For whom the MacBank Tolls

The hostile takeover bid by Toll for Patrick served as the backdrop to the Citigroup/ASIC controversy. Now, from the same rumble, the incorrigible Corrigan has found Macquarie Bank coming to his cause with a bit of financial derring-do, or greenmail, depending on how you might like to look at it.

From one report in the SMH, it appears MacBank is making a bid for Patrick to try to trump Toll's bid. But MacBank really doesn't want to own it; it only wants to form a group to buy it, financially re-engineer it, then flog it off again, and generate a few hundred million dollars in fees along the way. And the way they're going about it, they don't appear to have any of their own money in it (one report says they're putting in $165 million but also notes that exact same amount is being fronted by Corrigan and Scanlon, so I wonder if that isn't the same money). And, by insisting on a "break fee", will manage to walk away with perhaps $70 million even if the deal fails to get up.

The Australian Financial Review is also covering the stoush. In it's frontpage story (need a ticket to read), it said, "Toll Holdings managing director Paul Little has launched a blistering attack on Macquarie Bank, accusing it of a $7.2billion "con job" aimed at generating $400 million in fees and destroying his dream of buying Patrick Corp."

Anthony Hughes' commentary in the AFR (ticket, ticket) added:

Macquarie Bank's control of some of the nation's key infrastructure and its sometimes breathtaking fee-take has annoyed plenty before, but Toll Holdings' extraordinary attack marks one of the few times the investment bank has been assailed by another major Australian corporation.

However, Macquarie has been in plenty of contested asset sales before. This one is very similar to its purchase of Dyno Nobel last year, when it put $US75 million ($97.12 million) of its own equity into a $US1.7 billion deal, bringing clients in as well. The float eight months later delivered a $500 million-plus profit to a handful of institutional investors who joined Macquarie on the ground floor. Like Dyno, the Patrick offer is more of a private equity style deal, as opposed to the establishment of an externally managed infrastructure fund.

But the concept is broadly similar in that Macquarie also gets the equivalent of a performance fee and a share of the increase in value created by buying Patrick and re-listing it down the track.

Toll says the profit generated (about a 23 per cent return for the institutional investors) is part of a "smoke, mirrors and pass the parcel game", based on buying assets at 8.5 times EBITDA and selling them back to the market six months later at 10 or 11 times.

Probably the most sensitive number produced by Toll was Macquarie's fee, which Toll put at $300 million after assuming that $100 million in fees are paid away to other banks. The amount paid to others is likely to be higher. A lot of the costs for Patrick relate to about $4.2 billion in debt being provided by banks and Macquarie is pulling together bridging finance. It will refinance if the deal is done.

Corrigan and Scanlon are "incentivised" to play along. The Herald report said, "In the Macquarie deal, Mr Corrigan and Mr Scanlon would invest $165 million of their own money and earn a $40 million to $70 million profit on that investment when the company was relisted in six months. They would also receive executive options."

Que Dinah Shore singing, "nice work if you can get, and if you get it, tell me how."

Typically, Warren Buffett had something to say about this type of opportunistic deal making, as well as the things he was saying about derivatives in a prior post today.

Buffett: 'I don't buy from deal flippers'
Warren Buffett has hit out at private equity firms, saying that whenever he gets a call from one he puts the phone down.

Characterising them as "deal flippers" that do nothing to create value, Mr Buffett told the annual meeting of his investment company, Berkshire Hathaway, that he would never buy a company from private equity investors.

"They invariably auction the business and are looking for strategic buyers," he said. "A strategic buyer is just someone who pays too much."

"We have so many deal flippers in the game they're going to get in each other's way," Mr Buffett's chief lieutenant Charlie Munger added.

"How will private equity firms continue to make money by just flipping and flipping and flipping and flipping?"

"They'll make it on fees, fees, fees," quipped Mr Buffett....

See: Fee Pie Fo Some

Post note: Toll sued the Patrick side and the MacBank side crumbled. Game to Toll.