Babcock plunges 36% as overhaul of board fails to convince market

SHARES IN Babcock Brown, the troubled Australian investment bank that ultimately controls Eircom, plunged yesterday morning after a major overhaul of its board and management team failed to convince investors that the company can be saved.

A 36 per cent plummet in Babcock Brown’s Sydney-listed shares means that the company’s share price has now lost more than 90 per cent in value this year, as concerns about the viability of its debt-funded investment model intensified amid the global credit crunch.

The Australian company’s woes, combined with fears that more US banks will announce credit-related losses this quarter, dragged down financial stocks across Europe. The Iseq index in Dublin lost 93 points, closing down 2.1 per cent.

Babcock Brown, which manages Eircom’s immediate parent Babcock Brown Capital (BCM), is now expected to sell assets at a loss in a bid to reduce high levels of debt on its balance sheet.

However, a spokesman for Eircom said that the introduction of new management at Babcock had “absolutely no operational impact for Eircom”.

Babcock chief executive Phil Green stood down from his post after the group posted a 30 per cent cut in its half-year operating profits to Aus$175 million (€103 million).

He has been replaced by current finance director Michael Larkin. Executive chairman Jim Babcock, who founded the company in 1977, also quit.

Shares in the bank were suspended on Tuesday pending the announcement of the management changes.

Mr Green was also a director of satellite fund BCM, of which Babcock Brown owns 8 per cent, and has now notified BCM of his intention to step down from the BCM board.

Robert Topfer, who is chief of the Babcock corporate finance unit that orchestrated BCM’s €2.36 billion takeover of Eircom in 2006, will step down from his role as head of that unit, which Babcock now plans to wind back.

But Mr Topfer will remain on the board of BCM and focus on its interests, of which Eircom is one of the main components.

BCM owns 57 per cent of Eircom, while an employee share ownership trust has a 35 per cent stake in the former State telecoms firm.

The Eircom spokesman said the holding in Eircom through BCM was “not a big item on the balance sheet of Babcock Brown”.

The winding down of Babcock’s corporate finance unit could suggest that the bank wants to move away from a “wheeler dealer” image as a constant buyer and seller of assets and focus on the more traditional business of fund and asset management.

But by replacing its top executives with internal candidates, Babcock, which is the worst performing stock on the MSCI Asia-Pacific Index this year, failed to convince the market.

Babcock’s problems “go way beyond management”, according to Sydney-based fund manager Angus Gluskie.

“It’s the business model that’s come under fire, so changing the guard has only destabilised the market.”

Another Australia-based analyst, ABN Amro private client adviser Bill Bishop, said that investors had lost confidence and were fearful that the company would sell assets into a soft market to reduce its Aus$11 billion (€6.49 billion) debt. “It’s like trying to stop an aircraft carrier in the middle of the ocean – you just can’t change these things in the blink of an eye,” Mr Bishop told the Sydney Morning Herald.

Eircom and BCM will publish full-year results next Thursday. – (Additional reporting, Bloomberg)