BAM - Brookfield Asset Management

[Spekulatius]

With regards to GGP, if the share price won't reflect fair value and is a bargain then anyone can buy the units. It just so happens that BAM/subs can buy all of the units.

 

That is what I have struggled with here. Brookfield hyped GGP for like 7 years but the world was terrified of malls going under. No one in the market was buying up GGP so whats the big deal that Brookfield did?

 

They gained control without paying premium. In fact one could argue they artificially suppressed the stock. They certainly bought when the stock was at or close to a multi year low. Control is very valuable with real estate. So basically, when BAM has a minority interest, they basically write themselves a permanent call option on a total takeover. They also prevent anybody else from making a bid. I had no dog kn this fight and neither do I with TOO. I stated this before that if you think that BAM will do well, there is no point investing “alongside” BAM or even consider any of their vehicles, because with a GP/LP structure, the GP almost always comes out ahead.

[Gregmal]

While interning at a small brokerage firm in my early 20's, I saw two guys, each making $1M a year plus, get into a fist fight over who was responsible for paying a $75 ticket charge.

 

When it comes to money, people are animals. Especially in the financial world. I have no clue why people go into investments thinking they are owed anything or going to be treated specially. Self interest rules the day, whether its Fast Eddie plundering Sears into bankruptcy, the Oracle of Omaha refusing to put capital to work via buybacks or paying dividends almost solely because he wants to make one last big acquisition for legacy purposes, or BAM and their subs forcing a below market takeover through. Even if you do find an awesome and generous manager, you'll never get hurt being skeptical. You will get flattened thinking Fast Eddy has your back though.

 

I agree with a lot of what you said but I take issue with your over simplified cynical generalization. Nobody thinks we are owed anything or being treated specially. Every investment we make is a bet on the future behavior of the controlling parties, whether its management or controlling shareholder.  We do expect to be treated fairly. What happened to fiduciary duty? I don't want to turn this into a TOO thread, but what pissed people off was the bait and switch. Brookfield posted as a strategic sponsor and have people spent two years invested with them. Now that things are much improved, they decide to take advantage of the low stock price to get a bit more return. They changed narrative and bent facts to justify their low bid. They have totally forgot about their fiduciary duty as the GP of the partnership. Saying self-interest rules the day, you have no clue why people go into investment thinking they are owed anything is not conducive to the discussion. Every single investment we make, we think we are owed at least ethical behavior. Otherwise, theoretically every management can bankrupt a company on purpose and get themself a better deal out of the bankruptcy process by siding with the vulture fund.

 

I just think that the expectation to be treated fairly or expecting management to have ethical behavior, especially in the financial world, is setting oneself up to be taken advantage of. In the choice between ethics and dollars, I can count on one hand the number of people I've met who will always put ethics first. Out of the rest, some are just better at convincing others they will, but will ultimately chose the dollar anyway. The latter is kind of what Bruce Flatt seems to be.

[BG2008]

While interning at a small brokerage firm in my early 20's, I saw two guys, each making $1M a year plus, get into a fist fight over who was responsible for paying a $75 ticket charge.

 

When it comes to money, people are animals. Especially in the financial world. I have no clue why people go into investments thinking they are owed anything or going to be treated specially. Self interest rules the day, whether its Fast Eddie plundering Sears into bankruptcy, the Oracle of Omaha refusing to put capital to work via buybacks or paying dividends almost solely because he wants to make one last big acquisition for legacy purposes, or BAM and their subs forcing a below market takeover through. Even if you do find an awesome and generous manager, you'll never get hurt being skeptical. You will get flattened thinking Fast Eddy has your back though.

 

Gregmal,

 

I think you need better friends/associates and stop hanging out with the folks at CTO.  Find some better people to invest with.  Meant to be a joke, but maybe there's a bit of truth in it as well.  No malice intended. 

 

I agree with a lot of what you said but I take issue with your over simplified cynical generalization. Nobody thinks we are owed anything or being treated specially. Every investment we make is a bet on the future behavior of the controlling parties, whether its management or controlling shareholder.  We do expect to be treated fairly. What happened to fiduciary duty? I don't want to turn this into a TOO thread, but what pissed people off was the bait and switch. Brookfield posted as a strategic sponsor and have people spent two years invested with them. Now that things are much improved, they decide to take advantage of the low stock price to get a bit more return. They changed narrative and bent facts to justify their low bid. They have totally forgot about their fiduciary duty as the GP of the partnership. Saying self-interest rules the day, you have no clue why people go into investment thinking they are owed anything is not conducive to the discussion. Every single investment we make, we think we are owed at least ethical behavior. Otherwise, theoretically every management can bankrupt a company on purpose and get themself a better deal out of the bankruptcy process by siding with the vulture fund.

