How the LSE's predator Macquarie has taken off around the world

Imitation is the sincerest form of flattery - many big US firms want to rehash the MacBank model
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The Independent Online

The twin-engined Fokker 50 Turboprop barrelled through a descent a little too steep for comfort before touching the tarmac of Brussels International Airport with the gentlest of kisses.

The 50 or so passengers - mainly business types in sober suits - pulled down laptops and briefcases from the overhead lockers, unholstered their Blackberries and filed down the single aisle into the heart of Europe.

As well as its human cargo, this flight, and the 600-odd others tabled to set down on and depart Brussels International's three runways that day, carried fresh revenue to the airport's new owner.

Macquarie, the Australian investment bank that has tabled a hostile £1.5bn bid for the London Stock Exchange, took control of Brussels' major airport a little over a year ago.

In December 2004, Macquarie Airports - a fund set up specifically to invest in airports - paid the Belgian government €735m (£505m) for a 70 per cent stake in Brussels International. An overhaul of the top management and a refinancing of the business quickly followed. About 45p in every £1 that Macquarie has pumped into Brussels has been borrowed from elsewhere.

The airport is the fifth busiest in Europe, roughly the same physical size as London Heathrow but handling only a quarter of its 65 million passengers each year.

Figures released last night show that since Macquarie took charge of Brussels International, annual earnings before interest, tax, depreciation and amortisation have jumped by 18.7 per cent to €161.3m. Revenues were almost 7 per cent better at €324.6m in the year to the end of December, while operating costs were trimmed by 2.6 per cent to €167.7m.

The Belgian government still owns 30 per cent of the business and has three representatives on the board.

With governments the world over looking to raise money without lifting taxes or issuing bonds, these public-private partnerships are all the rage.

Brussels International is, in many ways, a model Macquisition. The bank has recognised global investors' almost insatiable appetite for relatively modest but steady returns of between 5 and 10 per cent. To satisfy this, it takes control of assets with steady income and dominant market position. These can include roads, ports, tunnels and bridges, as well as airports. For relatively small amounts of capital, MacBank swallows huge assets by borrowing other people's money, then repackages those assets into funds, which are sold to investors as unlisted funds or by stock market flotations.

Simon Maughan, the head of banking research at Dresdner Kleinwort Wasserstein, said: "It's a unique way of funding infrastructure projects, by tapping into equity rather than debt markets. It's been exceptionally successful and they have rolled it out worldwide."

Prices often rise for customers of the businesses bought by MacBank, although this has not been the case in Brussels. Costs are stripped and management re-bored. Kerrie Mather, the head of the Australian-listed Macquarie Airports, said: "Our focus is on attracting more passengers and expanding the commercial businesses, not on airline charges. They have been fixed here so they only grow in line with inflation. We buy to invest long term, without any view of actually selling out of the asset."

Unlike private equity firms, which generally want a 20 to 30 per cent return on investments, MacBank is happy with between 10 and 20 per cent.

Overall, Macquarie's earnings have grown by 19.5 per cent a year for the past decade. In 2004-05, net profit soared 67 per cent to A$823m (£347m). Its shares are worth nine times more now than in 1996, when they were first listed. They have more than doubled over the past two years. Its advance outside Oz has been even more prodigious. Net profits from international operations surged 83 per cent last year.

The model for Macquisitions was a product of national circumstance. Australian pension laws requiring employers to set aside a proportion of workers' pay for retirement has generated an immense £330bn pool of cash looking to be invested and deepening by as much as £45bn every year.

Macquarie's interest in infrastructure stemmed from advising the Australian government on how to finance Sydney's M2 motorway in the mid-1990s. It came up with the idea of floating a special-purpose company as the country's first listed toll motorway. Investors did well, and Macquarie - named after the Scots-born Lachlan Macquarie, a 17th century colonial administrator - went on to establish its infrastructure group, followed by its airport and communications fund.

Today, it has about £13bn in so-called "specialised infrastructure funds", which contribute generously to the group profits and are themselves often listed.

Macquarie's name is everywhere. Over here, it owns the M6 toll road and holds chunky stakes in Wightlink, the Isle of Wight ferry operator; Bristol and Birmingham airports; South East Water; Wales & West Utilities and Arqiva, the new name for NTL's broadcast and transmission masts.

Its most recent British acquisitions include Inmedia Communications, a satellite services company, and BBC Broadcast, the corporation's technology arm. Its 400 UK workers are housed at the top of CityPoint, one of the most prominent buildings in the City.

Imitation, it is said, is the sincerest form of flattery and many of the biggest names on Wall Street are looking to rehash the MacBank model.

Goldman Sachs is raising a $3bn fund to invest in infrastructure deals, while Credit Suisse First Boston, Morgan Stanley, Merrill Lynch and UBS are all exploring ways to turn tarmac into gold, by both advising on and investing in public infrastructure deals.

The potential for fees is enormous. Bankers sweep up advisory fees on the sale of the assets. Once poured into funds, MacBank carves out up to 1.5 per of the value of the assets in management fees. Incentive fees can deliver as much as 20 per cent on profits above a certain threshold.

"It's highly entrepreneurial," Mr Maughan said. "In some projects, you find one area of the bank bidding against another. But they like that because it promotes a culture of winners."

And those "winners" take big prizes. Top people at the "millionaire's factory", as Macquarie is known back home, enjoy stellar rewards. Allan Moss, its chief executive, is Australia's highest-paid businessman. He pocketed A$18m last year, his share of an A$90m payout to the seven-strong management team.

Despite recently becoming Australia's biggest investment bank, Macquarie was born only in 1985. The bank has become embroiled in several controversies over its business practices as it seeks to reassure the LSE customers that it would be a sensitive owner. Sydney airport came under fresh attack this week from airline users and consumer groups for "monopolistic practices", this time centring on baggage handling.