Transurban says enough
Since adopting a more conservative approach to the infrastructure model, not even the allure of extremely attractive assets have been enough to tempt Transurban to deviate from its New Year's resolutions.
Transurban's decision not to exercise its pre-emptive rights over Macquarie Infrastructure's 50 per cent stake in the Westlink M7 tollroad in Sydney is surprising but signals that Chris Lynch isn't going to be tempted to depart even modestly from the conservative course he set for the listed infrastructure sector last year.
Transurban had the right to match the $805 million price-tag Macquarie Infrastructure had established when it announced a plan to sell its stake to a new entity, Western Sydney Road Group, it established with an institutional co-owner last year. Transurban, which has a 50 per cent interest in the M7, had been expected to either acquire the interest itself or arrange a consortium to buy it.
The M7 is a very attractive asset which is still in its ramp-up phase, generating high single-digit increases in revenue off mid single-digit growth in traffic volumes. Transurban paid $38 million for a 2.5 per cent interest in the tollroad only last August, valuing the concession at more than $1.5 billion. That deal indicated that the price-tag the Macquarie deal placed on the M7 wasn't out of kilter with Transurban's own view of its value.
In the current environment, however, value is only half the equation. To fund the exercise of its pre-emptive rights Transurban would have either had to raise a big lick of capital, taken on a significant amount of new debt or settled for a relatively modest involvement in a consortium deal.
There are two layers, at least of difficulty for a company like Transurban in contemplating a deal of the magnitude of the M7 opportunity.
One is that while the value of good infrastructure assets has held up because of continuing strong demand from pension funds for long-life assets with relatively low-risk CPI revenue streams, the cost to listed infrastructure companies of financing their acquisition has soared. Both equity and debt (where available) are expensive.
The second is that Transurban itself changed the rules of the listed infrastructure game last year when its newly-appointed CEO, Lynch, unveiled a radical new structure and strategy for the group.
He halved its distribution, raised $1 billion of capital and committed it to maintain a conservative balance sheet – a complete disavowal of the conventional model of geared vehicles borrowing against revalued assets to maximise distributions. The rest of the sector has been forced, to some degree, to reluctantly follow suit.
Lynch was never going to re-leverage the group to pursue a debt-funded deal. Having raised $1 billion last year, the concept of a deeply-discounted equity raising would also have been unpalatable.
Transurban does have very strong connections with international pension funds and therefore might have been able to do something creative but the bottom line is that this isn't a good time to use expensive capital to buy relatively expensive assets.
Transurban has a number of more modest internal growth opportunities – to go with the inherent growth in good tollroad assets -- that it can fund from its existing resources without stretching its balance sheet or asking its shareholders for more capital.
Eschewing the M7 opportunity, therefore is an indication of Lynch's determination to maintain discipline in the face of temptation.
As Transurban is probably the strongest and best-rated of the major listed infrastructure groups, its decision to stay on the sidelines in the M7 process reinforces the view that unless market conditions change significantly the listed vehicles won't be major players in any new or recycled opportunities in the sector.
The most likely source of capital to fund those deals will continue to be the international pension funds and the small number of local institutions with the capacity to make large infrastructure investments.
Transurban had the right to match the $805 million price-tag Macquarie Infrastructure had established when it announced a plan to sell its stake to a new entity, Western Sydney Road Group, it established with an institutional co-owner last year. Transurban, which has a 50 per cent interest in the M7, had been expected to either acquire the interest itself or arrange a consortium to buy it.
The M7 is a very attractive asset which is still in its ramp-up phase, generating high single-digit increases in revenue off mid single-digit growth in traffic volumes. Transurban paid $38 million for a 2.5 per cent interest in the tollroad only last August, valuing the concession at more than $1.5 billion. That deal indicated that the price-tag the Macquarie deal placed on the M7 wasn't out of kilter with Transurban's own view of its value.
In the current environment, however, value is only half the equation. To fund the exercise of its pre-emptive rights Transurban would have either had to raise a big lick of capital, taken on a significant amount of new debt or settled for a relatively modest involvement in a consortium deal.
There are two layers, at least of difficulty for a company like Transurban in contemplating a deal of the magnitude of the M7 opportunity.
One is that while the value of good infrastructure assets has held up because of continuing strong demand from pension funds for long-life assets with relatively low-risk CPI revenue streams, the cost to listed infrastructure companies of financing their acquisition has soared. Both equity and debt (where available) are expensive.
The second is that Transurban itself changed the rules of the listed infrastructure game last year when its newly-appointed CEO, Lynch, unveiled a radical new structure and strategy for the group.
He halved its distribution, raised $1 billion of capital and committed it to maintain a conservative balance sheet – a complete disavowal of the conventional model of geared vehicles borrowing against revalued assets to maximise distributions. The rest of the sector has been forced, to some degree, to reluctantly follow suit.
Lynch was never going to re-leverage the group to pursue a debt-funded deal. Having raised $1 billion last year, the concept of a deeply-discounted equity raising would also have been unpalatable.
Transurban does have very strong connections with international pension funds and therefore might have been able to do something creative but the bottom line is that this isn't a good time to use expensive capital to buy relatively expensive assets.
Transurban has a number of more modest internal growth opportunities – to go with the inherent growth in good tollroad assets -- that it can fund from its existing resources without stretching its balance sheet or asking its shareholders for more capital.
Eschewing the M7 opportunity, therefore is an indication of Lynch's determination to maintain discipline in the face of temptation.
As Transurban is probably the strongest and best-rated of the major listed infrastructure groups, its decision to stay on the sidelines in the M7 process reinforces the view that unless market conditions change significantly the listed vehicles won't be major players in any new or recycled opportunities in the sector.
The most likely source of capital to fund those deals will continue to be the international pension funds and the small number of local institutions with the capacity to make large infrastructure investments.
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