PRIME Infrastructure Holdings has set in motion the process to...

PRIME Infrastructure Holdings has set in motion the process to distribute in-specie shares in AET&D, which houses assets of the former Alinta.
However, the majority of the securityholders should not get excited.

AET&D is for sale and a data room has recently been established and an information memorandum is available for possible buyers, with indicative offers due early next month. But if the sale realises any value for the equity in AET&D, which is uncertain, those proceeds will not go to the general body of Prime securityholders.

Instead, any such proceeds will go to former holders of $780 million BBI exchangeable preference shares (BEPs), hybrid securities which were issued to help fund the Alinta takeover. The BEPs were converted into BBI securities at 43c in the dollar late last year, equivalent to $333m -- less than half their face value. The former BEPs holders own 16 per cent of Prime.

In an unusual and complicated arrangement the former BEPs holders also managed to secure the rights to any residual value that may arise on the sale of AET&D.

A Brookfield entity is seeking to sell AET&D but it is the former BEPs holders who will determine whether a deal is done.

It was all part of a $1.8 billion recapitalisation and restructure of BBI which saw the Canadian asset management group Brookfield emerge as a 40 per cent cornerstone investor. It involved a $1.5bn equity raising, which was split $625m through a placement to Brookfield, $625m through an underwritten institutional placement and an underwritten SPP (share purchase plan) to retail holders.

Brookfield also subscribed to a $295m convertible note issue in exchange for some asset of BBI, including a 49.99 per cent economic interest in the Dalrymple Bay Coal Terminal. Management of BBI was internalised, and the name of the fund was changed to Prime.

Brookfield is now seeking to acquire the remainder of Prime through a recommended $1.6bn scheme of arrangement and a concurrent takeover offer. Under the proposal, Prime securityholders will be offered 0.24 units in Brookfield Infrastructure, which is part of the Brookfield group, and is listed on the New York and Toronto bourses, for each Prime security.

Based on Brookfield's current unit price of $US20.52 and an Australian dollar-US dollar exchange rate of US98.47c, the offer values Prime securities at $4.99, well above the current Prime security price of $4.54. There is also a liquidity facility to enable retail holders to take cash but on the present exchange rate that alternative is valued at only $4.15 per security.

Under the recapitalisation, Brookfield Asset Management was granted an option to acquire BBI's interest in AET&D, which was held by a BEPs entity, for "nominal proceeds". Brookfield indicated it would not provide any further financial support to AET&D and intended to sell the stake, but did not expect any financial return from the sale.

The recapitalisation needed the approval of the BBI and BEPs holders. The BEPs were listed and had fallen from their issue price of $1 to around 5c. On the way down, many of the original investors sold out and were replaced by a mix of professional investors, including hedge funds, value investors and other institutional investors.

After the independent expert Grant Samuel put the full underlying value of BBI's interest in AET&D in a range of $48m to $148m, the new holders of the BEPs became concerned that the option could transfer value from the BEPs holders to Brookfield, and threatened to vote down the recapitalisation and restructure.

Brookfield removed that threat by agreeing to relinquish the option in favour of the BEPs holders. Moreover, BBI (Prime) agreed that the sale of all, or a material portion, of the AET&D assets would be subject to the approval of a majority of the former BEPs holders.

Whether there is any underlying value in AET&D remains to be seen. Grant Samuel's valuation represented the value that could be realised for the underlying assets on a willing buyer/willing seller basis, less the debt in the AET&D structure. It essentially assumed away any financing risk. But Grant Samuel also warned that AET&D was financially distressed and unlikely to realise the "theoretical" full underlying value. The valuation also did not take into account transaction costs and Grant Samuel cautioned there would be at least some prospect that BBI would realise zero value for its interest in AET&D.

AET&D's assets for sale are a 20 per cent interest in the Dampier-Bunbury gas pipeline in WA, 74.1 of the WA Gas Network, which distributes gas in Perth and regional centres, 20.1 per cent of the Multinet Gas Network, which distributes gas in Melbourne, 100 per cent of the Tasmanian Gas Pipeline, which distributes gas from Victoria to Tasmania, and 100 per cent of WestNet Energy, which services electricity and gas businesses in WA.

Duet Group, which is co-managed by AMP Capital Investors and Macquarie Capital, owns the other 25.9 per cent of WA Gas Network and the other 79.9 per cent of Multinet. It also owns 63.2 per cent of the Dampier-Bunbury pipeline.

AET&D has corporate debt of $518m and there is $1.2bn of debt at the asset level, all of which sits in the businesses in which DUET has an interest. Tasmanian Gas and WestNet have no debt.

DUET holds pre-emptive rights over the AET&D assets in which it has an interest, but only if sales are at the asset level. The rights do not apply to a sale of AET&D.

There has been speculation that, following the recent sale of its stake in Duquesne Light, DUET may be a buyer of the assets in which it is invested. It would be a natural owner of those assets as it would convert the company into an operating business rather than an investor in a number of utility assets. It would also generate considerable synergy benefits.

But it's doubtful that DUET has the capacity. The Duquesne sale was made to reduce debt and to acquire the AET&D assets would require DUET to either take on debt again or raise equity.

However, some of the former BEPs holders are hopeful. They believe the underlying equity value of the AET&D assets is more like $200m, and they disagree with Grant Samuel's application of a 30 per cent discount to the full underlying value of the equity in the Dampier-Bunbury pipeline and the interest in Multinet, because it treats them as investments.

They note that unlisted infrastructure funds in North America and Europe are estimated to have surplus funds for investment in the order of $70bn. And Australia is regarded as a safe place to invest.

As to the distribution in-specie, that will be of non-voting shares in AET&D Holdings No 1 Pty and is intended to further ring fence the assets from Brookfield. The company has no assets and the shares have no value.

The assets are held by a subsidiary, AET&D Holdings No 2 Pty, and the former BEPs holders' option is over the shares of that company, which they will exercise if the sale of the AET&D assets realises any equity value.