dissidents' prime beef unlikely to derail bip

A SURGE in the price of Brookfield Infrastructure Partners securities has boosted the value of the offer price for Prime Infrastructure.
The surge more than offsets the adverse impact of the strong Australian dollar against the US dollar.

But that only reinforces the concerns of a number of Prime security holders who consider the Brookfield (BIP)proposal is inadequate and who have issues about corporate governance and process.

They consider that the rise in Brookfield's unit price since the merger was announced in late August shows that investors believe the Canadian asset management group would be acquiring Prime at an undervalue on the existing offer terms, and that it would result in a transfer of value from Prime security holders to Brookfield unitholders. Among other things, the dissidents are angry that, less than a year after internalising the management of Prime, it is proposed to again switch to external management, paying fees to Brookfield.

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The Brookfield offer is 0.24 units of BIP for each Prime stapled security, which equated to $4.60 per security at Brookfield's previous closing unit price of $US17.15 and an exchange rate of US89.93c, and represented a premium of $1, or 28 per cent, to Prime's pre-offer price of $3.60.

Brookfield Asset Management (BAM) will provide a $300 million facility, in exchange for units in BIP, to enable Prime holders to opt for cash, up to a limit of 4000 units in BIP, which equates to 16,664 Prime securities and would enable the vast majority of retail investors to take cash rather than end up with securities quoted on foreign exchanges.

BAM, which at present owns 39.9 per cent of BIP, is expected to emerge with between 28 per cent and 39 per cent of BIP, while Prime security holders would hold about 32 per cent.

Independent expert Grant Samuel valued Prime in a wide range of $4.36 to $5.47, reflecting the fact that Prime is a holding company with investments in operating assets, each with its own level of gearing.

Grant Samuel valued the scrip consideration in a range of $4.36 to $4.62, based on a price of $US17 to $US18 for BIP and an exchange rate of 93.59c. The cash consideration under the liquidity facility is valued at $4.36 a share.

Those values fall within the value range, albeit at the low end, and so the expert considers the offer is fair and reasonable and in the best interests of security holders.

Grant Samuel considered it was possible that continued strengthening of the Australian dollar might take the offer value below the value range, making it no longer fair, but said it was likely it would still regard the proposal as reasonable. That's because, with Brookfield owning 40 per cent, an alternative bid is unlikely, the proposal is structured so that Brookfield will increase its stake in Prime, and in the absence of the proposal Prime securities would be likely to sell at considerably below the offer price.

The Aussie dollar has continued to gain ground since the expert's report was prepared and is now around US97c. However, BIP's unit price has also continued to rise, to $US19.23 yesterday, and at that price the offer values Prime securities at $4.75, well above yesterday's closing price of $4.39.

Prime was formerly Babcock & Brown Infrastructure (BBI), which fell on hard times following the GFC and was on the brink of administration late last year with total debt of $8.86 billion, of which $3bn was due for repayment in 2010 and 2011.

Gresham Partners was brought in as a financial adviser and in October a $1.8bn recapitalisation and restructure was announced which avoided administration. It involved a $1.5bn equity raising comprising $625m through a placement to Brookfield, $625m through an underwritten institutional placement, and an underwritten SPP (security purchase plan) to retail holders.

Brookfield also subscribed to 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 (DBCT). Management of BBI was internalised, the name 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 one, reflecting the fact that the original equity was virtually worthless, which brought the issue price post-consolidation to $5.08 per security.

The dissidents say the merger valuation doesn't properly reflect $475m of cash held by Prime, which represents about $1.35 per security, or 30 per cent of the offer price, and ignores between 42c and 57c per security upside to Prime holders from the proposed future development of DBCT.

They also contend there was no urgency for the merger as the recapitalisation had stabilised the capital structure and Prime should have been given more time to realise value for Prime security holders. BIP however, claims a number of large Prime investors encouraged it to undertake the merger.

Then there are the corporate governance concerns.

BIP is a Bermudan exempted limited partnership. BIP's sole material asset is about 59 per cent of BIPL, with the remainder held by another Brookfield entity.

BIP is managed by a general partner, BIP General Partner (BIPGP), a wholly owned subsidiary of BAM. BIPGP, in turn, is managed by its directors.

BIP security holders do not have the right to either appoint or remove directors of BIPGP or to remove BIPGP as the general partner of BIP.

Rather, it is BAM and the Brookfield group that control the appointment of directors and can remove the general partner.

Prime security holders will meet on November 2 to vote on the proposed scheme of arrangement. Brookfield cannot vote its 39.9 per cent holding, which means the scheme will need the approval of 75 per cent of the remaining 60 per cent, or 45 per cent. That means it would take the holders of only 15 per cent of the securities to defeat the scheme.

But it would be a hollow victory. If the scheme is voted down Brookfield intends to launch an unconditional offer, which means it would have to take all acceptances.

If the scheme proceeds Brookfield will secure 100 per cent of Prime, whereas under a takeover bid it would need to satisfy the 90 per cent compulsory acquisition requirements to obtain full ownership. But whatever happens Brookfield will increase its holding from its present 40 per cent.

Brookfield clearly hopes that the fall-back of a takeover offer will discourage any dissatisfied Prime security holders from trying to vote down the scheme, because they could end up as locked-in minorities in an entity which has even less market liquidity than at present.