Babcock Takes Steps To Give Up Funds

SYDNEY (Reuters) – Troubled Australian investment management firm Babcock & Brown Ltd (BNB.AX: Quote, Profile, Research, Stock Buzz) (B&B) took the first steps on Thursday to give up the rights to manage two of its funds in the latest move to shrink its business.

Analysts said Babcock & Brown could sell the lucrative rights to manage more of its funds as it scrambles to raise cash after the global credit crisis put its high-debt business model under severe stress.

Babcock and Brown shares fell 9 percent on Thursday after the announcements, while Babcock & Brown Communities (BBC.AX: Quote, Profile, Research, Stock Buzz) shares were up 27.5 percent on the prospect of a takeover.

“It's a development that is being forced upon them…it certainly represents a structural change to the model,” said Angus Gluskie, portfolio manager at White Funds Management.

“Some of them (the investment arms) are non-core satellites, and it's possible there will be more to come…but they will not change the parts of the business that are profitable…,” he said.

Babcock & Brown, whose shares have dived over 90 percent since the start of the year on concerns over its once-flourishing business model, said on Thursday it would review its ownership and management rights of Babcock & Brown Capital BCM.AX, which has substantial global telecom investments including 57 percent of Ireland's Eircom.

Babcock & Brown Communities (BBC.AX: Quote, Profile, Research, Stock Buzz) said on Thursday it had agreed to buy the rights to manage itself, paying B&B A$17.5 million. That cleared the way for the fund to be taken over by parties which have expressed interest.

Babcock and Brown could give up management rights to more of its investment funds, as part of a sweeping strategic review announced last week to wind down its corporate and structured finance divisions and sell assets in an effort to revive market confidence, analysts said.

The move also included replacing its CEO and chairman.

For the first half of 2008, Babcock & Brown reported A$297 million in fees from assets under management, out of A$561 million in total revenue.

Babcock & Brown, like its bigger rival Macquarie Group Ltd (MQG.AX: Quote, Profile, Research, Stock Buzz), buys ports, power utilities and toll roads and bundles them in listed and unlisted funds. Babcock & Brown earns management fees in return.

But the business model of buying assets using high levels of debt has come under stress as problems in the U.S. housing market triggered a global credit crisis.

Another analyst, wishing not be named because of company policy, tipped Babcock's investment management vehicle to be next in line.

“They are the two main ones. The Everest Babcock & Brown vehicle is possible, too,” the analyst said.

Macquarie Communications Infrastructure Group (MCG) (MCG.AX: Quote, Profile, Research, Stock Buzz) last week unveiled plans to sell a key asset and use the proceeds to help repay convertible debt to ease investor concerns.

Another Macquarie-managed fund, Macquarie Airports (MAP.AX: Quote, Profile, Research, Stock Buzz) said it would reduce its stakes in two airports to cut debt and help finance a share buyback program of up to A$1 billion, in an attempt to restore investor confidence and boost its bruised share price.

Babcock & Brown shares were down 8,24 percent by early afternoon, while B&B Capital shares were down 1.56 percent at A$2.99, and Babcock & Brown Communities shares were up 27.5 percent at A$0.44, on the prospect of a takeover.

The benchmark S&P/ASX 200 index was up 1.1 percent.

By Mette Fraende and Denny Thomas

(Reporting by Mette Fraende; Editing by Kim Coghill)