retrospective...why they offered $4.40 in 2008

...and maybe why it fell over.

MR's motto could be "Think Big" but this article clearly sets out how this attitude and the global downturn changed Asciano forever. It also begs the question, to my mind anyway, as to whether he's up to delivering on his rhetoric.

Maybe, even with twice as many shares and world trade improving, we could again see a dividend (46 cents? Yeah,
not!) and s/p above $2.00.



Asciano's sell-down difficult MALCOLM MAIDEN
August 7, 2008

The company has set out a plan to deliver greater value than the rejected private equity bid.

ASCIANO'S June-year result confirms that the ports and rail freight group is a good asset combination weighed down by too much debt and that, one way or another, that has to change.

The private equity bid that Asciano rejected on price grounds is one possible solution, and yesterday Asciano managing director and substantial shareholder Mark Rowsthorn laid out another.

Asciano took less than a day to reject the $4.40-a-share scheme of arrangement proposal that Texas Pacific and the GE-Credit Suisse joint venture Global Infrastructure Partners lobbed on Monday, on price grounds.

And its plan to cut debt by partially selling off Asciano assets could deliver more value — but it will take time, and that leaves the window open for TPG and Global.

Yesterday's profit result made the problem Asciano faces crystal-clear. Operating revenue rose by 5% to $2.93 billion, and earnings before interest, tax, depreciation and amortisation (EBITDA) rose by a respectable 10.1% to $677.7 million in the 54 weeks to June 30, and to $652.9 million in the June year, in line with earlier guidance of between $650 million and $660 million.

But below the EBITDA line the port and rail group booked net financing costs of $385.6 million on a debt load that approaches $5 billion.

It also booked depreciation and amortisation of $255 million: depreciation is a big recurring charge for Asciano because the group runs hardware-heavy businesses, including stevedoring at Australia's four biggest container ports in Melbourne, Sydney, Brisbane and Fremantle, and Pacific National, Australia's biggest rail freight carrier, biggest east-coast grain hauler and second-biggest coal hauler, primarily in the Hunter Valley.

After those charges the group was left with a pre-tax pre-abnormal charges profit of just $37.1 million: the dividend of 46¢ a share for the year that it locked in last June with a 23¢-a-share final payout will absorb $302 million.

Asciano also has heavy maintenance capital expenditure, and some big capex coming on expansion, notably its push into the Queensland coal-moving market.

Queensland Rail is the incumbent in the Queensland coalfields, and Rowsthorn's prediction is that coal exports from the state will jump from about 185 million tonnes a year to 380 million tonnes a year by 2020. That's optimistic, but it's certainly a growth market, and Asciano now has a foothold, through contracts with Rio Tinto and Xstrata to haul

14.2 million tonnes a year: less than the 30 million tonnes hoped for, but a foothold nonetheless.

Expansion in Queensland will come at a high start-up cost, however. In the year just completed, capital expenditure was $353.2 million, with about one dollar in every three going to maintenance spending, and the rest to expansion.

Capital expenditure on growth projects is expected to double next year as Asciano pushes into Queensland and continues to develop its prospects elsewhere (it is, for example, in a consortium that in April was named preferred bidder to lead Saudi Arabia's Landbridge rail upgrade project, and is also expanding its Brisbane port facilities).

Asciano has too much debt to continue paying 46¢ a share in dividends and also bankroll its maintenance expenditure and expansion spending, and yesterday Rowsthorn said that the dividend would be pruned, and ownership of the core businesses sold down.

Dividends will fall to a point where they are covered by operating free cash flow, cutting the payout from 46¢

to between 24¢ and 30¢ this financial year if Asciano makes as much as expected.

The group will cover off its growth-oriented capital expenditure this year by raising $100 million through an underwritten discount security purchase plan for shareholders capped at $5000 per investor, and another $150 million or so through an underwritten dividend reinvestment plan.

And Rowsthorn aims to rebase the balance sheet permanently ahead of the first debt roll in May 2010 by "partially monetising one or more of its operating businesses" (business-babble for selling non-controlling interests in key assets) to investors who would hold paper that ultimately converted back into Asciano paper. He said yesterday that there was a lot of interest in the assets from investors including sovereign funds, and Asciano will probably mandate its defence adviser, JPMorgan,

to begin fielding formal expressions of interest.

But as with the private equity offer, partial sell-down prices will presumably reflect the current market reality: Asciano's debt load, a shortage of funds for investment because of the credit crunch, and continuing uncertainty about the economic outlook.

Yesterday's 3% sharemarket rally may have eased those concerns but it has not erased them. The rally was tipped off by declining oil prices that in part reflect slowing global demand.

The TPG-Global consortium is considering its next move after Asciano's quick rejection. It could withdraw, but probably won't.

Price is usually negotiable, and Rowsthorn confirmed yesterday that it was price that was the problem. And in that respect the proposed private equity takeover has an interesting wrinkle.

It offers Asciano shareholders cash or an equivalent amount in shares in a new, unlisted holding company: shareholders who took the share option would have the chance to capture any gains on the later resale or

refloat of Asciano, and that argues against Rowsthorn's argument that only a bid that loads in a full control premium can be recommended.


All the best,