Ann: Announcement of Acquisition of LCT and Entit, page-5

re: Ann: Announcement of Acquisition of LCT a... Toll roads: overtake or take over?
DANNY JOHN
May 11, 2010

TRANSURBAN has thrown down a $220 million challenge to its three major shareholders to back its equity fund-raising to buy Sydney's Lane Cove Tunnel, following their late approach to revive a $7 billion takeover bid for the toll-road company.

The three investors - the Canadian pension funds CPPIB and OTPP and Transurban's largest shareholder, CP2 - sought to engage the company in talks about an amended offer over the weekend as the Lane Cove deal was coming to fruition.

But the prospect of a dilutory rights issue that would cut their combined 41 per cent holding in Transurban by about 3.75 per cent as a result of a 1-for-11 fully underwritten, $542 million entitlement offer stopped the approach in its tracks.

They now face three choices: stump up $223 million at $4.60 a share (a 6 per cent discount to Transurban's last traded price of $4.92); don't take up their rights and become diluted as a result; or come back with what would be a hostile offer above the last approach of $5.25 a share.

The tentative bid - valued at $6.8 billion - was launched in November by CPPIB and OTPP, which own 28 per cent of Transurban, but without CP2's support.

The two Canadian groups were subsequently joined by the Future Fund earlier this year to try to get an agreed deal with Transurban over the line, but that move also faltered.

Australian-based CP2 has since taken the place of the federal government's investment fund as the third member of the would-be bidding triumvirate. CP2 owns 15.5 per cent of Transurban.

BusinessDay believes that the three shareholders are not opposed to Transurban's acquisition of the Lane Cove Tunnel, which provides a natural fit to its M2 toll road and its 50 per cent ownership of Sydney's M7 Westlink.

The 3.6-kilometre tunnel, which opened in March 2007, was placed in receivership in January after its parent company collapsed owing more than a billion dollars.

It cost nearly $1.6 billion to build but its toll revenue was not enough to service its debt after the traffic projections failed to live up to their forecasts.

Transurban will inherit a 27-year concession to operate the tunnel granted by the New South Wales government.

The major sticking point over the deal is the form of funding. It is believed Transurban's main shareholders would prefer the company to raise new debt rather than equity, especially as their takeover plan envisages them taking it private.

About $150 million of the $542 million of new equity will be used to pay down a small proportion of the company's existing borrowings and then to finance the widening of the M2 and M5 Sydney motorways later this year.

Transurban, whose board has been pushing for a higher offer, has now brought the long-running proceedings to a head by asking all its institutional shareholders - including its three main investors - to commit to the fund-raising move by later this morning.

If they choose not to take part, their share entitlement will be offered to other investors at the discounted price through a book-build later this week. Retail shareholders will have the chance to contribute from next week.

According to a statement issued by Transurban yesterday announcing its acquisition of the Lane Cove Tunnel, it said its two Canadian investors had indicated that if the company went ahead with its equity raising there was a ''strong chance'' they would not proceed with a bid.

Chief executive Chris Lynch, who described Transurban as the natural owner of the tunnel and the deal as a ''great outcome'' for shareholders, said the Canadians had proposed meeting the company either today or tomorrow.