Daniel Englander
Overvalued in the Land Down Under? June 17, 2008 at 1:34 PM
Babcock & Brown, an infrastructure investment holding company, endured a 50 percent blow to its stock price last week over fears of an unsustainable debt level. The company’s debt stands at roughly A$2.8 billion, while its market cap is only about A$1.75 billion. B&B has received a lot of criticism for its company model, which involves buying fixed infrastructure assets and then reselling to its satellite funds. The parent company has also formed a number of JVs with its subsidiaries while also generating long-term fees from the asset sales, making the incestuous arrangement that much more worrisome. To stem the drop in its stock price, B&B has said it will begin receiving bids this week for one of its four satellite funds, Babcock & Brown Wind Partners. The wind fund holds close to 3 GW of generation capacity valued at A$2.5 billion. It is likely that the sale will be less than the value of the assets, however, as B&B’s obvious cash needs have eroded a significant amount of its bargaining position.
So why is any of this important? Going back a few months, B&B launched what it termed a “Strategic Initiative” to sell off some of its wind assets - specifically the 800 MW it has under management in Europe - to gain back some of its declining market capitalization. In a recent report from KPMG, B&B Wind Partner COO Geoff Dutaillis acknowledged that “BBW is undervalued given current security prices.” Specifically, BBW’s holdings cost the company $2.3 billion to develop or acquire, while their current value is closer to $2 billion. Part of this has to do with its European holdings, including the $750 million acquisition price it paid for Portugal’s Enersis in 2005, which the subsidiary co-owns with its parent company. Initially, the Strategic Initiative sought to spin out the European components and move into the higher value North American and Asian wind markets. However, the company may have missed the boat on getting in. In the second half of 2007, it laid out A$1.78 billion to up its wind portfolio by 67 percent, mainly through acquisitions. B&B has the distinct honor of being the only major wind company to develop less than half of its capacity in house.
But by how much did B&B overpay to get into the wind game? It’s hard to know, though Dutaillis claims the company nabbed the going rate of $2.5 million per MW, while IPOs and acquisitions have seen prices at twice this level, according to the KPMG report. It’s possible B&B got in at the back edge of a utility scale wind bubble in Europe and overpaid to compete. However, paying itself through its subsidiaries probably didn’t help matters much either. Ultimately, B&B’s trouble may signal the beginning of a renewable energy bubble, and one that may not be necessarily limited to the wind markets. When mid- or small-market players willingly take on debt to compete in new markets with big valuations based on large expected revenues, especially when that growth is based on acquisition and not development, its possible a bubble isn’t too far off.
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