Investors lose faith in Macquarie Satellites

Macquarie Group controls the management of eight ASX listed entities that have performed abysmally in recent times as the following table shows:

Name	2007 Price High	2008 Price Low*	Percentage Decline
Macquarie DDR	$1.395	$0.053	-96.2
Macquarie Countrywide	$2.300	$0.200	-91.3
Macquarie Communications Group	$6.910	$0.740	-89.3
Macquarie Office	$1.750	$0.225	-87.1
Macquarie Media	$5.200	$0.675	-87.0
Macquarie Leisure	$3.890	$0.875	-77.5
Macquarie Infrastructure Group	$3.990	$1.310	-67.2
Macquarie Airports	$4.390	$1.785	-59.3
Average decline (high to low)			-81.9
Decline in S&P 200 (high to low)*			-53.0

* Low to 28 November 2008.

Macquarie Group itself may have been run prudently (it’s what they keep telling us), but even in the current environment, no prudently managed company or trust has experienced losses of the magnitude shown in the above table. As can be seen, average declines were well in excess of the S&P 200 index.

Then of course there was also BrisConnections. This toll road is being constructed between the Brisbane CBD and the airport and was floated by Deutsche Bank and Macquarie Group during 2008 at $1 (with two more installments of $1 to be paid during 2009 and 2010). It’s currently trading at one tenth of a cent. It would be trading at zero if the ASX did not have a rule prohibiting listed securities from trading at less than one tenth of a cent. It’s a disaster of monumental proportions.

What’s worse is that Macquarie strongly encouraged broking clients to buy units in BrisConnections. Disgruntled investors are now contemplating legal action. Stay tuned.

Macquarie Group reportedly received a fee of $100m for the float of BrisConnections and I predict that it will eventually cost Macquarie in excess of $100m – i.e. they will have done the work for free. (Macquarie and Deutsche Bank will have to provide the unpaid installments for every unit holder who cannot pay – and that’s a good percentage of them).

Macquarie Countrywide and Macquarie Office are typical of the manner in which many of these Macquarie entities were run. Both started out as 100 percent Australian based REITs with good assets and low debt. However, over the years, they were taken on a wild international expansion phase using ever increasing levels of debt. That debt is now being partially paid down by selling US properties (purchased in boom times) into one of the worst real estate markets in memory. The end result of all of this for investors is evident in the above table.

Total remuneration of executive key management personnel at Macquarie Group during the 2008 year was $124.8m – shared between 13 people. That’s an average of $9.6m per person or the equivalent of $184,600 per week. Think about that for a minute. That amount of money would have paid the annual salaries of approximately 2,200 Australians earning an average wage.

When a company decides to remunerate its executives at those sorts of levels they must perform all the time – there is absolutely no excuse for the non-performance we have seen from the entities that I’ve listed above and from Macquarie Group itself.

Macquarie’s logo is often described as the “silver doughnut” but it seems that their executives have consumed the doughnut and left their investors with the hole.

The above facts raise some very serious questions:

1. How on earth does an executive team that has presided over the annihilation of value in these satellite entities justify such wantonly excessive remuneration?

2. Will any of the investors who experienced severe losses in the above entities ever trust Macquarie with their money again?

3. How does a provider of funds management services who has lost the confidence of retail investors (and some institutional ones as well) not avoid a material shrinkage in the size of its business? Is it true that 3000-4000 staff will be retrenched during 2009?

4. When does Macquarie intend writing down the asset valuations in the above entities to realistic levels? The market is much more accurately reflecting what these entities are really worth than the book values reported by Macquarie. In particular, the capitalization rates used to value US properties in the REITs appear to be pure fantasy in the current environment.

An added question for the Macquarie Capital division of Macquarie Group: How many more deals can you continue to do between yourself and other Macquarie controlled entities?

I’ve always thought that buying something and then selling it to another entity controlled by that same buyer and booking a profit on the sale (as well as taking a fee) was pure chicanery. Surely this level of wheeling and dealing within the Group is not sustainable and is a key vulnerability for Macquarie Group because Macquarie Capital generates most of its (so called) profit.

Macquarie has now switched its focus to unlisted investment vehicles, but the problem remains – there has been a loss of confidence and significant damage to reputation from the terrible results experienced by investors in Macquarie branded entities. That loss of reputation is not immediately quantifiable but it is nevertheless very real.