positive speculator article

2:14 PM, 19 Jun 2008 Giles Parkinson
Transurban transformation

Chris Lynch has only been CEO of toll-road operator Transurban since April, but clearly he’s not mucking around. And toll-road and other infrastructure stocks would do well to take note.

After commissioning UBS to help on a strategic review, Lynch has come to a conclusion which was probably staring him in the face at the start – Transurban’s future as a debt-funded yield play was not sustainable.

So in one fell swoop, Lynch has cut the forecast distribution guidance from around 58c to 22c – and the yield from more than 10 per cent to around 4 per cent – raised up to $1 billion in equity, cut costs, announced an asset sale, and completely transformed the profile of the business.

“This is a much cleaner and easier to understand investment proposition,” Lynch says. “It’s far more real and down to earth. It’s a more fair dinkum business model.”

That last phrase may just resonate around the market. Transurban was already a more palatable investment for many in the market because it didn’t suffer the “governance discount”, as RiskMetric’s Martin Lawrence describes it, of having an external manager, like the various Babcock, Macquarie, Challenger and Allco funds.

By cutting debt and promising to only fund distributions through cash flow, Transurban is also addressing the other issues that have been concerning investors in the market.

Lynch wants investors to be able to see through to the quality of the underlying assets. Macquarie and Babcock & Brown want investors to do the same with their various specialist funds – it’s just not that easy with the opaque nature of their business structures.

So while Transurban has found a way to retain and profit from its status as a listed investment, Macquarie and Babcock & Brown will find themselves under increasing pressure to either liquidate their assets to prove their worth, or take them private.

Macquarie has already moved this way with the listed buyout fund Macquarie Capital Alliance, which was probably the easiest of the funds for which to find a formula that allowed everyone to save face, and protect the value of their original investment, and their management fees.

Indeed, Macquarie is likely to be able to boost its fee take from MCAG after the take-private proposal is sealed. According to JP Morgan, it could be more than double.

Macquarie received base management fees of $12 million and $14 million from MCAG over the last two years based on the formula of a 1 per cent fee on enterprise value.

JP Morgan notes that base management fees in its unlisted model are 1.5 per cent to 2.5 per cent, as well as a performance fee of 20 per cent of any gain over 8 per cent.

But back to Transurban. Interestingly, Lynch reports no major impact on Australian traffic flows – current or predicted – from the rise in fuel prices. The one exception to this is in America, where Transurban owns the Pocahontas tollway in Virginia, because the proportional rise has been greater than elsewhere. This is possibly why Transurban is looking for a further sell-down of its US vehicle DRIVe, from 75 per cent to as low as 30 per cent, and perhaps why they are not fretting so much about missing out on the hairy-chested bidding for the Pennsylvania Turnpike, where the $US12.8 billion purchase price was too much even for B&B, which bailed from the winning consortium at the last minute