 

I just think that the expectation to be treated fairly or expecting management to have ethical behavior, especially in the financial world, is setting oneself up to be taken advantage of. In the choice between ethics and dollars, I can count on one hand the number of people I've met who will always put ethics first. Out of the rest, some are just better at convincing others they will, but will ultimately chose the dollar anyway. The latter is kind of what Bruce Flatt seems to be.

[John Hjorth]

Commercial Observer [April 23^rd 2019] : The Power 100: Commercial Real Estate’s Most Powerful Players.

[John Hjorth]

Basically, since my post #1013 of May 21^st 2019, I've sidestepped BAM & subs, simply just by trying to "look around how things work other places".

 

I've looked at BlackStone & BlackRock. This post is about BlackStone.

 

Blackstone has for years applied a business model similar to BAM, but disguised [technically] another way. Not even the investors "nearest the core" of the business are assured against anything taking advantage of them. If you grab the last BX 10-K & 10-Q, it's all explained there [, in "risk section"].

 

The interesting part of my look at BX [related to BAM] is that BX somehow is coming back to its senses, by the decision [April 2019, I think], to convert from an L.P. to a C-corp. Now somebody qualified for doing so has to explain to me, how that is even possible, to obtain/maintain existing power structure.

[gokou3]

Genesee & Wyoming Inc. to be Acquired by Brookfield Infrastructure and GIC in $8.4 Billion Transaction

https://web.tmxmoney.com/article.php?newsid=6266614095800997&qm_symbol=BIP.UN

 

The $8.4B deal consists of $6.4B of shares plus assumption of $2B of debt.  In addition, per 8-K there is an acquisition debt financing of $3.15B.  BIP is putting down $500M of equity and the rest comes from its institutional partner.  So Brookfield is going to control a $8.4B EV company with only a $500M (<6%!) sliver of its "own" money in typical PE fashion?

[John Hjorth]

Thank you for posting this, gokou,

 

Primary sources from the mouths of the horses :

 

Brookfield Infrastructure Partners Press Release : Genesee & Wyoming Inc. to be Acquired by Brookfield Infrastructure and GIC in $8.4 Billion Transaction [July 1^st 2019].

GIC Press Release : GIC and Brookfield Infrastructure to acquire Genesee & Wyoming [July 1^st 2019].

 

By reading the press releases, there seems to be minor contradictions among them [, or I may have misread them].

 

- - - o 0 o - - -

 

I haven't studied anything in depth, but the price for G&W is USD 112 per share - G&W 2018 earnings per share is USD 4.03. Alone that looks weird to me, when we talk about a BAM sub. Perhaps the idea is to break it up for a profit by offering it in parts to the major railways?

 

- - - o 0 o - - -

 

I haven't heard at all about GIC before, nor did I know it was Brookfield client. - I'm an avid collector of identities of Brookfield clients, because they are those that make the wheels at Brookfield spinning.

[gokou3]

GIC is one of Singapore's two Sovereign Wealth Funds -- the other is Temasek.  Each of them is among the top 10 SWF in the world.  Pretty amazing for a city-state.

 

https://www.swfinstitute.org/fund-rankings/sovereign-wealth-fund/

 

I am hoping someone could explain the rationale for the GWR deal as well since it is not obvious from the typical valuation metrics like P/E.

[John Hjorth]

Thanks again for your post, gokou,

 

I actually looked at GIC shortly before my last post. Let me just say, that I'm not - in any way - impressed by the long term return generated by GIC.

 

In short, GIC seems in need of (a) helper(s) - This transaction makes me think - on initial basis - "uhmm-hoo" [like those strange noises from Mr. Buffett's mouth, when Mr. Munger asked Mr. Buffett : "Do you really want to buy this?", looking out over the trading area of Solomon Brothers].

 

I may be totally wrong here.

[Spekulatius]

Thanks again for your post, gokou,

 

I actually looked at GIC shortly before my last post. Let me just say, that I'm not - in any way - impressed by the long term return generated by GIC.

 

In short, GIC seems in need of (a) helper(s) - This transaction makes me think - on initial basis - "uhmm-hoo" [like those strange noises from Mr. Buffett's mouth, when Mr. Munger asked Mr. Buffett : "Do you really want to buy this?", looking out over the trading area of Solomon Brothers].

