bip fronts up with the prime deal motivator

IT'S unlikely to satisfy all of the critics.
Bbut it took a cash sweetener of only 20c per security unit to swing the support of the major securityholders behind the Brookfield group's proposed takeover of Prime Infrastructure Holdings (formerly Babcock & Brown Infrastructure).

Those securityholders no doubt took into account that since the proposal was announced two months ago the surge in the Aussie dollar against the US dollar has in turn pushed up the unit price of the bid vehicle, Brookfield Infrastructure, resulting in the offer value increasing by 40c, or almost 9 per cent, from $4.60 per security to $5 per security.

The bid vehicle, Brookfield Infrastructure Partners (BIP) said yesterday it had held discussions with some of the largest Prime securityholders, owning about 24 per cent of the securities, or 40 per cent of the securities eligible to vote on the proposal, and believed they would vote in favour of the enhanced proposal, and also accept the concurrent unconditional takeover offer, in the absence of a superior proposal or other material change in circumstances.

It suggests that had BIP not agreed to pay the sweetener, it ran the risk that the major securityholders would have voted down the scheme and, presumably, would also have decided not to accept the takeover offer.

The offer only proceeds if the scheme is rejected.

The scheme needs the approval of 75 per cent by value and 50 per cent by number, of those who vote. BIP itself holds 40 per cent of Prime, which it cannot vote, and that means it will take holders of only 15 per cent of the securities to defeat the scheme.

The support of the major securityholders for the cash sweetener almost certainly means that the scheme will now be approved.

If not, there's always the fall-back of the takeover offer. Because it's unconditional, BIP would almost certainly lift its stake considerably in Prime but may fall short of the 94 per cent it would need for compulsory acquisition and if that were to happen, any holders who didn't accept would become locked-in minorities.

The risk of becoming a locked-in minority could discourage securityholders who are still dissatisfied with the bid consideration from trying to vote down the scheme.

BIP's offer for Prime came almost a year after a recapitalisation and restructure of BBI to avoid administration.

It involved a $1.5 billion equity raising, split $625 million through a placement to Brookfield, $625m through an underwritten institutional placement and an underwritten SPP (security purchase plan) to retail holders.

Brookfield also took up a $625m convertible note issue in exchange for some assets of BBI, including a 49.9 per cent interest in the Dalrymple Bay Coal Terminal. Management of BBI was internalised, the name was changed to Prime and Brookfield was hailed as a 39.9 per cent cornerstone investor. Following the recapitalisation there was a consolidation of the securities on the basis of 15,000 to 1, reflecting the fact that the original equity was virtually worthless, and which brought the issue price post-consolidation to $5.08 per security.

At the time of the recapitalisation there was heavy buying by US and Canadian investors, many of whom could be regarded as camp followers of Brookfield, having done well from investing in other activities in which the Canadian-based asset management group was involved and hoping to repeat the experience with Prime.

It's suggested they acquired between 25 per cent and 30 per cent of Prime.

But it has been an unhappy experience for them. Following the recapitalisation, Prime securities sold within a range of $3.30 and $4 -- well below the $5.08 issue price in the recapitalisation.

Two months ago Prime announced a recommended deal under which BIP would acquire full ownership, with an offer of 0.24 units in BIP for each Prime stapled security, which equated to $4.60 per Prime security, based on BIP's previous closing share price of $US17.15 on the NYSE and an $A/$US exchange rate of US89.93c.

The proposal valued Prime at $1.6bn. It would boost BIP's market capitalisation to more than $US2.5bn and create a leading global infrastructure company. It would give Prime securityholders the opportunity to participate in Prime's existing activities within a larger, more diversified portfolio of infrastructure assets. Some observers suggested the offer was proposed as a means to enable the unhappy camp followers to exit their poorly performing investment in Prime.

Since the proposal was announced, the $A exchange rate has risen strongly, briefly moving above parity against the $US this week, and closing yesterday at US98.95. That boosted the value of much of the Prime assets and as a result BIP's unit price has also risen strongly, reaching $US20.65 yesterday.

While more than 90 per cent of Prime's securities are held by institutions, the vast bulk of the securityholders are retail investors, many of whom were picked up from the Alinta takeover.

The cash facility is not available under the takeover offer. To provide some certainty for the cash alternative, the price for BIP securities was fixed at $US17.02, but Prime holders bear the risk of exchange rate movements.

Holders who opt to utilise the cash facility will also receive the cash sweetener of 20c per security, but as BIP admitted yesterday the value they would receive by taking BIP units is higher than what they would receive under the facility.

While BIP pointed out that the value of the scrip offer had risen to $5.01 per Prime security it didn't spell out the value of the cash facility.

Well, based on BIP's unit price of $US20.65 the value of the cash alternative has plunged from $4.54 per security when the offer was announced to only $4.125.

That's a difference between the scrip and cash alternative of 87.5c per security.

The scheme meeting is scheduled for November 4.

If the gap hasn't narrowed significantly by then, retail holders would be better off to take the scrip and sell on the New York or Toronto exchange. There are a number of Australian brokers who would be able to handle such a transaction.