Tuesday, March 17, 2009

Flawed Models

When I first read the article regarding Asciano, I thought it was a bulk carrier.

Turns out, it is a port and rail operator in Australia.

However, I think one can draw parallels between the two types of companies which have been created over the last several years.

Asciano was conceived as a high-yield business, paying distributions greater than earnings -- which the global financial crisis has shown is a flawed infrastructure model. So Asciano was loaded with debt of $5 billion, leaving Toll virtually debt-free.

It was obvious after the global credit markets seized up near the end of 2007 that Asciano's debt level was unsustainable and the company's share price, which opened at $10.65 when Asciano joined the lists in mid-2007, began to slide.

By mid-2008 the share price was down to around $3.50....

Asciano's share price rose to $4.83 on news of the approach from TPG-GIP last August but since then has been in steep decline, touching a low of 40c last month after the half-year results failed to reach market consensus.

I wouldn't go so far as saying the bulk carriers paid out dividends greater than earnings. However, because the international shipping business has such highs and lows, the survivors are the ones who stash cash when times are good. These carriers didn't, instead paying out dividends when times were good.

Of course, I don't think it's only shipping companies who can be faulted for this. The companies asking for bail out money from governments, such as the auto industry, are also ones who didn't save cash.

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