re: Ann: Unsolicited Indicative Non-Binding p... Business...

re: Ann: Unsolicited Indicative Non-Binding p... Business Spectator:

3:34 PM, 5 Nov 2009 Stephen Bartholomeusz
Transurban's true value
Recent Bartholomeusz
Transurban's true value Nov 5
Duelling department stores Nov 5
Telstra tangles its line Nov 4
Westpac's new normal Nov 4
Rating the recovery Nov 3

TOP News
David Jones says Q1 sales similar to Myer's as shares end almost 5% lower 4:05 PM
Transurban shares surge over 19% on rejection of Canadian funds' takeover bid 3:14 PM
ACCC to allow joint marketing of Gorgon gas 2:26 PM
China's Centrex investment approved by FIRB 2:17 PM
BHP suspends WA rail work due to safety 2:58 PM

The Spectators
Bartholomeusz: Transurban's true value
SCOREBOARD: Trade optimism
Bartholomeusz: Duelling department stores
Gottliebsen: The double squeeze on SMEs
DEALS TV: Pipe dream


The proposal by two giant Canadian pension funds to acquire Transurban, while rejected by Transurban, could provide a catalyst for a reappraisal of the value of listed infrastructure stocks.

The approach from Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan was dismissed by Transurban as an "unsolicited, indicative, non-binding proposal" to acquire the group via a scheme of arrangement.

Subsequently the Canadians have revealed that their proposal was for an offer of $5.25 per security, with a minimum aggregate take-up of a rollover and top-up into unlisted scrip of 22 per cent of capital. At $5.25, the offer would be a 20 per cent premium over yesterday’s closing price for Transurban securities and a 25 per cent premium to its three-month volume-weighted average price.

The proposal contained a raft of conditions, including the unanimous support of Transurban’s board, satisfactory due diligence, approval of the funds' own investment committees and the execution of the scheme. It isn’t surprising Transurban chose not to embrace it.

Transurban has, however, almost unique appeal to the pension funds and with more than $200 billion of assets between them they have the capacity to get the Transurban board to take them seriously. Transurban itself said it remained willing to engage with bona fide proposals which provided appropriate value and certainty for security holders.

The reason Transurban appeals to them – and the reason both funds are already on the register with about 14 per cent of Transurban each – is the nature and quality of its asset base. Transurban operates and has majority interests in eight tollroads in Australia and North America.

As a portfolio it is very high quality. In the 2009 financial year, in the midst of the financial crisis, all of its operating tollroads generated revenue growth, contributing to a 7.6 per cent increase in Transurban's share of their total revenue and an increase in its earnings before interest, tax, depreciation and amortisation of 11.5 per cent. These are very resilient assets.

Transurban’s Citylink project in Melbourne, in the midst of a $1 billion upgrade, is regarded as one of the best tollroad assets in the world. That upgrade and the recently-announced in principle agreement for a $550 million upgrade of the Hills M2 Motorway in Sydney highlight the degree of optionality and latent growth in the portfolio.

The M2 concession period will be extended from 2042 to 2046 if Transurban and the NSW government commit to the project and tolls will increase by 8 per cent on completion of construction.

If the pension funds do come back with a proposal Transurban can consider seriously it will be a good test of the market’s sophistication.

Transurban securities were trading at around $4.40 before shooting up to $5.14 on the news of the approach.

That is, however, still a far cry from the $8.34 level at which they peaked ahead of the financial crisis and is still short of the $5.49 per security Canada Pension Plan paid for a placement of about 11 per cent of Transurban in June last year, with knowledge of the deteriorating global financial and economic environment.

Obviously, that $5.49 per security conferred no control, significant influence or even a board seat. The market, overall, is significantly lower today than it was in the middle of last year but isn’t necessarily a reliable guide to the value of inflated-protected income streams locked in for several decades.

Transurban was the first of the locally-listed infrastructure stocks to recognise the fundamental changes to the financial and market context that would result from the crisis. That $659 million placement to Canada Pension Plan was part of a $1 billion equity raising to strip the usual pre-crisis leverage of listed infrastructure from its balance sheet, which is now conservatively structured.

The problem for Transurban investors – and the challenge for the market if the Canadians persevere – is that without the continual re-gearing of their balance sheet to pull forward future cash flows (the model perfected by Macquarie Group) infrastructure vehicles become very sound but unexciting for investors, unless the investors are pension funds.

That is because tollroads generally have concession periods measured in decades and pricing agreements that enable them to lift tolls by CPI-plus rates every year. It was that consistency and predictability of the rising cash flows that enabled the listed infrastructure funds to be highly geared before the crisis completely undermined and discredited the model.

That means a Transurban can still deliver consistent growth to ordinary investors but can’t deliver the souped up yields of the past.

For pension funds, with liabilities also accruing over decades, tollroads provide a perfect matching asset. Because of the vastly different investment time horizons – decades for the pension funds, months or, at best, a year for conventional investors – Transurban is far more valuable to Canada Pension and Ontario Teachers' than to most of the rest of its investor base.

The market clearly didn’t appreciate the extent of the valuation mismatch until the Canadians' approach was disclosed. It isn’t clear that it yet properly appreciates just how attractive Transurban is to pension funds, or the implications of the approach for the value of the better assets in listed funds like Macquarie Infrastructure Group (MIG). Ontario sold out of MIG late last month, for $342 million.

Canada Pension paid about $1.7 billion for Macquarie Communications Infrastructure Group – a group with a far more complex and indebted structure than Transurban – earlier this year. The price it finally paid was a premium of more than 180 per cent to the prices at which MCIG securities were trading before the initial offer was unveiled.

If the Canadians are determined to acquire Transurban, there would be a lot of upside to its value if Transurban and domestic investors are able to look at it through the eyes of the prospective purchasers.