January 12, 2006

MACQUARIE’S LATEST QUARRY

Wizards of Oz, a bank in Australia makes a bid for London’s stock exchange

Eric Ellis

CALL it The Empire Strikes Back.

From the far side of the world comes Australia’s Macquarie Bank, named after a parsimonious Scottish colonial governor, looking to buy the London Stock Exchange, a 350-year-old monopoly where the spoils of empire were traded more than two centuries before Australia became a nation.

That’s a lot of history, but times and technologies change. Threatened by Internet trading, stock exchanges around the world are consolidating to ensure their survival.

But the LSE, having fended off recent bids from Swedish, French, and German exchanges, seems determined to buck the trend and stay independent. No respecter of traditions, Macquarie’s New Worlders coldly regard the LSE as financial infrastructure, an asset little different from the freeways, airports, and utilities, from Copenhagen to Kuala Lumpur, that it has specialized in buying for the past decade.

“The LSE fits our strict investment criteria,” says Macquarie’s 56-year-old CEO, Allan Moss. “We are attracted to businesses, particularly in infrastructure, that are somewhat insulated from competition or have privileged market positions.” The LSE has both: It is the preferred listing venue in Europe for companies from the U.S. to China, and business is booming. Trading volume in 2005 was up 25% over the previous year

Needless to say, the British aren’t impressed. The LSE’s board has dismissed Macquarie’s $2.7 billion bid as “derisory.” Senior members of the exchange have lobbied Britain’s Chancellor of the Exchequer, Gordon Brown, to stop the Macquarie bid. As Charlotte Black, marketing director of one of Britain’s biggest stockbrokers, Brewin Dolphin, puts it, “The LSE is a vital part of U.K. PLC. It is not a motorway, which is what Macquarie seems to go for. It’s not appropriate that such a crucial asset should be in the hands of a private institution.” Brown’s office has not yet responded, but one analyst close to the deal said the chancellor was unlikely to intervene, given Britain’s respect for laissez-faire markets.

The LSE is perhaps the best example of that. Its shares have been pushed up 6% over Macquarie’s bid price, suggesting that investors believe an alternative bid, probably from European exchange operators Deutsche Börse and Euronext, is imminent. But name-calling and rival bids won’t be enough to spurn Macquarie, known at home as the “millionaires’ factory” for its generous salaries and bonuses. (Moss’s 2005 compensation of $13.6 million made him Australia’s highest-paid executive.)

Macquarie has a reputation for spotting undervalued assets in regulated industries wherever they might be—and for getting its prey. It buys assets through its investment bank, then recycles them through its family of publicly traded investment trusts, taking generous fees along the way. “Macquarie is Australian for ‘takeover,’ ” says Murray Williams, director of Georgeson, a shareholder-services group that has been on both sides of Macquarie’s takeover bids. “These guys are writing the book.”

Macquarie has built an impressive portfolio of assets. It owns bridges in Korea, ferries to Britain’s Isle of Man, Chinese shopping malls, and airports across Europe as well as in its native Australia and is bidding for terminals in Delhi and Mumbai. Macquarie Parking is the largest operator of airport parking services in the U.S., with 24 facilities at 15 airports. The bank owns toll roads in Britain, China, and the U.S. in addition to energy and water utilities in Europe and the U.S. Its $2 billion media fund has contracts with Australia’s state broadcaster and recently bought control of one of four cable TV operators in Taiwan.

During Moss’s reign, Macquarie’s market capitalization has swelled from $800 million in 1996 to $12 billion today, and its shares rose 78% last year. Profit for the six months to September was $353 million, up 88%, on revenues of $1.6 billion, and assets under the group’s control were $85 billion. But some observers, like Sydney banking analyst David McDonald of Shaw Stockbroking, worry that Macquarie’s penchant for debt—equal to the assets at some of the trusts, he says—could expose Macquarie if interest rates rise. “Its tendency to increase user tariffs soon after buying an infrastructure asset could also make it vulnerable to political pressure in some of the countries it operates in,” McDonald says.

Moss insists Macquarie isn’t a swaggering rainmaker and that the typical Macquarie deal “will be at least a year in determination.” He says the bank “has a philosophy that gives a high level of autonomy to our businesses and encourages internal entrepreneurism. And we do it with very diligent central control.”

Perhaps. But the good folk of Paternoster Square, where the London Stock Exchange is headquartered, will need a little more convincing