Why Transurban stuck to its guns

Transurban's December quarter traffic and revenue numbers underscore the unique quality and predictability of its portfolio of toll roads. The continuing consistent growth in traffic volumes and solid growth in revenues provides substance to the group's view that last year's approach from two big Canadian pension funds significantly undervalued the portfolio.

All Transurban's Australian assets recorded positive traffic and revenue growth in the quarter, despite the impact of the final phase of the upgrading of its key CityLink network in Melbourne.

Most notably there was strong growth in both volumes and revenues in its Sydney toll roads and, interestingly, growth in the usage of the network by trucks, a sign of the improving economic conditions.

The importance of the December quarter numbers is not that they contained much that would have surprised the market, but the fact that Transurban continues to generate solid and predictable growth in a sector where that kind of consistency is rare.

The only blemish in the portfolio was the Pocahontas Parkway in the US, where the impact of the US recession saw volumes fall more than 11 per cent, although a toll price increase held the drop in revenue to 2.5 per cent.

Pocahontas is, however, only a very modest proportion of Transurban's asset and earnings base. The rest of its roads are high-quality, mature, urban toll roads that generate solid and growing utility-like revenue growth.

That is what attracted Canada Pension Plan Investment Board and Ontario Teacher's Pension Plan to the group in the first place – they each own about 14 per cent of the group's securities – and is the reason the funds approached Transurban with their proposal for a $5.25 per security scheme of arrangement offer last year. That approach was rejected out of hand by Transurban (see Transurban's true value, November 5, 2009).

Since then, the Canadians have gone quiet and there doesn't appear to have been any contact between the stalkers and their target. The December announcement from the Future Fund that it was considering joining the Canadians was more a public relations ploy than a significant development.

The market seems to share the Transurban board's view of the – for the moment – dormant proposal. Transurban's securities have consistently traded above the proposed offer level, at around $5.50, since the approach was disclosed.

There is a view in the market that any serious assault on Transurban would have to start at a price closer to $6 than $5 and therefore, at the level proposed, there is no pressure on the Transurban board to engage with its stalkers.

The Canadians appear to have sat back and hoped that the market would exert pressure on Transurban to break the impasse and open negotiations. However, so far that doesn't appear to have happened.

Not only is the security price trading materially above the indicated offer price, but it appears that there has been only minimal hedge fund activity and therefore the register hasn't been destabilised.

The dynamics could change if the Australian-headquartered infrastructure fund manager CP2, which also owns more than 14 per cent, were to join the campaign. CP2's investor's attitude to swapping a listed exposure for an unlisted vehicle isn't yet clear.

The appeal of Transurban to the pension funds – and the Future Fund – is obvious, given that its revenue streams grow at CPI-plus rates over long time-frames, providing a neat match with pension fund liabilities. The maturity and quality of the Transurban portfolio makes it a particularly compelling proposition in a sector where a lot of toll road operators have failed to deliver that consistent growth (see A loonie price for our tollroads, December 1, 2009).

For the moment, Transurban appears content to sit back, continue to churn out evidence of its resilience and predictability and wait for the Canadians to come back with something that it will have to take seriously.

The aspiring bidders, of course, understand that re-opening the process with a higher number will create the opportunity for Transurban to encourage them to bid further against themselves. Hence the continuing uneasy hiatus.