The $7 billion price of success may have initially raised a few eyebrows but Queensland Motorways was not only the best asset Transurban could buy – it was an asset it had to buy.
While at face value paying 27 times historical earnings might appear somewhat steep, the fact that the winning Transurban consortium only very narrowly outbid the rival Hastings/Abertis runner-up says it wasn’t the only knowledgeable bidder to put that level of value on the toll road network.
The compelling attraction of Queensland Motorways to Transurban is that it owns a network of established toll roads in Brisbane with concession periods that run for between another 37 to 51 years.
The length of the concession periods is significant. Owning toll roads is a bit like being a miner. If the portfolio isn’t added to periodically, the asset base is depleted as the concessions expire. Queensland Motorways will increase the average concession life of Transurban’s portfolio from 22 years today to 26 years, while the fact that these are such long life assets with inflation-related pricing and compound annual traffic growth of 5.7 per cent a year over the past decade helps explain the high valuations the bidders placed on them.
For Transurban, with a stated strategy of sticking to its core jurisdictions of Australia (where it dominates Victoria’s and NSW’s toll roads) and Virginia in the US, the opportunity to add a new network of roads in Queensland, where it currently has no presence, and extend its dominance of the sector across the eastern seaboard, made absolute strategic sense.
With the core toll roads in the network having been open for the best part of three decades, Transurban wasn’t buying into a greenfields network but one with a substantial operating and financial history that Transurban has spent the best part of 18 months analysing.
Transurban, with its owner/operator model, would hope to extract some synergies and add some value from its long experience of operating similar toll roads.
It also knows from experience that owning an integrated network creates future opportunities – it becomes the logical party to develop, own and operate any future toll roads in areas adjacent to the Queensland Motorways network.
One of those opportunities might emerge quite quickly.
BrisConnections, which is in the hands of its bankers, owns the Airportlink toll road that connects to the Clem7 tunnel that Transurban is about to acquire. It is on the market but a sales process was frozen as the larger Queensland Motorways offer developed.
The buyer of Queensland Motorways was always the most obvious and best-placed prospective buyer of BrisConnections.
To fund the purchase Transurban, with a market capitalisation of just under $11 billion, has announced a $2.74 billion equity raising that includes a $400 million placement to its consortium partners, Australian Super and Abu Dhabi’s Tawreed Investments.
Transurban will have a 62.5 per cent equity interest in Queensland Motorways, with Australian Super owning 25 per cent (at a cost of $1.1 billion) and Tawreed 12.5 per cent. The rest of the funding – about $2.8 billion – will be in the form of non-recourse debt.
Transurban was at pains to reassure its own income-conscious security holders that despite the size of the deal it won’t adversely impact their distributions, reaffirming its distribution guidance for this financial year of 35 cents per security and the 2014-15 guidance of 39 cents per security. The maintenance of its distribution guidance is a clear signal of its conviction that, despite the price tag, the acquisition will create value for its security holders. It says it believes the distributions will be fully covered by its free cashflows.
The big price Queensland’s QIC Ltd will receive for the toll roads underscores the scarcity and value of good infrastructure assets and the scale of funds available, in Australia and around the world, to finance them.
With the recent sale by NSW of its Port Kembla and Botany ports for an unexpectedly high $5 billion, the Queensland Motorways outcome should encourage state governments, which are being exhorted by Tony Abbott and incentivised by Joe Hockey to sell state-owned infrastructure and enterprises, to expedite any privatisation or privately-funded infrastructure plans they might have.