BABCOCK & BROWN CAPITAL 2006 ANNUAL GENERAL MEETING PRESENTATION

Transcription

1 ASX Release 8 November 2006 BABCOCK & BROWN CAPITAL 2006 ANNUAL GENERAL MEETING PRESENTATION Please find attached the presentations being made today to Shareholders at the Annual General Meeting of Babcock & Brown Capital Limited. ENDS Further Information: Kelly Hibbins Investor Relations Babcock & Brown About Babcock & Brown Capital Limited Babcock & Brown Capital is an Australian-based investment company that focuses on a concentrated portfolio with a flexible investment horizon. The Company s mandate allows it to build positions in domestic and overseas companies and both listed and private entities. Babcock & Brown Capital concentrates on growing the value of its investments over time. Investments are held while they continue to meet the Company s investment objectives. Babcock & Brown Capital listed on the Australian Stock Exchange in February For further information please see our website:

2 Chairman s Address Annual General Meeting 2006 The 2006 year has laid the foundation for BCM s future strategic direction and value creation. This has been a very successful year. One in which BCM achieved its primary investment objective by acquiring control of a substantial business that it had identified for investment. At the time of the last AGM, BCM had acquired an initial 10.8% stake in eircom and eircom had announced that it had received a preliminary offer from Swisscom. Its share price was 2.33 at the time. Since then: As a result of government intervention, Swisscom withdrew its rumoured 2.45 offer BCM was able to acquire a further 17% of eircom in the falling market BCM s 27.1% strategic stake ensured that eircom did not go to a private equity auction and BCM was able to negotiate a joint offer with eircom s employee share ownership trust (the ESOT) at a 2.20 bid price On 18 August 2006 our syndicate completed the A$8 billion purchase of eircom. The syndicate now owns 100% of eircom with BCM holding 57.1% at an average entry price of 2.07 While the market pressure to get invested has dissipated, with A$200m BCM retains enough investable capital to look at follow-on opportunities around eircom or other significant investments which leverage BCM s telco expertise. As the capital structure of our eircom investment is optimised over time, the return of funds will put BCM in a position to look at a wider range of investments. We will remain patient and disciplined That the BCM team was able to execute one of Europe s larger private equity transactions in less than 12 months and without a protracted bid process is a testament to all concerned and in particular the competitive advantages offered by BCM, within the context of the wider Babcock & Brown platform. Notwithstanding the eircom successes, the board and management of BCM remain focused on translating that success into an increased share price. While the market has reacted favourably from the depths of an A$3.70 share price to the current range of A$4.20 A$4.30, neither the board nor management will be satisfied until the BCM share price reflects the true value of its eircom investment, certainly in excess of the A$5.00 issue price. In part an increase in the share price will reflect the market s understanding of the private equity model in so far as it applies to BCM. Private Equity relies on the acquisition of highly cash generative businesses with free cash flow growth rates in excess of the cost of finance. High leverage (in the eircom case 80%) results in a disproportionate amount of the growth flowing to the benefit of equity. This increased equity value is realised on eventual sale of the investment, or in the

3 case of a particularly sound investment, on an early re-financing, and should reflect in an increased share price. eircom has a highly cash generative fixed line business with a stable EBITDA of approximately 600m. As a recent re-entrant to the mobile market it has a fast growing mobile business that could achieve 20% market share as the 3 rd operator in Ireland. An incumbent telco with substantial growth is very unusual in western Europe and is stark contract to Telstra and Telecom New Zealand. The stability of eircom s cash flows and the opportunity for growth in its mobile business, is reflected in the strong market support for its recent 3.85 billion debt offering and its BB- S&P credit rating. The strength of the market position of eircom s debt augurs well for an early re-financing and I would like to think that I was in a position to talk through such an event at next year s AGM. BCM is very happy with its partnership with the ESOT and the management team that we have together assembled at eircom. BCM is also happy with the eircom s first-half results and I look forward to Pierre and Rex taking you through them in detail. I express the boards thanks and appreciation to those involved in the successful delivery of the eircom investment which was achieved through a considerable team effort using the resources of Babcock & Brown s global network. I d like to thank you for your attendance here today and now hand over to Rob Topfer, executive director of BCM, to take you through BCM s results. Executive Director s Presentation For the year ended 30 June 2006 BCM reported a profit before tax and nonrecurring eircom restructuring costs of $39.4 million. This amount excluded BCM s share, of a one-off eircom expense, of $71.1 million. Including this one-off restructuring charge, BCM reported a loss after tax of $30.5 million. The non-recurring eircom expense arose at 30 June 2006 when the board of eircom determined that in light of the BCM offer for the company a material restructuring of eircom s debt portfolio was imminent. It decided to expense 156 million relating to the costs of restructuring and early redemption of its debt. It is BCM s share of these costs that equates to $71.1 million. No dividends were paid or recommended during the year ended 30 June I wish to bring to your attention 3 circumstances that are likely to obscure BCM s reported results going forward. Firstly, BCM equity accounted its investment in eircom up to 18 August 2006 when we settled the acquisition. From this date forward BCM will consolidate eircom s results. This means that for the 2007 year BCM s stake in eircom will be part equity-accounted and part consolidated.

