BREAKFAST DEALS: Ports clean-up

The port lease auction in New South Wales exceeded expectations to such an extent that governments in Australia can’t help but realise they can get a good price from privatisations to improve their balance sheets. Meanwhile, some familiar takeaways have emerged from a Woodside Petroleum announcement, this time to do with gas. Speaking of which, APA has picked up $400 million from its pipeline sale, while Norfolk Group’s talks with RCR Tomlinson appear to have produced a deal.

Port Botany, Port Kembla… a beginning?

The larger than expected bounty collected by the New South Wales government for the privatisations of Port Botany and Port Kembla would no doubt grab the attention of cash-strapped governments around Australia.

State Treasurer Mike Baird was happy to announce on Friday that the New South Wales Ports consortium had handed over about $5.1 billion for the 99-year leases for Port Botany and Port Kembla, with $4.31 billion for the former and $760 million for the latter.

The consortium was made up of AustralianSuper, Industry Funds Management and QSuper, along with Tawreed Investments, which is owned by Abu Dhabi Investment Authority.

Among the losing consortiums was the CPP Investment Board, Alberta Investment Management and QIC team, along with another group made up of Ontario Teachers' Pension Plan, Borealis Infrastructure and Hastings Funds Management.

It’s largely sovereign wealth funds mixing it with retirement funds for long-life government infrastructure assets with steady returns – textbook.

What wasn’t textbook was the price, which was almost double what the state government anticipated in its May budget. With earnings thought to be about $200 million, that’s a 25-times earnings pricetag.

Word is that investments to expand the port will mean the lease pays off more than enough for the investors.

So why aren’t there more of these, the big super funds are asking? In this morning’s edition of The Australian Financial Review, AustralianSuper chief executive Ian Silk is reinforcing the message that Australian superannuation funds are growing faster than the local privatisation drive.

“There’s a lot of people talking about institutional investors, including super funds, investing in domestic infrastructure, but that line entirely misses the point,” Silk told the newspaper.

“There’s no shortage of capital, what there is a shortage of is good quality assets. Investors will have no option but to invest more overseas than they’d like unless there is a strong pipeline of infrastructure assets coming on. Everyone is saying Australia could do with better, high-quality infrastructure – we just have to be able to invest in it.”

Silk complains that local funds are having to look increasingly at privatisations in Europe and the US, where there is far less debate about whether offloading unnecessary government assets is good or not for the long-term public purse and productivity.

Queensland, with an inquiry led by former treasurer Peter Costello recommending some major privatisations, is the most obvious candidate.

It should be said that governments in Europe and the US are financially rooted and the incentive to sell assets is far greater. The fact that Australia is slow to the mark isn’t particularly surprising, although that doesn’t mean the assets they’re holding onto are more useful to them.

But, with the announcement from Woodside last week that its onshore James Price Point plan has been axed, a domestic gut-check mightn’t be far away.

Woodside Petroleum, Royal Dutch Shell

It was a case of déjà vu on Friday when an announcement from Woodside Petroleum chief executive Peter Coleman prompted a rally in the share price, reminding some investors that major shareholder Royal Dutch Shell wants to cash out.

Woodside told the market what many have been anticipating for a long time. The onshore Browse Basin LNG plan in the Kimberley is not feasible because of surging construction costs, a high Australian dollar and the potential of cheap supply from the US. The environmental objections, however pressing or irritating, were the last thing on Woodside’s mind.

The share price rallied 3.2 per cent as investors reassessed how a delay to Browse will influence the company’s earnings when the Pluto LNG project starts to pay off in coming years without another big capex spend.

It raised the prospect of a share buyback. Woodside could either directly purchase shares off Shell, which owns 24 per cent of the company, or do a broad share buyback in the hope of coaxing the UK giant into a block trade.

It should be remembered that all these ingredients were present on October last year when an increase in production expectations brought about a share price surge and the prospect of a Shell selldown. It’s six months later and the only thing that’s clear is there’s always the possibility of something, or nothing happening. Terrific.

All this depends of course on what exactly Woodside does with the Browse and how capital intensive it still is. Most expect a floating processing plant. Even Premier Colin Barnett is softening his stance on the issue, which could create less jobs and generate less tax revenue.

Which makes the comments from Shell about how the project should be shaped all the more interesting.

The Australian reports that Shell Australia chair Ann Pickard left nothing to doubt.

“Shell’s floating LNG technology is the fastest, most economic and the best technical solution available for Browse,” Pickard said according to the newspaper.

Coleman didn’t take the bait, saying the company is considering its options.

It’s clear that Shell wants to get off Woodside’s register at some stage and that the share price level is the defining factor. Nothing beneath $35 a share appears to be of interest. The ASX-listed oil and gas player will start this week at $36.40.

But if Woodside pushes the project in a direction Shell doesn’t like, the UK giant will be left holding a stake in a project it disagrees with, run by a company it holds a stake in that it doesn’t want.

A lot of pieces need to fall into place for that scenario to play out. But Woodside’s Browse announcement undoubtedly creates more questions than it answers.

For more on this, read this morning’s edition of The Distillery.

APA Group, QIC Global Infrastructure

Speaking of gas, APA Group will sell its Moomba-to-Adelaide gas pipeline to QIC Global Infrastructure for $400.6 million.

This is as per the wishes of the Australian Competition and Consumer Commission, which made the sale a condition of APA’s purchase of Hastings Diversified Utility Fund.

The problem the ACCC had was that APA also owns a 50 per cent stake in gas pipeline between Adelaide and Port Campbell. The concern was that the company might gain too much control over east-coast gas supply.

No matter now.

Wrapping up

Norfolk Group will probably update investors on its takeover talks with RCR Tomlinson after a few weeks of discussions.

The Australian Financial Review understands that the offer is less than 50 cents a share, with Norfolk having last changed hands at 50.5 cents.

The newspaper says the offer is expected to be recommended by the target’s board.

African-focused potash miner Elemental Minerals is in a slightly different position, with its share price surged 32.9 per cent to 46.5 cents a share on Friday.

The company is the subject of an indicative, non-binding, incomplete and conditional takeover offer from Bermuda-incorporated Dingyi Group Investment, which is controlled by China’s Li Kwong Yuk.