A Future Fund stake in Transgrid expected to go through

Transgrid is a regulated business, of which about 90 per cent of its assets are leased from the NSW government.

A deal to sell a $2bn-odd stake in Transgrid to the Future Fund is believed imminent, as other shareholders prepare to decide whether they want to exercise their right to buy the holding from OMERS instead.

Canadian pension fund OMERS has been in talks to divest the holding to the Australian sovereign wealth fund, but other owners of Transgrid have the right to buy the asset at the same price as an external party if one of the shareholders wants to exit.

Most expect that the deal with the Future Fund will go through, as other investors of the NSW electricity power company have been sellers of the asset in this market.

Groups which originally bought into the $10bn business have found that the capital spending requirements for introducing renewable energy into the system has been higher than anticipated, such as the expense of funding interconnectors to the South Australian market.

As a consequence, the Morrison-run fund UTA, advised by Macquarie Capital, has sold its position to Singapore’s sovereign wealth fund, the Government Investment Corporation, securing a 10 per cent holding for at least $1bn in a deal advised by Citi that values Transgrid at $10bn.

Meanwhile, another shareholder, the Abu Dhabi Investment Authority, is now selling its holding through Barrenjoey.

However, some suspect that could be pushed back, as the logical suitors have already committed to buy the holdings from other shareholders.

Transgrid was sold by the NSW government in 2015 for $10.3bn.

The buyer was a consortium of Spark Infrastructure, Utilities Trust of Australia, Canadian pension fund CDPQ, Wren House and the Abu Dhabi Investment Authority’s Tawreed Investments.

In 2020, Canadian pension fund OMERS purchased a 19.99 per cent stake from the Kuwait Investment Authority’s Wren House Infrastructure Management for a price thought to be around $2bn.

Transgrid is a regulated business, of which about 90 per cent of its assets are leased from the NSW government over the long term.

The remainder includes contestable assets such as its connection assets, which provide growth opportunities for investors as demand from new renewable generation increases over the next decade.

When the asset was privatised, the then listed Spark committed to owning 15 per cent, the Morrison & Co-advised UTA 20 per cent, CDPQ 25 per cent and Tawreed Investments and Wren House each 20 per cent.

The consortium paid 1.6 times its regulated asset base at the time, which was considered a large amount.

In 2020, onerous regulations meant the asset had a return on equity of about 5 per cent, which was considered low.