The Future Fund's domestic take-off

The Future Fund's quest to increase its exposure to domestic infrastructure is set to become a reality as its deal with the Australian Infrastructure Fund is sealed.

Three months after it signalled its desire to acquire the assets within the Australian Infrastructure Fund, the Future Fund is now within sight of a completed deal and a major expansion of its tangible assets investment strategy.

The Future Fund announced yesterday that it has entered a binding agreement with the Hastings Funds Management-managed Australian Infrastructure Fund to acquire its underlying portfolio for an overall cost of $2 billion.

That price, a 10 per cent premium to stated asset values, an effective 22 per cent premium to the price at which AIX’s securities were trading before the Future Fund’s interest in the portfolio of airport investments was revealed in August, and a 31 per cent premium to the volume-weighted price at which they had traded in the previous three months, ought to be sufficient to deter any competing offer.

AIX has also agreed not to solicit or discuss a competing proposal, to give the Future Fund a right to match any rival proposal and to pay a $20 million break fee should any of its directors fail to recommend its proposal or a third party gains a majority interest in AIX.

Given the price, and the reality that AIX has been in play since August and no alternative has emerged, it would appear the Future Fund is on track to complete the transaction and acquire the portfolio of minority interests in five airport-owning entities.

AIX owns 12.4 per cent of Australian Pacific Airports Corporation, which owns the Melbourne and Launceston airports, 29.7 per cent of the Perth Airport group, 49.1 per cent of Queensland Airports – Gold Coast, Townsville and Mt Isa, 28.2 per cent of Airport Development Group – Darwin, Alice Springs and Tennant Creek and 40 per cent of Hochtief Airport Capital – Sydney, Hamburg, Dusseldorf and Athens.

A complicating factor is the existence of a web of pre-emptive rights held by other investors in the underlying airports which would be triggered by the Future Fund deal and which could diminish the size of the transaction, although the value the Future Fund has attributed might deter some of those investors from exercising their rights.

One would assume that the due diligence the fund would have conducted before it approached AIX and in the three months since would have given it a reasonable understanding of the probable attitudes of the co-investors and the likelihood of the pre-emptives being triggered at the individual asset level.

The Future Fund has a pre-existing interest of just under 17 per cent of APAC, which appears to be the investment it is keenest to increase.

It would be relatively indifferent as to whether the pre-emptives on the offshore airports are exercised and, while it would no doubt be keen to acquire as much of the domestic portfolio as possible, the way its offer has been structured means the transaction can adjust in value and shape to any shrinking of the portfolio caused by the triggering and exercise of the pre-emptive rights.

The AIX portfolio is unusually attractive to the fund, which has made no secret of its intention of increasing its exposure to infrastructure. At present it has $4.7 billion, or 5.9 per cent, of its $80 billion portfolio invested in what it refers to as its tangible assets program. If it could acquire the entire AIX portfolio it would have about 8.4 per cent of the fund invested in that program.

The long-term nature of the fund’s mandate and the mandated objective of achieving real returns of 4.5 per cent to 5.5 per cent means it needs a core of long-term inflation-protected income streams.

As the bulk of the fund is invested offshore and is hedged, which has forced the fund to hold quite a lot of expensive liquidity in what has been a volatile environment, domestic infrastructure assets have extra appeal as Australian dollar investments with low-volatility and predictable and growing income streams.

There aren’t many available domestic infrastructure portfolios of sufficient size to have a material impact on the fund, which makes the AIX transaction a highly-strategic one. The funds’ mandate precludes it from making takeover offers, which further restricts its ability to target infrastructure assets.

If the transaction proceeds smoothly AIX plans to return the Future Fund’s cash to its security holders, with the main return of $2.95 to $2.98 per security occurring in April next year and then a smaller return of 24 to 25 cents before 30 June if possible.

AIX’s desire not to let the deal stretch into the subsequent tax year is another reason why it would be difficult for a counter-bidder to go through the same kind of protracted due diligence process the Future Fund has undertaken, without AIX’s co-operation, and challenge the Future Fund’s offer.

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