cash is not exactly king in prime bid case

IT seemed like a good idea, Brookfield's "liquidity" facility to allow retail holders of Prime Infrastructure to get cash for their holdings.
This, instead of securities quoted on foreign exchanges, but the idea appears to have gone awry.

On August 23, Brookfield Infrastructure Partners and Prime announced an agreed deal under which BIP would acquire Prime for $1.6 billion. BIP is part of the Brookfield group and is listed on the New York and Toronto stock exchanges.

Under the proposal, Prime security holders will receive 0.24 units in BIP for each Prime stapled security. Based on BIP's previous closing price of $US17.15 on the NYSE and an exchange rate of US89.93c, that equated to $4.60 a Prime security -- a premium of $1, or 28 per cent to Prime pre-announcement price of $3.60.

While more than 90 per cent of Prime securities are held by institutional investors, the vast bulk of the security holders are retail investors, many of whom were picked up in the ill-fated Alinta takeover, and they could be reluctant to end up with securities that are traded on foreign exchanges.So Brookfield Asset Management (BAM) has provided a $US300 million ($313m) liquidity facility to enable Prime holders to opt for cash, up to a limit of 4000 units in BIP.

That equates to 16.664 Prime securities and should be more than enough to enable all of the retail holders to receive cash.

To provide some certainty for the cash alternative, the price for BIP securities was fixed at $US17.02 per unit (which was the five-day volume weighted average price at August 23), but Prime holders would bear the risk of exchange rate movements.

For the scrip offer Prime holders bear the risk of movements in both the BIP unit price and the exchange rate.

The liquidity facility arrangement is similar to a put option under which Prime holders can require BIP to acquire their scrip consideration for cash.

Since the bid was announced there has been a surge in the value of the Australian dollar against the greenback. The price of BIP units has also surged, which may be partly influenced by the fact the boost to the exchange rate increases the value of the Prime asset it is seeking to acquire.

BIP's unit price yesterday was $US19.73, an increase of $US2.58, or 15 per cent.

On that basis the value of the scrip offer has improved to $4.89 a share.

However, because of the stronger dollar, the value of the cash alternative has dropped from $4.54 when the bid was announced to $4.22 -- 67c per security below the value of the scrip offer.

Prime's security price closed up 6c yesterday at $4.51.

That's 29c, or 6.8 per cent, above the value of the cash alternative, but 38c, or 7.7 per cent, below the value of the scrip offer. There's another month to go before Prime security holders vote on the proposal, but if the gap between the alternative offers doesn't narrow significantly, retail holders may be tempted to take the scrip and sell on the NYSE. There are a number of Australian brokers who would be able to handle such a transaction.