Macquarie International Infrastructure Fund

[Drizzt]

somehow share buy backs are likely to support demand for the stock, raise market capitalization, which would bode well with what the management are trying to do.

[freedom]

if the management really cares about shareholder value, it always can return all the cash used for share buyback through special distribution. of course it will permanently damage the market capitalization.

from September 09 til 28, the company did no share buyback. the share price of MIIF went down in a straight line. if I am not wrong, there were not one day the share price rose. of course, we can argue that the market were bad.

from October 3 til 14, for every single day, I roughly calculate 1/3 of the transaction are done by the company share buyback, that's 1/3 of transaction for 10 consecutive days. if it is not share buyback, it will be an outright market manipulation.

[Drizzt]

but we cannot dispute the benefits of share buy back but you could always reason they wanted to buy something. just couldn't find the right purchase. pretty amazing.

[Nick]

I disagree. You are arguing that share buy back are meant to support share prices which is entirely debatable since it rest upon two major assumptions - 1) The trading of shares is highly illiquid and 2) The Company dominates the buy queue which implies no competition.

In MIIF case, the turnover of the stock is pretty liquid. Since the share buy back had been conducted, the average daily trading volume is 2.65 million shares. Similarly, close to 385 million shares were traded over the period of which 63 million shares were purchased from MIIF which meant that only 17% of the transaction resulted from MIIF actions. I don't think this is sufficient in supporting the share price as we did see a collapse of share price from its peak of 61.5 cents to 49 cents over the past few months.

Instead, I would argue that the decline in the market valuation can be partly attributed to the share buy back as it had reduced the Fund cash position by around $30 million PERMANENTLY. This is $30 million which unit-holders will never see again or cash which MIMAL cannot use to invest in income producing assets. It is no wonder that the market valuation fell far more than it was expected since the profit generating capabilities of MIIF remained unchanged but its equity (and cash) has declined and looks set to keep declining.

As I said earlier, the only way for MIIF to increase its market valuation is to make an acquisition to further diversify its income and increase the absolute value of its distribution. There is nothing wrong with share buy backs since the implied dividend yield is in the double digit figures and do benefit yield investors (who are interested in dividend per share and price per share as opposed to overall distributable income and market capitalization).

Essentially, share buy back = return of capital in the form of special dividend. The only difference is that the former increases the share price (and buys time for MIMAL to scout for investments) while the latter causes a decline. But in terms of market capitalization, both will be destructive since the overall cash position had declined.

Ultimately, if MIMAL was really interested in fees, they could easily just make an acquisition. Is it really hard to find something to buy ? I don't know. They did say they looked at > 60 opportunities but turned all but 2 down. Why go on all this trouble to do something which rationally destroy both the cash component of the Fund and its market capitalization in the process !

[Drizzt]

probably right. they could just make a shitty acquisition.

[freedom]

probably right. they could just make a shitty acquisition.

a shitty acquisition could improve market capitalization? unless the managements are moron, they would not do that to destroy themselves.

share buyback is their best shot to improve fees in the near term.

[Nick]

probably right. they could just make a shitty acquisition.

a shitty acquisition could improve market capitalization? unless the managements are moron, they would not do that to destroy themselves.

share buyback is their best shot to improve fees in the near term.

Shitty acquisition will most likely boost fees for 3 reasons -

1) Acquisition fees
2) Higher fees since there isn't any more cash and possibly MIIF could tap on its $140 million debt facility further raising investment value.
3) Potentially higher market capitalization since it will definitely be DPU accretive (as no new equity was raised).

Why go to all the trouble to deplete its market capitalization by throwing away cash to unit-holders via share buy backs and HOPE that the market will be irrational enough to increase its market capitalization in the process when it would be far easier to just buy something !

As I said earlier, there might be motiavations behind the share buy back but it is definitely not related to fees. Could be for some other factor. Initially, I suspected that they might be hoping to support the price for placements but after 6 months, it looks unlikely.

(Not Vested)

[freedom]

i believe if the management of MIIF learned anything in the crisis, it would be "don't do shitty acquisition". its long time damage is un-repairable.

yes, there would be acquisition fee, but at what price? damaged management reputation, damaged future prospects.

[Nick]

i believe if the management of MIIF learned anything in the crisis, it would be "don't do shitty acquisition". its long time damage is un-repairable.

yes, there would be acquisition fee, but at what price? damaged management reputation, damaged future prospects.

I thought the boost in management fees would be sufficient compensation ! FSLT and Cityspring never had qualms about all the M&A stuff haha ! A shitty acquisition wouldn't be a bad deal exactly since it would be DPU accretive in the short run. They could easily buy something at 5% ROA and still make it DPU accretive since no new cash was raised. Think about it - is it difficult to use $130 million cash to buy something which is already 50% geared ie asset worth $260 million and can generate $6 mil distribution a year ? Cash would be gone so the drag on fees will disappear. DPU will increase thereby possibly raising the share price. Acquisition fees comes in. Definitely good deal for them. But they ain't doing it...why ? Perhaps, MIMAL has changed after the 2008 saga ? They have definitely changed but to such an extent, I won't comment.

After all, we always complain that business trust might be better off buying their own under-valued shares as opposed to making new acquisitions. And here we have a rare biz trust actually doing that and we say they are interested in fees only even though I don't see how is that possible ?

Personally, MIIF in 2011 is radically different from MIIF in 2008. The power doesn't lie in MIIF Boardroom any more after the change in strategy. MIIF can't influence the Fund as it did before. The days of asset trading is over. Power now lies in the Boardroom of TBC, CXP and HNE. How these three assets perform will determine the Fund's fate.

[d.o.g.]

Management fees are based on market capitalization. Share buy backs will raise the share price but does it mean it will raise the market capitalization ?

Basic rules of supply and demand mean that when demand is stable, as supply goes to zero, prices go to infinity. But demand is NOT stable, in fact buy-backs temporarily INCREASE demand. So more demand, less supply, prices go up. If trading liquidity is limited the effect is even more pronounced.

In an efficient market, buy-backs would have no effect whatsoever. But since the stock market is NOT efficient, buy-backs do have an effect. If a company with $500m market cap and $500m of equity only trades $1m of stock a day, the company can easily boost its share price by buying an extra $500k of stock a day. This consumes resources at 0.1% a day, but can easily raise the share price 1-2% a day (since demand is now 50% more than normal).

After 10 days the company has used up $5m and bought back 1% of stock, but if it has raised the share price 5%, the market cap is now 0.99 * 1.05 * 500 = ~$520m. On paper it has "created shareholder value" of $20m. This can't work indefinitely since resources are not infinite. But it can help boost the share price temporarily, especially when the general market is dropping.

In the case of MIIF, the management gets paid more for a higher market capitalization and they are penalized for holding cash. Therefore the logical thing to do is to execute buy-backs which can potentially improve market capitalization and definitely reduce cash. Two birds with one stone. Even if the market is not rational, the MIIF management apparently is.