New toll road to fame and fortune?

Just over a year into the top job, Transurban boss Scott Charlton has put excitement back into listed toll roads by positioning the company as the next owner of Sydney's Cross City Tunnel and flagging interest in buying the $4 billion-plus Queensland Motorways.

Just over a year into the top job, Transurban boss Scott Charlton has put excitement back into listed toll roads by positioning the company as the next owner of Sydney's Cross City Tunnel and flagging interest in buying the $4 billion-plus Queensland Motorways.

If Charlton can pull off both deals he will have created the most efficient toll road operator in the world and in the process achieved world dominance in the listed toll road operator space. It now owns all or part of nine toll roads in Sydney, Melbourne and the US.

He has also shown that the owner and operator model for toll roads can work, in sharp contrast to the litany of disasters over the past few years with traffic forecasts for toll roads by third parties inflated, resulting in several toll roads being placed in receivership, costing investors and banks billions of dollars.

In the case of the Cross City Tunnel, which was put into receivership in September for a second time in seven years, Charlton has pulled off a master stroke with the purchase of Royal Bank of Scotland's debt exposure to the toll road for $475 million, a significant discount to its estimated $612 million face value.

It was a smart deal on both sides because RBS is keen to reduce its debt before a December 31 calendar balance date and had decided that the Cross City Tunnel was one headache too many. RBS called in the receivers in September with a view to selling the asset and getting repaid.

Transurban has made no secret it would like to buy Cross City Tunnel - at the right price. The tunnel connects with Transurban's 75 per cent-owned Eastern Distributor motorway, which, combined with its ownership of key Sydney Motorway Network concessions such as the Eastern Distributor and the M5 South West motorway, gives it further advantages to leverage - and may present new opportunities to innovate around delivery.

Charlton's decision to go direct to RBS and negotiate to buy the debt at a discount to face value, puts it in the box seat to do what nobody else has been able to do: make money out of Cross City Tunnel.

As the secured creditor Transurban can either cut a deal with the receiver to swap the debt for the asset or, if another party makes an offer that is higher than the face value of the debt, Transurban can outbid it or earn a bucket load of cash. If it chooses the latter it could make more than $100 million in profit.

In a statement to the Australian Securities Exchange, Transurban said it would also pay an additional fee of up to $27.5 million over four years to RBS if traffic numbers on the Cross City Tunnel picked up relative to Transurban's assumptions.

This isn't the first time Charlton has woven his magic. He did it this year when he managed to pull off funding from the state and federal governments by lodging an unsolicited proposal to build an eight-kilometre toll road between the F3 and M2 roads in northern Sydney. The cost of building the new motorway link is $2.65 billion.

But the jewel in the crown for Transurban would be buying Queensland Motorways, which owns the tolling rights to five Queensland roads. At $4 billion-plus it wouldn't bid alone but with a consortium of superannuation funds, maybe including Uni Super.

The former Bligh government shocked the investment community in November 2010 when it abandoned the sale of Queensland Motorways and instead offloaded it in an off-market transaction to the state's investment arm Queensland Investment Corporation (QIC) at a discount of at least $1 billion despite private sector interest. At the time several companies, including Transurban, had completed some preparatory work for a bid, only to find the government had pulled the plug. Not surprisingly it attracted a great deal of criticism.

Three years on QIC is looking at offloading the toll road business. There is speculation it will try to structure a sale that enables it to hang on to the lucrative management rights - and fat fees - by introducing a passive investor.

The feeling is that QIC is overexposed to infrastructure assets, particularly toll roads. But there will be a long list of interested parties, including Industry Funds Management and the Canadian pension funds.

"We think Queensland Motorways is a great asset ... We don't know what the process that QIC is proposing yet. We could play various different roles as operator, owner, back office and potentially working with partners," Charlton told a news conference on Monday.

Transurban's shares have jumped more than 16 per cent in the past year to $7 a share as the market has renewed its interest in the dwindling number of listed infrastructure assets. Most of them came a cropper during the global financial crisis, either blowing up, being restructured or taken out. Transurban is one of the few survivors after deleveraging itself and ignoring an unsolicited takeover offer by two foreign pension funds at $5.25 a share in November 2009.


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