Noble shareholders will be hoping Alireza was wrong: Gadfly

[SINGAPORE] Yusuf Alireza, the former Goldman Sachs partner who's leaving the post of chief executive officer at commodity trader Noble Group, managed to keep his cool over the past year.

Even as detractors attacked the company, he insisted that it was selling the right assets to become nimbler and more profitable. He sold the company's agricultural unit, one of its biggest drags, freeing up cash and balance sheet resources to expand into more profitable areas, such as energy trading - all while facing the worst stock rout in the company's history.

Still, there are assets and there are assets. One of the first sales by Noble under its new bosses will be one he'd previously rejected. Noble Americas Energy Solutions, an electricity-trading unit bought from the commodity-trading venture between Sempra Energy and RBS in 2010, will be sold "to generate both significant cash proceeds and profits to substantially enhance the balance sheet," the company said.

The unit delivered its second-highest operating income in the first quarter although that declined from a year earlier, Mr Alireza told an investor call earlier this month. Asked if he'd consider the business as one of the non-core assets he was happy to sell, he answered: "Definitely not."

What can Noble expect to raise from selling this unit? It doesn't break out numbers for the business but paid US$317 million in cash and assumed US$371 million in debt to buy it in 2010. About half of that equity value - US$175 million - was recorded as goodwill as of Dec 31. Next to Noble's net assets of US$3.41 billion and net debt of US$3.69 billion, the sale is unlikely to make the difference between life and death.

A sense of the electricity-trading business's performance can be gained by looking at the broader Gas & Power unit of which it's a part. While Noble as a whole reported an Ebit margin of 2.2 per cent in the first quarter, Gas & Power's margins dropped to 45 per cent from 50 per cent a year earlier. That looks more like a cash cow than an albatross.

Noble's 6 3/4 per cent 2020 bonds are trading at less than 76 cents on the dollar, implying a yield which, despite falling in recent months, is still a painful 15.7 per cent. The challenge for a company in Noble's situation is that it needs to raise cash for the short term without destroying the long-term business. Mr Alireza appears to have thought that the North American electricity-trading unit was one of the company's crown jewels. Bondholders will be glad for the extra cash from this sale. Equity investors will have to hope he was wrong.

BLOOMBERG