Mike Baird, as NSW Treasurer and now Premier, couldn’t have chosen a better moment to execute the asset sales strategy that underpins NSW’s infrastructure investment program Restart NSW.
The sale of a 98-year lease over the Port of Newcastle today has generated another gob-smacking price for the state. Where the sale had been expected to raise around $1 billion, the fierce bidding from five consortia resulted in the winning consortium of Hastings Funds Management and China Merchant paying $1.75 billion.
If the sale were an isolated privatisation the price-tag – more than 25 times prospective earnings before interest, tax, depreciation and amortisation (EBITDA) -- would have started people muttering about the prospect of “winners curse”.
It comes, however, after Industry Funds Management, Australian Super, Q Super and Abu Dhabi’s Tawreed Investments paid the NSW Government $5 billion for 99-year leases over Port Botany and Port Kembla last year. That sale was at 25 times the ports’ EBITDA.
Only last week Transurban, Australian Super and Tawreed paid 29 times historical EBITDA for Queensland Motorways and its portfolio of toll roads. The initial gasps that price drew appear to have been dispelled as a better understanding of QML’s potential under Transurban has been gained.
In fact earnings multiples aren’t an intelligent way to value long-dated assets like ports or toll roads with concessions/leases measured in multiple decades or, in the case of the ports, almost a century.
The Hastings-led consortium would not be looking at Newcastle as it is today – where it is the world’s largest coal export port -- but what it could be under their ownership over the next 98 years.
That’s not only a vote of confidence in the long-term outlook for demand for coal (China Merchant is one of China’s oldest and largest state-owned enterprises and would have a good understanding of its long-term energy needs) but probably also says the buyers believe they can diversify the port’s customer base.
With Newcastle’s peak dividend to the NSW Government only $15 million in 2013 the government, even if it had the inclination, wouldn’t have committed large-scale new investment to the port even though the existing infrastructure only occupies two-thirds of a site that is larger than the Botany and Kembla ports combined. The new owners of Port Kembla have already announced major expansion plans.
The level of interest in Newcastle underscores yet again the scale of the funds floating around the globe looking to invest in infrastructure assets, which have very long-term cash flows with steady growth characteristics which are particularly attractive for pension funds with long-term liabilities. It also helps make the numbers work that the cost of debt is at historically low levels.
The Victorian Government’s plans to sell leases over the Port of Melbourne and the port at Hastings in order to do as NSW is doing and recycle capital into new infrastructure will be boosted by the success of the Newcastle deal and the demonstrated appetite for Australian ports. The Queensland Government is conducting a scoping study of the potential sale of a 99-year lease over the port at Gladstone but is yet to commit to a sale.
The NSW Government has already said that about $340 million of the proceeds from the Newcastle deal have been earmarked for Newcastle’s central business district, with the rest to go into its Restart NSW infrastructure fund.
Now that it has completed its ports program, the government’s focus will shift back to its electricity generation privatisation program.
The centrepiece of that program, the sale of Macquarie Generation to AGL for $1.5 billion, has been held up – whether temporarily or permanently – by the Australian Competition and Consumer Commission’s opposition to AGL as the acquirer. AGL has taken the issue to the Australian Competition Tribunal.
NSW’s electricity distribution assets, potentially worth several tens of billions of dollars, aren’t slated for sale during the government’s current term but may come into play in the medium term, as might Queensland’s electricity assets.