I’ve listed a few out below:
Sydney Airport – they received a takeover offer at $8.25 in early July from a consortium involving infrastructure funds and super funds, valuing the company at $22bn, a 42% premium.
Mid-September the consortium increased their offer to $8.75 ($23.6bn). This bid looks likely to be approved by the Sydney Airport Board.
Ausnet Services is the latest infrastructure company to receive a takeover offer and a bidding war is already breaking out. Last month, they announced a takeover offer at $2.50/share from Brookfield Asset Management, followed quickly by one from ASX-listed APA Group (APA) at $2.60, as 31% premium.
Spark Infrastructure – owner of electric utilities, received a takeover offer from Ontario Teacher’s Pension Plan and private Equity firm KKR at $2.70/share then a revised offer at $2.80, a 22% premium.
Vocus – an Australian telecom retailer and telecom infrastructure provider, was taken over by Macquarie Infrastructure and Aware Super for $5.50, a 30% premium.
Transurban – bought the half of Sydney toll road WestConnex that did not already own for $11bn.
The first and most obvious is that pension funds and infrastructure asset managers have a big focus on long term returns, longer than almost any other manager of funds. For super funds, the money that they manage is people’s savings for retirement. It’s very important to have consistent, reliable, and enduring returns and cash flows because of the long-term focus for the money they are managing.
The second reason is that retail super funds are growing strongly, especially in Australia, and will continue to grow strongly because of the Super Guarantee (whereby employers must contribute 9.5% of an employee’s wage into their super fund). The larger these super funds become, or more precisely, the more money being managed in the entire super system, the further afield you have to look. It may surprise some to know that the Ontario Teacher’s Pension Plan is a large investor globally. Although, it is active in Australia because of the assets available here and the similarity to the Canadian market.
There has also been a shift in pension plan management towards owning more highly cash generative private businesses. The reasons being the returns from other non-equity investments such as government and corporate bonds are yielding such low levels, forcing investors to look elsewhere. These low yields, or interest rates, are a key reason that valuations on listed equities are also above historical averages. This all adds to the appeal of owning private businesses.
What do we mean by Infrastructure companies?
They develop and own large assets that cost a lot to build and will typically charge millions of people small, largely recurring amounts to use their services. Further, society typically only needs one of the assets, so having multiple private companies build these is a poor use of capital.
Infrastructure has historically been managed by state governments, but these days the right to build and/or manage the asset is generally sold to a private company, providing a regulated monopoly. There are strict rules around what the company can charge and how much fees can be increased each year. This provides a clear framework for the investor to value the project and understand their likely return on capital investment. Indeed, the pricing set by the government is typically decided based on providing an acceptable return on capital investment for the infrastructure owner.
Infrastructure companies often have very high debt loads compare to other companies because they either enter into long term contracts with governments or other users of their service.
For example, an energy utility might sell their electricity to a government on a contract that lasts 10 or 20 years. This is certainly the case with our Ethical Portfolio holding Northland Power, a renewable energy producer. Similarly, the cash flow might be very predictable such as in the case of an oil pipeline or traffic on a toll road. These characteristics make it less risky for the lender because of the transparency of where future cash flows will come from to service the debt. For the same reason, it provides a very predictable stream of cash flows for the investor, something which I mentioned earlier, is very attractive to those requiring consistent returns over decades.
Cheap financing & enduring cash flows
The same is true for companies, and those with large debt (like infrastructure companies) are benefitting because it costs less to borrow to finance these projects. While few are under the illusion that interest rates will remain this low forever. It is certainly making these assets more attractive at present as low interest rates are both a benefit to the infrastructure company. It makes the company more attractive in terms of its valuation.
The nature of infrastructure companies such as utilities, toll roads, airports, and pipelines mean that in normal times, the cash flows from customers are quite predictable. This is what is so attractive to these long term investors. With pension obligations sometimes decades away from becoming due, pension plans need ways to invest that can provide long term cash flows that are likely to increase above inflation for a very long time.
Toll roads are a great example. A motorway will cost hundreds of millions of dollars, maybe even billions, to build over several years. But once built, they receive a concession from the government to charge a fee for every trip on that road; a fee which can increase every year. And this concession might last for maybe the next 40 years. It makes the future cash flows very predictable.
Similarly, an airport is an important asset to a region, and each region, maybe even each state (in Australia at least) will only have one major, international airport. It’s a monopoly used by millions of people that indirectly pay for its use as they pass through.
The Impact of Covid-19
Who will be next?
Based on my earlier discussion, three companies come to mind:
Atlas Arteria – owns an interest in a high-quality toll road capped at $6.5bn, well within the reach of well-funded investment schemes, and is currently still trading below pre-covid levels from recent lockdowns in France.
Auckland Airport – New Zealand’s main international airport that also has substantial real estate investments could be attractive. However, in relative terms, Auckland Airport is not displaying the discount to pre-covid market value as Sydney Airport was, now being valued at the same level as mid-2019.
APA Group – while they have been on the bidding end of things, their earnings profile would fit a long-term investor nicely and already counts UniSuper as a ~15% shareholder.
Oracle Investment Management
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