布鲁克菲尔德商业合作伙伴：有这样的合作伙伴，谁需要敌人？

This is a case study discussing how BBU management systematically took advantage of minority shareholders in one of its controlled investments.

Abusing minority investors while simultaneously acquiring larger public companies is a highly curious and unsustainable business model.

Governance risks make BBU uninvestable, and could depress valuation on its other controlled public investments.

BBU has done reputational damage to the broader Brookfield brand.

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This is a case study on Brookfield Business Partner’s controlling investment in Teekay Offshore (TOO). In my view, BBU was highly aggressive and abusive towards minority shareholders. The precedent set by these abuses, as detailed below, make Brookfield Business Partners uninvestable due to governance concerns. Further, in my opinion, Brookfield Business Partner’s self dealing sets an adverse precedent for other minority investors and limited partners within the publicly traded BBU ecosystem, particularly shareholders in Genworth Canada (OTCPK:GMICF), Graftech (EAF), and North American Palladium (NAP).

After all, If BBU’s management of an investment in a simple leasing business like Teekay Offshore can go this poorly in just 20 months during a bull market, then what happens when the cycle turns?

BBU’s business model is deteriorating – it can buy, but it can’t sell.

Brookfield Business Partner’s size facilitates a competitive advantage to purchase companies desperate for capital. However, after scorching its reputation through its management of Teekay Offshore, its ability to exit investments in the public markets is impaired. Further, BBU’s limited track record of investment exits has already been spotty. Readers can draw their own conclusions from Brookfield’s ungraceful paring down of Graftech, which is down ~50% over the past 18 months from BBU’s initial target IPO range, as well as North American Palladium, which has underperformed dramatically since Brookfield recapped equity investors by diluting them 92% in 2015.

Acquiring larger companies while simultaneously abusing minority shareholders in other investments is a highly curious business model, to say the least. This behavior and business model is unsustainable. Current and prospective shareholder’s of Brookfield Business Partner’s would do well to question the valuation assumptions of a public private equity stock with an impaired ability to exit investments.

There are many fair reasons why investors lose money in the stock market. Cycles turn, fundamentals can deteriorate, capital markets can sour. However, when a large asset manager abuses minority investors by making a takeunder bid at ~1x Cash Flow

only 20 months after aggressively marketing that they would “maximize shareholder wealth” – well, this is not really an equitable reason to lose money. Brookfield Business Partner’s was deceitful in its communication and actions.

What makes BBU’s takeunder offer, at an all-time low, particularly offensive is that it came after Teekay Offshore’s Adjusted EBITDA increased 48%

, Leverage Ratio decreased 40%

, debt maturity tenor was doubled, and industry fundamentals inflected. Further, Teekay Offshore’s business is a very stable “floating pipeline” infrastructure business underwritten by very long-term contracts with investment grade counterparties. Teekay Offshore was supposed to be “real asset investing” driven by tangible assets and cash flows and not swinging for the fences.

In 2017, before Brookfield’s involvement, Teekay Offshore was distressed. (For a full history of how Teekay Offshore was originally distressed here is a slide deck.)

The shorter story is that the previous management team at Teekay Offshore pushed dividend payouts at all costs in order to hit greedy bonus targets from Incentive Distribution Rights.

After nearly a decade of paying out cash flow that should have gone to replacement capex or paying down debt, Teekay Offshore was inevitably caught by a market downswing and faced a liquidity crises. Dividends were cut, TOO’s stock collapsed, the prior management team was thrown out, and Brookfield stepped in with a white knight recapitalization investment on July 27, 2017.

In September 2017, Brookfield Business Partners closed a $610M equity investment for ~60% ownership of publicly traded Teekay Offshore. Teekay Offshore continually traded as a public company and its prior ParentCo, Teekay Corporation (NYSE:TK), initially retained control of the company, albeit with reduced economic ownership to only ~15% of shares outstanding. TK and BBU pitched themselves as shareholder friendly “co-sponsors” of Teekay Offshore with 74% combined economic control and a roughly even split of board seats between TK, BBU and independents.

For further details on the Strategic Sponsorship please reference the below presentation:

Teekay Offshore was the type of business and assets that fit the Brookfield investment model for “real asset investing” very well.

