It is a tribute to Chris Lynch’s relatively brief tenure as chief executive of Transurban that the toll road group, which was enveloped in crisis within months of his appointment in 2008, is today regarded as a conservative blue-chip.
Lynch deserves credit for remaking the model for infrastructure investment after the old leveraged template developed by Macquarie Group was undermined and discredited by the global financial crisis. In fact, Lynch proved prescient because he radically re-engineered the Transurban model several months before the crisis properly engulfed the sector when Lehman Bros collapsed in September 2008.
At the time, it appeared Lynch – a former BHP Billiton chief executive and rival to Marius Kloppers for that group’s top job – may have gone overboard in dismantling a model that had previously produced very attractive yields for investors by borrowing against rising asset valuations and future cash flows.
There was a strong intellectual underpinning to that model, given that Transurban’s toll roads generated CPI-plus revenue growth over concession periods lasting decades. It enabled infrastructure operators to give their current investors some of the future embedded value of the super cash flows the concessions generate towards the end of their life.
As the credit crisis unfolded and morphed into a full-scale global financial crisis, however, that wasn’t a story frightened investors wanted to hear.
Lynch slashed distributions to bring them into line with the cash Transurban was actually generating, which decimated the group’s yield, and raised $1 billion of equity to deleverage the balance sheet. He introduced a stringent culture of cost control.
Essentially he de-risked and simplified a previously complex structure and, after an initial investor backlash, eventually convinced the market that the new Transurban model was the template for the post-crisis environment.
He has also been able to do something else that, in theory, should have been near impossible.
The nature of discounted cash flow valuations means that there is minimal value attributed to cash that will be generated in the long term, despite the near-guaranteed step-up in the cash flows from established toll roads. That tends to make toll road operators more valuable to offshore pension funds with long-term liabilities than equity market investors.
Lynch and his board were, however, able to fight off a sustained series of takeover approaches in 2010 from Canada Pension Plan Investment board, Ontario Teachers’ Pension Plan and CP2 – Transurban’s major security holders at the time. Despite the failure of the pension funds’ assault and the difficult sharemarket environment over the past year, however, Transurban securities trade above the price the funds offered.
After only four years with the group, Lynch’s decision to retire has come as something of a surprise, even though he had indicated that he believed five years was about the right tenure for a chief executive. His appointment last year to the Rio Tinto board was perhaps a pointer to his thinking and his future plans, although he apparently has yet to decide whether or not, at 58, he has ended his executive career.
Transurban’s chairman, Lindsay Maxstead, made it fairly clear today that the core strategy developed by Lynch would be maintained.
There is some unfinished business within the group for Lynch’s successor to tackle and embedded options to evaluate. A number of its Australian toll roads are in the midst of upgrades or have further value-adding potential, while its two US projects are still works-in-progress.
Transurban’s status as owner of one of the bigger and higher-quality portfolios of toll road assets in the world at a time of acute financial and economic pressures in the US and Europe may also throw up some more opportunistic growth options.
In any event, Lynch’s successor – and there are a number of strong internal candidates as well as an external search underway – will inherit a growth business in very strong condition and with a very clear model and strategy.