE. I just liked the fact that they had not had to have a capital raising and further that they had a far more conservative payout ratio so they had adjusted that as well. The negative was its exposure to South Africa but the fact is that having a high net worth bank as well as a traditional banking model seemed to make me feel that their income was a bit more stable. The capital adequacy ratio they target are very high as well. Essentially in my case I have an investment in a good merchant bank that has survived and MAP as well.

These are just some opinions and as such they do not constitute advise but just how I see my reasoning in being invested in this. Do your own research before any investment decision. I have been wrong many times in the past and will be wrong many times again.