The underlying assets of Teekay Offshore are very stable, predictable and manageable. It is a leasing business similar to aircraft lessors, albeit for niche offshore infrastructure. Teekay Offshore’s asset base can be thought of as floating pipelines that serve select basins in the North Sea, Brazil and Canada.

Teekay Offshore is not highly correlated to the oil cycle, but rather basin-specific projects that are secured by contracts with its long-term oil-major partners.

In May 2019, Brookfield made a takeunder offer for Teekay Offshore’s stock at $1.05, an all-time low.

Teekay Offshore almost went according to plan. By 1H18, Teekay Offshore had achieved every objective laid out in the Brookfield recapitalization plan from September 2017. Teekay Offshore’s Adjusted EBITDA increased 48%

and its Leverage Ratio

decreased by 40%.

Investors initially responded well to Teekay Offshore’s execution and the co-sponsor model with Brookfield and Teekay Corporation. TOO’s stock price hit an intraday high of $3.10/unit in May 2018. Brookfield was poised to make a sizable return on its initial basis of $2.50/unit and an additional windfall from exercising its cashless warrants with a strike price at $4.00. These warrants were a sweetener struck in the recapitalization deal and could have been highly accretive to BBU.

But then a series of events unfolded over 2018 that unnecessarily turned Brookfield’s sponsorship from a catalyst, to a risk. These actions resulted in severely depressed trading volume and dislocated TOO’s stock price from its underlying fundamentals as well as its peer trading multiples.

The chart and text sections below highlight a series of events that resulted in TOO’s stock price dislocating from its fair value and its peer trading multiples:

The greatest sin of what went wrong with Teekay Offshore was poor investor communication. This was painful because it was self-inflicted and could have easily been remedied.

Originally, at IPO and through 2017, Teekay Offshore was created as a high dividend paying company. Throughout the majority of its trading history, Teekay Offshore was owned by yield-oriented investors. Brookfield’s recapitalization transformed Teekay Offshore into a company that reinvested cash flows for growth instead of paying them out. This clearly requires marketing to a different investor base and it never happened.

Brookfield, with $400bn in AUM, is an expert in investor communication. Each Brookfield entity has their own annual investor day every year in September in New York. In fact, I attended the BBU investor day in September 2018 and Teekay Offshore was one of the highest requested topics when BBU management polled the audience for what it should talk about.

By Spring of 2018, Teekay Offshore’s trading volumes had drifted well below where any institution could own them. Proper investor communication should have been a staple all along.

When attending the Brookfield Investor Day in September 2018, I asked Cyrus Madon if he was concerned about TOO’s low trading volumes. He replied that he wasn’t concerned and that BBU had the same problem after IPO. In my opinion, he was completely out of touch with the capital market’s views. At the time Teekay Offshore’s nominal trading volumes were in the bottom 97

percentile of the Russell 3000 constituents.

In my view, Brookfield Business Partner’s management team has purchased too many companies too quickly, and has done a poor job understanding sentiment in the capital markets. In addition to Teekay Offshore, there are several instances of capital markets failures. For instance, BBU sponsored an IPO of Graftech in 2018. BBU owned 34% of EAF. The IPO priced at a 33% discount to initial range, and stock is down a further ~16% after BBU has implemented multiple secondary sales. Brookfield was also unsuccessful in fully monetizing its 92% in North American Palladium through a year-long strategic review process.

There is a highly interesting comparison to make between Brookfield’s sponsorship or Teekay Offshore and Fairfax’s (FRFRF) sponsorship of Seaspan Corporation (SSW) which was made around the same time. Fairfax’s investment in Seaspan was a strikingly similar recapitalization. Seaspan is a similar maritime leasing business, but the underlying assets are containerships.

Fairfax, as sponsor, held two separate investor days, multiple non-deal roadshows and analyst meetings all within the first year.

Despite Seaspan Corporation having more leverage, operating in a much more commoditized industry, and having less available free cash flow than Teekay Offshore,

Then, in direct contrast to Teekay Management's comments, On June 13, 2018, Moody’s assigns an abysmal Caa2 Rating on Teekay Offshore’s $500M 5-year unsecured notes, well below expectations.

The debt rating process and its investor communication should have bene handled much better.

The debt ratings process was initially run by a Brookfield interim CFO, Tim Cowan. A firm with the resources and "expertise" of BBU should not have missed ratings this badly, nor let management miscommunication so widely — these were unforced errors.

