When a company plans to quit an investment at a loss when building cash, and then telling the world it has no more debt strains, you have to take a second glance.
And that’s the situation at Macquarie Airports where it is proposing to try and sell all its stake in Japan Airport Terminal (JAT) back to JAT for a loss of around $20 million, and a 22% cut in its guidance for the distribution for 2009, a substantial price to pay for the extra cash involved in the transaction.
The plan to try and quit the 15% stake in JAT in a buyback was revealed in a statement to the ASX yesterday Macquarie Airports (MAp)
MAP said on yesterday it was offering to sell the stake back to JAT, as part of JAT’s tender offer to buy back a total 22% of its own shares at 1000 yen each.
The buyback would go to a JAT shareholder vote on June 26, MAP said in the statement to the ASX.
"While we still expect JAT’s strategy to bear fruit, the external environment has changed significantly since we made the investment and, given the size of our interest, we will not have the opportunity to apply our active management,” Kerrie Mather, MAP’s chief executive said in the statement.
If MAP’s entire 15% per cent interest should be acquired at the tender offer price, MAP would expect to realise a maximum of about $260 million, a loss on book of around $20 million, as MAp explained in the statement.
"Should MAp’s entire interest be acquired at the tender offer price, MAp would expect to realise a maximum amount of approximately A$260m including the benefit of hedging arrangements that were previously entered into, versus the A$280m at which the interest in JAT was recorded at 31 December 2008.
"Whilst the sale of part or all of its interest in JAT will add to MAp’s considerable cash reserves, the earnings contribution from JAT will no longer qualify for inclusion in future proportionate earnings.
"To reflect both the removal of JAT from proportionate earnings and the expected sustainable earnings of MAp’s businesses this year, MAp believes that it is appropriate to amend the guidance previously provided for 2009 from 27.00 cents per stapled security to 21.00 cents per stapled security." (That’s for the company’s financial year which ends at December 31).
"MAp reiterates that, following the defeasance of TICkETS in November 2008 and the deleveraging of Sydney Airport announced in February 2009, MAp has no corporate level debt and no material debt maturities at its airports until September 2011.
"Taking into account the deleveraging of Sydney Airport, MAp has over $A500m in cash on hand, excluding the expected proceeds from the tender of its JAT shares," MAp told the ASX.
If that buyback tactic works, Macquarie Airports will have well over $A750 million in cash in hand, but at a cost of the sharp fall in distribution.
The question is why, if the company had "over $A500 million in cash and no debt problems for over two years, why sell the JAT stake and cop a cut in distribution that will hurt investors.
The answer is that by raising the cash and cutting distribution, MAp kills a very important issue dead: the fact that distributions run ahead of actual proportionate earnings.
The company has had a policy of trying to bring distributions (which were boosted by borrowings, like so many other infrastructure and property trust groups did) into like with actual earnings from the businesses being managed or invested in.
MAP said yesterday:
"Since 2006, MAp has had a stated objective of converging the regular distribution and proportionate earnings. By 2008, proportionate earnings had grown to 21.00c per stapled security, providing almost 80% coverage of the distribution.
"By 2008, proportionate earnings had grown to 21.00c per stapled security, providing almost 80% coverage of the distribution.
“MAp remains confident that its airports will deliver strong long term growth and is committed to the policy of distributing 100% of sustainable earnings to security holders over time."
By removing the JAT stake by selling into the buyback and by then cutting distribution, the company has all but met that objective to converge the distribution and proportionate earnings and will be in a position to distribute 100% of sustainable earnings for this year, subject to no more financial shocks and problems in the airline business.
MAp securities rose 9 cents to $1.97.
