For those of you who aren't familiar with Macquarie Infrastructure (NYSE:MIC), it is an externally managed collection of three businesses that have virtually zero synergies and no reason to be under the same roof. The businesses are IMTT, a port storage business, Atlantic Aviation, a FBO (fixed base operator) which provides services to private jets and Hawaii Gas, a Hawaiian Gas utility. These businesses are generally hard to replace and should generate relatively steady cash flows.
The stock worked for a number of years as people chased yield and the external manager, a unit of Macquarie Bank, talked up the stability and growth of their businesses. The Bank-owned external manager got paid very handsomely thanks to a management fee equal to a percentage of the market cap and an incentive fee calculated on outperformance versus the US utility index.
It was (and still is) a structure that assumes management will ultimately do right by shareholders even if it might impact their compensation. I won't rehash here how many hundreds of millions of dollars of gains the Bank was paid under this arrangement or what blew it up. There are a number of articles out there about how badly the external manager has acted and how poorly they have run this corporation. One only has to look at the stock price over the past two years to see that the external management and their compensation deal has been terrible for shareholders and has been great for the external manager.
Given the dramatic underperformance of the stock versus its benchmark, there is virtually zero chance Macquarie Bank, the external manager will ever again be paid an incentive fee for managing these disparate businesses. MIC has generated a terrible -22.72% return from Q2 2015, the last time it beat the Utility Index, until October 31, 2019 . The Index meanwhile has generated a 76.53% total return over that time. That is an impossibly high water mark.
So what does a scruples-challenged external manager do when they have an embarassment on their hands and won't be paid high fees in the originally agreed upon way? Sell the company and demand a HUGE fee in exchange for giving up a $32 million management fee of course.
The company set up a sliding scale that adjusts their compensation depending on the cumulative gross proceeds they get for selling parts or all of the business. You can see the deal in this filing. If shareholders get $50 for their stock, the manager gets between $281million and $309million. PLUS, they get another $25million if they close deals before Jan 2022.
Let's take a step back for a second. This external manager was paid hundreds of millions of dollars driving the stock to a high of $87.24 through a mixture of unrealized promises (being generous and politically correct) and overleveraging the business.
The most egregious example of management being less than forthright occurred on the Q3 2017 conference call when the old CEO, James Hooke, suggested that Q3 underperformance at IMTT was due to two storage tanks being out of service, but that they had been placed back in service at the start of Q4. Hooke also addressed leverage when questioned about it on the call saying:
"when we look at the state of the balance sheet, we're much more focused at this point in time I think in adding extra tenor to that in terms of like you always want to have the refinancings as far as you can. I don't think we're too worried about the shape of the balance sheet in terms of where we're at from a debt to EBITDA because we understand fully where it is from a debt-to-EBITDA."
Keep in mind that management was already over 1 month into Q4 during this call. Yet just 3 months later, new CEO Chris Frost slashed the dividend blaming a collapse in IMTT utilization during Q4 2017 (that persisted thru the first half of 2019 and is only just recovering) and that leverage was too high as a result of declining results at IMTT. Frost said:
"Our leverage is nearly 5 times net debt to EBITDA, so we intend to lower it. For that reason, we intend to apply a portion of our available resources to debt repayment. Our objective is simple, we would like to reduce our leverage from where it is today to between 4 and 4.5 times given our current business mix."
I have more to say on that but I'm looking more at the future in this piece. Clearly, the market does not trust management at all. The stock is less than half of its peak, shareholders have a 23.5% negative total return since that Q3 2017 conference call where management was uninformed at best, the dividend was cut by almost 1/3 and these guys will still get paid around $300 million just getting the stock back to $50. That is not alignment of shareholder interest in my mind.
The good news is that despite past terrible mismanagement of the overall enterprise, gross misalignment of management incentives and just general greed of the external manager, the assets are still pretty good.
IMTT is recovering utilization and should do around $290million of EBITDA this year. Atlantic Aviation should do about $280million and Hawaii Gas should do around $60-65million. These 2019 EBITDA estimates are based on the midpoints of guidance from the company's Q3 2019 earnings release. I realize that management does not have great credibility with guidance, but these numbers are not crazy in my opinion.
The company bought 50% of IMTT in 2014 for $1.025billion. At the time, it was considered that MIC got a great deal on that half of IMTT as their partner was managing it terribly, MIC had rights of first refusal etc etc etc. EBITDA at the time was $280million. So there has only been 4% EBITDA growth at IMTT. But low utilization (a major cause of the stock blow up) is improving. If the value was $2.050billion five years ago, I think it's reasonable to say 4% higher as a floor valuation is fair bet, which implies at least $2.15billion for IMTT. That would be just over 7x EBITDA, which is a huge discount to public oil and refined product storage companies like Nustar (NS) which trade at over 10x EBITDA. I think a 10% discount to NS is probably a more reasonable guess, putting IMTT at $2.61billion. There is upside to that and I'm sure MIC management would say that's a crazy low number, but they have no credibility so I'll stick with a reasonably conservative number.
Atlantic is the crown jewel of MIC. Private aviation is a steady grower and FBO's have nice moats around them. In 2015, BBA Aviation bought Landmark a FBO from Carlyle for $2billion, 12.4x EBITDA. Atlantic is bigger and better than Landmark, but let's use that multiple and assume no growth. You get $3.5billion. Again, the company might argue with me. Whatever. I'm trying to be conservatively realistic here.
This one is pretty straight forward. Gas utilities typically trade at 12-15x EBITDA and higher in a takeout. I'll take the midpoint multiple, 13.5x and the midpoint of EBITDA $62.5million. That's gets you $850million.
One last time, I think these are conservative but reasonable numbers.
|Atlantic Aviation||$3.5 billion|
|Hawaii Gas||$850 million|
|less net debt||-$2.175 billion|
|Gross Equity Value||$4.775 billion|
|Implied Net Value/Share||~$47.50|
In the scenario above, management would be paid, $230-260million. Again, I think that is outrageous as this company is perhaps one of the worst examples of governance failure and misalignment of management and shareholders I have ever seen. Situations like this are infuriating for any investor that values really honest and forthright management. That said, at today's closing price of $43.14, the stock yields 9.27% and you will get a dividend on November 7th so your risk goes down naturally that way. I think the dividend is reasonably well covered and the CEO who took over after things blew up has derisked the business by paying down debt. The stock briefly hit a low of $34.93 in December, so perhaps that is your downside. That was a somewhat unique situation though as you had some tax loss selling and that was before the company was in play. The August lows of $36.88 are probably more realistic but again, that was before the company was in play.
Of course, the economy could slow down and hurt EBITDA. Again, IMTT is already still recovering utilization through repositioning storage tanks. 85% utilization is already close to recessionary levels. Atlantic Aviation is more economically cyclical, but private jet travel has not been on fire this year. Atlantic Aviation 2019 numbers are not based on a big spike.
Lastly, Macquarie Bank is the largest shareholder and they also get paid more if shareholders get a higher price so I do not think they will just fire sale this company or its parts. I also do not think they will decide against strategic alternatives. I think a full sale or at least some meaningful monetization is likely. MIC is a black eye for them and they have also set themselves up to be paid a healthy multiple of their management fee even though they have spectacularly failed shareholders for the past 5 years. I think this is a good risk/reward here despite management and you get paid reasonably well to wait.
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Disclosure: I am/we are long MIC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.