Prime Down, Spark Next?
Prime Down, Spark Next?
I’m not surprised foreign investors are seeing value in Australia’s listed infrastructure stocks. On the back of Ontario Teachers’ Pension Plan’s failed bid for Transurban, another Canadian fund, Brookfield Infrastructure Fund, yesterday launched a bid for the 60% of Prime Infrastructure that it doesn’t already own.
No doubt foreign investors are attracted to Australia’s first-world status, healthy economy, sound government balance sheet and reliable legal system. Most of all, the prices currently on offer are, in my opinion, extremely attractive.
These assets produce highly predictable, regular cashflow and in the current global economy, that’s a rare attribute. They also lend themselves to pension funds and genuine long-term investors looking for a safe, reliable investment and protection against inflation (Australia’s own pension funds were piling into this sector at the height of the boom three years ago, but are nowhere to be seen now the asking prices are, in some cases, half what they were. Anyone surprised?).
So which infrastructure assets might the foreigners raid next? My best guess is another stock we own in the Value Fund, Spark Infrastructure. I recently saw a Citigroup broker report downgrading Spark because of the large amount of investment needed in its regulated electricity businesses over the next 5 years.
For any investor with cash looking for a home, the ability to invest more capital over the coming years and earn a regulated 11% return on it is a positive, not a negative (this is one of the main reasons Warren Buffett cited for investing in regulated electricity businesses in the US; the ability to employ, over time, substantial amounts of additional capital at attractive returns).
Spark is also a fund already married to a global infrastructure investor, Hong Kong-based Cheung Kong Infrastructure (CKI). That means alternative bidders are unlikely, but Cheung Kong is a logical owner of these assets. It already owns 51% of the same electricity distribution businesses Spark owns. And its recent purchase of UK distribution assets shows it’s keen to add to its already large portfolio of global infrastructure assets.
I’m probably wrong about the exact target but I’m confident there will be more action in this sector. The prices are attractive and there is plenty of money around the world looking for a safe, reliable home.
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Hey Steve - just wondering what percentage of iifunds you had in PIH at the time of announcement? Last I checked it was 13%
I was literally one day away from selling my personally managed stake so I'm pretty happy (I actually had to frantically log on and cancel my sell before the market opened!!)
It appeared that the reasons for owning PIH had changed since the NGPL loss and although disappointing, $3.60 was an okay price to get out of an investment where the original reasons for buying had changed significantly. I wouldn't be surprised or upset if you had sold down our stake for the same reasons.
Keep up the good work - in it for the long haul.
Hi Rowan. I sold a few to fund our share of the Photon placement (hopefully that doesn't end up looking as silly as it looks at the moment!) but it was about a 10% position in the fund before the takeover. I had a value on it of about $4.80 so I'm reasonably happy with the price offered - Brookfield will do very well out of it though.
IMO, the problem with the view that foreign raiders are going to snap up the equity slivers atop Aussie infrastructure assets on the cheap is that generally the value of the underlying assets is relatively easy to estimate and so the usual 30% or so premium that needs to be paid in any takeover, will usually push the price to fair value (as has been the case with PIH) even if it was a bargain prior to the bid.
As a financial featherweight, I'd much rather buy 40c dollars and cash out 80c dollars in a relatively short period of time, than buying and holding 60c dollars for the long-haul, which is an approach that is much better suited to richer value-investors than I.
Having any bidders (whether Aussie or foreign) certainly helps in the execution of the former strategy, and so I would welcome this situation with open arms.
Hi Steve - what do you think the chances are of Brookfield lobbing a higher offer price to shareholders is? Given Brookfield is already the majority shareholder a second bidder isn't expected, but do you feel the current offer price is enough to get minority holders over the line?
Steve in view of your comments above re your belief that Brookfield would do very well out of this deal do you think it would be reasonable for an individual investor to consider keeping the shares in Brookfield?
I'd say the chances of a higher bid are close to zero. Only 15% of the register is domiciled here in Australia and one of the main reasons for doing the deal is so the foreigners don't have to be invested in an Aussie vehicle. They will all vote in favour and take their BIP scrip.
Each investor will have to make their own decision based on individual circumstances but, in general, if you are prepared to invest internationally there are probably better alternatives out there. Even Brookfield itself would be worth a look. The manager is often a better investment than the fund.
[...] makes it an interesting space. We’ve already done well out of our investment in Prime Infrastructure. The other two aren’t without their [...]
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