This marks a significant turning point for the worse in Brookfield’s management of Teekay Offshore. Subsequently after receiving a much worse rating than expected rating on its unsecured note offering, Brookfield upsized the offering by 40% to refinance a portion of debt that it had originally purchased at a discount from Teekay Corporation as part of the 2017 recapitalization.

Brookfield originally purchased a $200M inter-company loan from Teekay Corporation for $140M (see Strategic Investor deck). On its initial $140M investment for this piece of debt capital, Brookfield paid themselves $200M par value plus a $12M make whole for a 52% return in just eight months.

This transaction had the effect of re-levering Teekay Offshore’s balance sheet by the $72M return that Brookfield made. The timing of the refinancing, particularly so quickly after the recapitalization, began to seed concerns that Brookfield wasn’t playing for equity holders anymore.

Includes inter-company loan and make-whole in debt.

This was one of the most aggressive and uncalled-for actions by Brookfield.

On June 30, 2018, in the notes of the financial statements (bottom of page 41) it was disclosed that Brookfield had put a 2-year revolving credit facility in place which they priced with an escalator to Libor + 700 bps.

This facility was put in place to finance shuttle tankers. These are the most stable assets in Teekay Offshore’s book of business and they are employed on a long-term basis with the highest credit quality oil majors.

In March of 2019, I led an investor luncheon with a small number of investment funds in Amsterdam with the CFO of Teekay Offshore, Jan Rune Steinsland. In this meeting, Jan Rune highlighted that Brookfield Business Partner's based the pricing of this facility off of the market price of BBU's unsecured debt. In my opinion, this was an asinine way to price this security.

Was a ~10% interest rate really an appropriate rate for long-term cash flow assets with investment grade counterparties?

Recall from the 2017 Strategic Presentation that shuttle tankers were a core strategy of the Brookfield recapitalization.

Was this responsible management? Was this the promised “strong strategic alignment” and “capital allocation expertise” that Brookfield advertised?

On January 8, 2019 Teekay Offshore cut its dividend from 1c per quarter to zero cents.

Dividends were never really a large part of the recapitalization plan, but the cut also did not save a material amount of money.

It did however, spook investors even further.

Brookfield’s mismanagement of Teekay Offshore from 2017 until spring 2019 was painful, but the investment thesis was still intact relatively intact as no permanent damage was done. Fundamentals were trending the right direction and investors could have recovered given there was no immediate risk of permanent capital impairment.

This changed when Brookfield made an all-time low $1.05 takeunder bid. This predatory bid was haphazardly justified using a distressed block trade that occurred when BBU bought out the remaining Teekay Offshore interests owned by Teekay Corporation in April 2019.

In BBU's offer letter, it made a series of claims that are, in my opinion, highly questionable.

In hindsight, it was easy to point to the preceding events and believe that Brookfield Business Partner's was never playing for equity appreciation in Teekay Offshore. However, it still amazes me that this course of action was chosen by BBU management.

Brookfield already owned 60% of shares and had additional warrant coverage of 10% - and these were cashless exercise. The amount of money BBU is potentially saving by squeezing out the the remaining shareholders at such an offensive price pales in comparison to the reputational risk and bad blood they have created. Three class action lawsuits have been filed so far.

The bottom line is that BBU's investment in Teekay Offshore was supposed to be a very simple and easily manageable transaction. Whether BBU grossly miscalculated or acted nefariously in its Teekay Offshore investment, neither sets a good reason why investors should trust BBU with their capital, particularly in investment situations where BBU management has control and can become opportunistic.

Footnotes

Using trailing twelve month EBITDA less reported taxes, reported interest expense and company stated maintenance capex.

Based on company reported 2018 Adjusted EBITDA over 2017 Adjusted EBITDA from March 2019 corporate presentation in Oslo.

Based on company reported 2018 Adjusted EBITDA and Net Debt as well as 2017 Adjusted EBITDA and Net Debt.

Using trailing twelve month EBITDA less reported taxes, reported interest expense and company stated maintenance capex.

Based on company reported 2018 Adjusted EBITDA over 2017 Adjusted EBITDA from March 2019 corporate presentation in Oslo.

I am/we are long TOO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure:

I work for various funds, family offices and individuals who pay me on a consulting basis in which my compensation may be tied to stock price appreciation for disclosed positions.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.