 

I may be totally wrong here.

 

It’s pretty expansive at 15x EBITDA and 3.3% cash flow yield. Oh the allure of cheap money. They must be seeing something in it though, perhaps a platform for more acquisitions in this space.

[CorpRaider]

Damn.  Railroads earn ~40% GMs and 30% OMs and 20%+ ROEs?!?!?

[John Hjorth]

To me, an excellent Twitter thread by Kyler [CoBF member khturbo] on the Genesee & Wyoming transaction.

 

Head - BAM wins, Tail - BAM does not loose [ref. what Spekulatius has said several times].

 

[gokou3]

Macquarie, Brookfield waste no time with $1b rail deal

https://www.afr.com/street-talk/macquarie-brookfield-waste-no-time-with-1b-rail-deal-20190704-p52403

 

It is understood the two parties have agreed a deal that would see MIRA take the 51.1 per cent stake and it is likely to be signed in coming days.

 

The deal is expected to be conditional on Brookfield acquiring GWA's parent company, US-listed Genesee & Wyoming, as planned, and is likely to be worth about $1 billion.

 

...

 

When MIRA bought into GWA in late 2016, the deal valued the unit at $2 billion on an enterprise value basis and was priced off adjusted EBITDA worth $180 million on a run-rate basis.

 

[chrispy]

http://commercialobserver.com/2019/07/brookfield-andrea-balkan/

[John Hjorth]

Thank you for the elaboration, Kyler,

 

Perhaps I was reading the sentence of yours a bit out of the overall context. I agree with you about BAM's overall operational fields now appear to be complete.

 

We have had discussions earlier in this topic about where opportunities for growth most likely will be, and I recall infrastructure being the guess by some fellow board members - a guess on which I personally concur. To me it appears evident, that BIP can't handle such growth by itself - if it's material - going forward. Some of that demand for capital then - if it becomes actual - has to be met by the parent.

 

Yes true on the infrastructure side. It does seem like they could put a lot of capital to work there, and I would be pretty excited if they did.

 

And @Vince, there's a sources and uses of cash page in the Q4 supplemental showing the parent cash flow situation. The $2.5bb I used was just a round number. It was $2.4bb last year off the top of my head so it should grow to $2.5bb+ this year and with OAK the run rate would be probably closer to $2.8bb by the end of the year.

 

BIP Press Release [July 11^th 2019] : Brookfield Infrastructure announces $750,034,900 equity offering.

 

I speculate similar capital transactions will appear in the future as BIP continues at its growth trajectory.

 

Edit :

 

Please also see all the historical financing transactions and capital transactions described in BIP 2018 Annual Report, p. 57 - 69.

[John Hjorth]

Reuters [February 8^th 2019] : Brookfield in talks with India's Reliance Industries to buy tower, fibre assets: report.

 

BIP Press Release [July 19^th 2019] : Brookfield Infrastructure Acknowledges a Stock Exchange Filing by Reliance.

 

That BIP Press Release reads a bit awkward. Reliance Industries Limited Stock Exchange Filing [July 19^th 2019].

 

It seems like the potential telecom tower assets deal with Reliance Industries mentioned by Reuters in February 2019 is on the move. I think that is great.

 

Edit:

 

I found this tweet by Teemac, but don't know the source.

[peterHK]

Reuters [February 8^th 2019] : Brookfield in talks with India's Reliance Industries to buy tower, fibre assets: report.

 

BIP Press Release [July 19^th 2019] : Brookfield Infrastructure Acknowledges a Stock Exchange Filing by Reliance.

 

That BIP Press Release reads a bit awkward. Reliance Industries Limited Stock Exchange Filing [July 19^th 2019].

 

It seems like the potential telecom tower assets deal with Reliance Industries mentioned by Reuters in February 2019 is on the move. I think that is great.

 

Edit:

 

I found this tweet by Teemac, but don't know the source.

 

Source is BMO Equity Research.

 

Looks like a good deal. AMT has I think outlined the thesis for India towers fairly well.

[ValueMaven]

is anyone else amazed by the speed, and volume with with these guys are doing deals?

[John Hjorth]

Thanks for info on source, peter.

[gokou3]

This article provides further color:

 

https://www.financialexpress.com/industry/tower-assets-ril-closes-rs-25215-crore-deal-with-brookfield/1650549/

 

"Brookfield and other investors are bringing in over Rs 25,000 crore and they will own 100% of the Tower Infrastructure Trust. The enterprise value will be a combination of this plus the debt which will go up to Rs30,000 crore. So, the enterprise value will be around Rs55,000 crore,” he said.

