Private temptations in Transurban's register

CP2's stake sale underscores the appeal of Transurban to institutional investors while further opening up the road toll operator's register.

Transurban’s retiring chief executive, Chris Lynch, could be forgiven for having a satisfied smile on his face as he watched nearly eight per cent of the toll road operator’s capital pass through the sharemarket this morning.

Nearly two years ago Lynch fought off a very aggressive series of takeover attempts by a group of international pension funds, which held more than 40 per cent of its capital. The group included Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan Board and CP2, an Australian fund manager which manages money for international pension and sovereign wealth funds.

After successfully resisting the bid, and raising more than $542 million to acquire the Lane Cove tunnel in Sydney even as the funds were putting their final offers on the table, Transurban saw Canada Pension Plan and Ontario Teachers’ dump their 25 per cent of its securities into the market, an exit managed by UBS.

Today UBS continued its dominance of the big trades in Transurban (and block trades generally) by overseeing probably the biggest block trade this year, the sale of 7.9 per cent of Transurban by CP2 for about $630 million. CP2 held a little less than 13 per cent of Transurban before the sale.

CP2 was managing the Transurban holding for four international investment funds and apparently two of them decided they wanted to quit their exposure to a listed entity – most pension funds and sovereign wealth funds gain their exposure to infrastructure assets through less volatile unlisted vehicles.

Earlier this year Lynch announced his plan to retire in July, a little more than four years after he was appointed chief executive of the group just ahead of the onset of the global financial crisis in 2008. His tenure has seen Transurban’s business model radically remade, its balance sheet dramatically deleveraged, its cost base slashed heavily and its reputation of having the world’s highest-quality collection of toll roads enhanced.

He’d be happy to see the CP2 stake broken up and the core of it distributed widely around the market. He’d be even happier that the sale was executed at $5.51, a discount of about 3 per cent to the market but a premium to the final offer of $5.30 per security made by CP2 and the two Canadian funds in 2010.

The price underscores the appeal of Transurban and its long-term CPI revenue growth from its collection of toll roads to institutional investors in an uncertain and volatile sharemarket environment. It is regarded as a defensive stock that nevertheless performs well in a rising market.

The CP2 selldown does, however, further open up the Transurban register and Lynch’s successor, whomever that might be, will be only too aware of the appeal of those inflation protected and rising income streams to defined benefit pension funds.

Pension funds are prepared to value those long-term income streams and their capacity to match the funds’ long-term liabilities more highly than conventional equity market investors, which means Transurban will always be vulnerable to another attempt to privatise it. There aren’t many listed infrastructure assets remaining in this market, or indeed elsewhere.