4 Secondly, we are in the process of assessing the fair values of the eircom assets and liabilities acquired and allocating the purchase price against these. This process is not yet complete, but may result in materially higher levels of depreciation and amortisation in the eircom business. This may have the effect of substantially reducing BCM s consolidated reported accounting profits. And thirdly, as Kerry mentioned earlier, if BCM proceeded with a refinancing of its eircom investment, depending on the terms of this refinancing, it may result in higher interest which may also have the effect of reducing BCM s consolidated reported accounting profits but would increase shareholder returns. In all of the above circumstances we will endeavor to provide shareholders and the market with appropriate information for them to assess the true underlying performance of our eircom investment. Looking forward, there are potential follow on investments around eircom that BCM would make. They range from smaller standalone businesses, to property and data centre development to 3G and NGN. While BCM has A$200m or less of investable capital these follow on investments will remain a priority.

5 Babcock & Brown Capital Annual General Meeting 8 November 2006

6 BCM Directors Kerry Roxburgh Bill Wavish Gregory Clark Phil Green Rob Topfer Chairman, Non-executive Director Non-executive Director Non-executive Director Executive Director Executive Director 1

7 eircom Management Team Pierre Danon Rex Comb Robert Haulbrook Executive Chairman CEO Head of Meteor Mobile Con Scanlon Deputy Chairman and General Manager ESOT 2

8 Chairman s Address Kerry Roxburgh

9 Executive Director s Address Rob Topfer

10 BCM Review of 2006 Operating Results Year ended 30 June 2006 A$ 000 Period ended 30 June 2005 A$ 000 Revenue 44,336 11,480 Operating profit before tax and non-recurring associate restructuring costs 39,391 9,398 Non-recurring associate restructuring costs (71,073) - Operating profit/(loss) before tax (31,682) 9,398 Tax benefit/(expense) 1,166 (2,510) Net profit/(loss) after tax (30,516) 6,888 Earnings per share Basic and diluted earnings per share before non-recurring associate restructuring costs 20.3 cents 3.4 cents Basic and diluted earnings/(losses) per share (15.3) cents 3.4 cents Net tangible asset (NTA) backing NTA before non-recurring associate restructuring costs $5.39 $ NTA $5.04 $2.45

11 eircom Strategy Executive Chairman Pierre Danon

12 eircom Investment Rationale The macro-economic picture in Ireland is attractive Highest real GDP growth in Europe Highest GDP per capita Highest population growth in Europe Attractive tax regime (12.5% tax rate) The underlying business economics are strong Resilient Fixed Line business model with strong and stable cash flow Growth from - Re-entry to mobile - Correction of below average broadband penetration - Potential for incremental top line growth from new services; entertainment based The downside risk is low as the industry in Ireland has structural benefits Significant barriers to entry in the Irish market Limited Fixed Line competition Settled regulatory environment Low population concentration makes network competition difficult 7

13 eircom - Strategy to Drive Value eircom is a well managed telecoms company in a position to launch a new growth phase From eircom today Successful cost reduction plans implemented Highly successful winback campaign Attractive outcomes from sound working relationship with the regulator Continued broadband rollout to building on existing strong platform eircom is a good platform from which we can focus on and accelerate growth pursue growth in key areas further optimise the business eircom focus Stability of the fixed line business Continuing focus on growth trajectory in Meteor 8 Strategic re-entry to mobile market through acquisition of Meteor

14 eircom - Strategy to Drive Value cont Management s strategy centres on increasing EBITDA by focusing on revenue growth areas and cost containment Grow Revenue Stability of fixed line revenues Broadband Value Added Services Mobile Cost Containment and Optimising Existing Business Continued focus on cost cutting and cash management Step-up initiatives to reduce cost of non-quality and leverage IT/Network optimisation Efficiently managing HR requirements Targeted Capex Focus on network renewal, maintenance and improvement, to increase network quality and support DSL Optimise corporate finance Property real estate and masts Pensions Substitutes for traditional voice decline Capture new revenues 9

