Two worrisome articles on BAM.
giofranchi
Gio, thanks for posting these.
Worrisome is a good word to use in my opinion as, while I am inclined to temper the tone of both articles, nevertheless they raise a flag or two.
Regarding the "Second Wave" article, without knowing the full facts (which we'll probably never know), it would appear that the author is venting frustration at the poor share price over the last year or so. Brookfield may have been fully justified in calling off a sale of the asset based on a "good faith" assessment by management of its long-term worth. That the share price is (greatly) lower today could simply be a combination of changed facts in the intervening period plus a depressed Mr. Market, or perhaps just a mistake! I would add too that Brookfield's Private Equity Group has an excellent long term track record and is motivated to generate long-term value for its investors. Now if Brookfield was trying to engineer it so that Second Wave will ultimately be forced into bankruptcy (allowing Brookfield to pick up the pieces on the cheap), well that's a different story. If anyone has evidence of the latter I would be very interested to hear about it.
As for the "Paper World" article, the author has obviously done a lot of work and has highlighted some "worrisome" issues. However, I think it's a pity that he decided to take such a definite negative line of argument throughout the article, because it just looks like he's got an axe to grind (company said considering legal action would do that to you I suppose). Anyone who's studied the Brookfield / Brascan / Edper story will know it has a history of wanting control for limited capital (Jack Cockwell, current board member and the driving force behind the group from the 70s through to the early 2000s, was the brains behind this strategy). So the accusation of a pyramidal control structure, is well, about 40 years old.
The focus on the lack of cash flow relative to net profit, particularly in the last 3 years, is just too myopic in my opinion. Net profit / total return is simply the amount that flows through the P&L to the balance sheet / intrinsic value of the company. In assets such as real estate / infrastructure etc., cash flows do not typically reflect an increase or decrease in value. If Brookfield buys a distressed asset on a 10% yield and a year later it's yielding 5%, with no change in cash flows, does this indicate a paper world in a sinister sense? In my view, the pertinent questions are: can the company fund its obligations (mainly interest as capex tends to be minimal), how predictable are its cash flows and obligations and for how much could the company sell its assets, given a reasonable amount of time to find buyers. As a reminder, management believes both book value and its estimate of intrinsic value are understated versus what it could achieve in an orderly wind-down of the company.
The author does however raise some interesting points about BIP and BREP, the infrastructure and renewable energy businesses, which I admit I haven't looked at in as fine a detail as BAM. For instance, the renegotiation of the two power purchase contracts with related parties. And they are playing silly games by suggesting that Trevor Eyton is independent, because he most certainly is not!
Neither do I much like that Brookfield decided to go down the legal route with the author. Without knowing the specifics of this case, Brookfield has a history of secrecy and are prone to aggression when questioned about their integrity. From Peter Bronfman to Jack Cockwell and then to Bruce Flatt, everything that I've read about them would support the view that Brookfield's culture is one of hard work and high integrity, although there's no denying that for many years they've pushed the "maximum control, limited capital" strategy aggressively, which a lot of people may not ever be comfortable with.
Bottom line: do you trust management to "do the right thing"? I do.
Thoughts?