 

In the June quarter, Reliance Jio reported a stable set of numbers on Friday. During the three months of April-June 2019, the company’s net profit rose 6% year-on-year to Rs 891 crore.

 

While Jio’s revenues increased 5.2% to Rs 11,679 crore quarter-on-quarter, the operating margins came in as a positive surprise, which expanded a good 110 basis points to 40.1% versus 39% in the previous quarter. The Ebitda (earnings before interest, tax, depreciation and amortisation) was up over 8% on sequentially to Rs 4,686 crore.

 

 

Am I reading this correctly, that this deal is executed at an EV of Rs55,000 crore for a company with Rs 4,686 crore of QUARTERLY earnings?  This would be a EV / EBITDA < 3.0.

[John Hjorth]

Is anyone else amazed by the speed, and volume with which these guys are doing deals?

 

Not really amazed, ValueMaven,

 

-more like satisfied. [ : - ) ] But yes, BAM & subs seem to have had great business momentum the last few years. They are now harvesting the fruits of developing a business model during the last 15 years or so, that appears to work. They have invested heavily in building the contact & client network, regional offices etc., which is the real asset here, and the economic value of that is not booked on the balance sheet anywhere. The number of clients is now 600+ and growing, not so long ago is was about 450 [both numbers mentioned by Mr. Flatt somewhere].

 

I still occasionally go back to tiddman's post from January 2018 to reread it - it's just excellent :

 

I've had large positions in both Berkshire and Brookfield for about 15 years.  One of the things I like about having both investments is that they are in many ways completely different, and yet each company is widely diversified and based on cash flow returns. 

 

Berkshire is almost entirely in the US, has long term holdings, organic growth, makes little use of debt or financing, and Buffett at the helm.  Brookfield is very international in multiple countries, is more transactional, makes heavy use of debt and financing, and the management team is about 10-15 people who are all considerably younger than Buffett and Munger.

 

I really don't think that Berkshire would have any interest in acquiring Brookfield or any of its subsidiaries, and it's interesting to me that even though both of them have broad reach, they almost never encounter one another or partner on any investments.  They just have totally different approaches. I think that Buffett and the Berkshire execs would be put off by Brookfield's use of debt and financing, and while Brookfield in some ways models its business after Berkshire, it could not do what it does without debt financing.  The secret to Brookfield's success is access to third party capital, but Berkshire has always generated its own capital via insurance companies.

 

I think both companies have a bright future but over the next 20 years I think that Brookfield probably has more opportunities for growth and a broader reach.  BAM has a market cap of only $43B, all of the Brookfield subs combined add up to around $70B.  Berkshire is nearly 10x as large with a market cap of $500B and its returns are still driven primarily by one person.  Brookfield is driven by a team of younger execs who each have their own opportunities for growth.  In fact I think Berkshire could learn something from Brookfield's culture and management style.

[ValueMaven]

'This cash flow is now over $2 billion annually and growing. This amount, based on our estimates, should be over $5 billion in 2023 and with no specific use for the capital, it may be returned to shareholders.'

[John Hjorth]

'This cash flow is now over $2 billion annually and growing. This amount, based on our estimates, should be over $5 billion in 2023 and with no specific use for the capital, it may be returned to shareholders.'

 

Oh-noo, please no more "spread-sheet-talk" in this topic. We have been exactly there before, where I asked for somebody shedding some light on the assumptions, to which question I got the reply "Mr. Flatt's assumptions are absolutely reasonable" [or something like that] [i couldn't find them anywhere, so I asked, and after the "absolutely reasonable"-answer just : silence].

[ValueMaven]

When forum did you ask this? 

[gokou3]

'This cash flow is now over $2 billion annually and growing. This amount, based on our estimates, should be over $5 billion in 2023 and with no specific use for the capital, it may be returned to shareholders.'

 

Oh-noo, please no more "spread-sheet-talk" in this topic. We have been exactly there before, where I asked for somebody shedding some light on the assumptions, to which question I got the reply "Mr. Flatt's assumptions are absolutely reasonable" [or something like that] [i couldn't find them anywhere, so I asked, and after the "absolutely reasonable"-answer just : silence].

The $5 billion cash flow number is stated in last September's Investor Day BAM presentation page 111, linked below.  See the rest of the file for derivation of this number.  Just putting out the info, I do not necessarily agree with the assumptions.

 

http://www.2018-brookfield-ir-day.com/