15 eircom 1st Half Report Card and Business CEO Rex Comb

16 Financial Highlights for 6 months to Sept 06¹ Group Adjusted EBITDA of 330m 660m annualised (not including further Meteor growth) 306m from fixed line 24m from Meteor Fixed line Revenue is up, but mostly low margin interconnect substituting for high margin voice traffic DSL customer base increased by 100%, with 325k customers with eircom at 27 Oct 06 Q2 EBITDA, a look through number, demonstrates the resilience of the fixed line business, Cost reduction continues to be a significant agenda item in the future Meteor Building at high speed to a profitable business Customer base increased to 734,000 as at 30 Sept 06 of which c.70k customers are post paid Revenue of 167m, the company is making substantial strides to its goals. Commenced an accelerated build out to parity with the other operators ¹ Based on unaudited eircom management accounts 11

17 Income statement for eircom and Meteor 6 mths to Sept 2006 ¹ Pro-forma September 2006 Fixed Line Meteor Consol Adj. eircom Group M M M M Revenue (23) 977 Operating costs (527) (143) 23 (647) Adjusted EBITDA * Non-cash Pension (credit) 4 Depreciation & amortisation (163) Transaction costs (24) Restructuring costs (8) EBIT 139 Finance costs (204) Share of associates profit Profit before tax (65) Tax (16) Profit for the year (81) *Adjusted EBITDA before restructuring programme costs, transaction costs, non cash pension charge/credit and profit on disposal of property and investments ¹ Based on unaudited eircom management accounts 12

18 Fixed Line EBITDA Resilience Fixed line EBITDA continues to be stable at c. 600m pa ¹ Voice decline offset by rebalancing to access and CPI increases Broadband growth and resulting gross margin improvement Pay cost increases offset by natural attrition 200 Adjusted EBITDA ¹ Fixed line has been stable at around 151 million for last 6 quarters except for the December 05 quarter 0 Q1 Jun 05 Q2 Sep 05 Q3 Dec 05 Q4 Mar 06 Q1 Jun 06 Q2 Sep FY 2006 FY 2007 Source: unaudited eircom management accounts ¹ Adjusted EBITDA before restructuring programme costs, transaction costs, non cash pension charge and profit on disposal of property and investments

19 Fixed Line - Quarterly Breakdown YTD Q1 Q2 YTD Sept. June Sept. Sept. M 05/06 06/07 06/07 06/07 Revenue Cost of sales (202) (105) (108) (213) Gross margin Pay** (172) (90) (86) (176) - Non pay (130) (71) (67) (138) Operating costs (302) (161) (153) (314) Total operating costs (504) (266) (261) (527) Revenue improvement due to higher sales of DSL, low margin interconnect traffic and lower discounts, offset by reduction in Retail traffic. Cost of sales increases are due to higher foreign outpayments volumes and also equipment costs associated with DSL and CPE. Non pay cost increases due to sales & marketing costs associated with defence of core revenue streams, and higher miscellaneous costs due to outsourcing of staff and increased provisions for compensation claims. Adjusted EBITDA* Source: eircom management results for June 2006 and eircom management accounts for the six months results to September 2006 * Adjusted EBITDA before restructuring programme costs, transaction costs, non cash pension charge/credit and profit on disposal of property and investments. ** Before non cash pension charge/credit. Non cash pension credit for YTD Sept 06/07 is 4m (YTD Sept 05/06, 28m charge), making Pay costs including non cash pension credit/charge for this period 172m (YTD Sept 05/06, 200m). 14

20 Mobile Overview : Market Irish mobile market currently growing at 11.5% pa with Meteor taking 61% of that growth ¹ Mobile ARPUs ² among highest in Europe¹ 3rd operators in Europe have achieved ~20% market share and 30% EBITDA margins ³ Meteor Growth Engine of the Business Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q Post-paid subscribers ('000) Pre-paid subscribers ('000) ¹ ComReg Key Data Report - Sept 06 ² Average Revenue per User ³ JPMorgan for average 3rd operator market share 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 Service revenues ( m) Acquisition of Meteor by eircom Nov 05 Source: eircom Preliminary Results Presentation, May 2006 and eircom management information to 30 Sept 06 15

21 Mobile : Strategy Build solid foundation for long term growth Attain parity with key competitors - Network coverage & quality - Systems development - Distribution (460 Retail Sales points of Distribution and growing) - Products & services Organisational development Network parity being implemented Aggressively rolling out additional sites and upgrading core systems. Expanded coverage through national roaming agreement Move up the Value Chain Maintain strong momentum in Bill Pay - Corporate - Government Broaden product portfolio 16