Strategy to boost undervalued assets -- Babcock & Brown cash raising

To raise cash for future development -- and frustrated at the low market valuation of its shares -- global wind fund manager Babcock & Brown Wind Partners (BBW) has decided to capitalise on the "unrecognised value" in its portfolio by selling selected assets. BBW believes a "substantial valuation gap" has arisen between the underlying value of its assets and the implied value reflected in its share price.

Citing recent acquisition activity in the wind sector, such as Scottish and Southern Energy's purchase of Airtricity and Iberdrola's listing of its wind business, BBW notes the significant increase in valuations being attributed to other wind energy assets and businesses, particularly in Europe. "On a relative valuation basis, it is evident that BBW trades on a lower prospective EV to EBITDA multiple" than its listed European peer group, such as EDF Energies Nouvelles (EDF EN) and Iberdrola, says BBW's Kathryn Coffey, referring to the enterprise value (the company's market capitalisation plus debt, minority interest and preferred shares, minus cash and cash equivalents) and its earnings before interest, tax, depreciation and amortisation. "This is despite the fact that BBW is uniquely positioned as a pure wind energy generator and has a portfolio of significant scale as demonstrated by its position as a top five global wind farm owner and operator," Coffey adds.

She argues that BBW's portfolio is "second to none in the European market in terms of asset quality, capacity factor and exposure to favourable regulatory regimes." While BBW believes overall market conditions remain favourable for wind power players, with EDF EN, Iberdrola and others outperforming their respective indices, the general decline in the stock market has not helped, making it more difficult for BBW to buy new assets because of to its high cost of capital. For CEO Miles George, the assets sale will enable BBW to "manage the next phase" of its growth and "provide for improved value recognition for BBW and its security holders."

In selecting which bits to sell off, BBW is focusing on its European holdings, and in particular its Enersis portfolio of operating wind plant in Portugal, which it jointly owns with parent company Babcock and Brown (B&B), traded on the Australian stock exchange. B&B may also add further undisclosed European wind assets on the basis that a larger portfolio may attract a higher relative value. Under the agreement, the two companies will market the assets jointly, while also reserving the right to proceed independently if they so wish.

BBW says it will only sell those assets where the "realisable value is at an exceptional level compared to [BBW] criteria" and where it believes the true value can be captured. The company also hopes that, by making a significant sale, it will increase the value attributed to the rest of its portfolio. It expects to complete the sale of the Enersis portfolio within six months. Proceeds will be used for future acquisitions and to reduce associated debt.

Into the black

Announcing interim results, BBW says the company made a net profit of A$3.1 million in the half year to December 31, 2007, compared with a net loss of $0.9 million in the same period the previous year. Generation, though slightly below forecast, increased to 2078 GWh, up 51%, while revenues rose 107% to A$100.5 million, largely on the back of the Enersis portfolio, plus the Monte Seixo, Serra do Cando, Conjuro and Valdeconejos installations, all located in Spain. Over the six month period, BBW spent A$115 million on building new wind capacity, including Fruges in France and Kaarst in Germany and the Lake Bonney 2 development in Australia, and A$1,660 million buying new capacity. The company added 979.5 MW to bring its total operational and installed capacity to 2430.6 MW at the end of the year, of which 262.3 MW is under construction, spread over 76 plant, six countries, three continents and 13 wind regimes. As a result, generation is forecast to increase by 2790.5 GWh to reach 7123 GWh a year. Looking further ahead, BBW's development portfolio comprises at least 16,000 MW owned by B&B to be delivered over the next eight years, plus up to 350 MW under a framework agreement with Spanish wind project developer Gamesa Energia and up to 255 MW under an agreement with Plambeck in Germany.

Portfolio financing

Furthermore, BBW reports it has received commitments exceeding EUR 430 million in the latest syndication of its corporate financing facility. When it first refinanced its global wind farm portfolio in May 2007, the company raised EUR 1.03 billion (Windpower Monthly, June 2007). Since then that multi-currency financing facility has been increased to EUR 1.69 billion. The just completed syndication process saw KfW IPEX-Bank, The Royal Bank of Scotland, Rabobank and HVB/Unicredit join the group of four international banks -- Portugal's Banco Espirito Santo de Investimento, Banco Millennium BCP Investimento, the Bank of Scotland and France's Dexia Credit Local -- acting as lead arrangers for the facility.

In anticipation of the half year results, BBW's shares rose from a low of A$1.32 to finish at A$1.50 on the day the results were released, before falling back to A$1.31 on March 7. They then rallied following the announcement of the strong level of support for BBW's corporate syndication and continued rising above A$1.50 through mid-March.

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