Investment bankers to rival Spark bid

Investment bankers at Macquarie Capital are believed to be working on a rival bid for the $5bn electricity asset owner Spark Infrastructure.

It is understood that the party weighing a rival approach is an unlisted fund.

It comes as Barrenjoey Capital Partners and UBS are advising Ontario Teachers’ Pension Plan Board and Kohlberg Kravis Roberts on a $4.9bn proposal to buy Spark Infrastructure, announced on Thursday.

Goldman Sachs is defending the target, which first received a verbal $2.60 per share offer from the consortium, then an offer in writing at $2.70 six weeks ago and another at one at $2.80 in recent days, with the latter two including dividend payments.

The latest price is said to value the target at 1.5 times its regulated asset base, including debt, as at December.

The Spark Infrastructure and Sydney Airport bids, collectively worth more than $27bn, are expected to be followed by more buyout proposals in the Australian infrastructure space with $US300bn ($400bn) of private equity and pension fund capital looking to invest in the sector.

Banks, particularly Goldman Sachs, Barrenjoey Capital Partners and UBS, appear to have positioned themselves for a fee bonanza based on this trend, with the three involved in the two deals. But they are in for a fight, as so far both offers have been rejected.

Goldman Sachs has been working for an IFM-led consortium offering $8.25 per share for Sydney Airport, while Barrenjoey and UBS are the airport’s defence advisers.

The target companies on Thursday told the market that they had rejected the bids.

Spark said the Ontario and KKR approach undervalued the company, but it was willing to offer some engagement, with limited information, rather than due diligence.

KKR has recently launched a global core infrastructure fund that can target opportunities with returns below 10 per cent.

Sydney Airport told the market that the $22.3bn proposal received by an IFM-led consortium, including GIP and QSuper, was not in the best interest of security holders, and at $8.25, undervalued the company.

The theory is that a price closer to $9 is needed, but some believe the airport faces major headwinds with uncertainty around business travel and the arrival of Western Sydney airport.

Some shareholders in Spark on Thursday indicated that they believed that KKR and Ontario would have to lift their offer to around $3 to be acceptable.

It may depend on what other infrastructure investment opportunities are available.

Opportunities to buy infrastructure assets like Spark, with future earnings certainty not affected by inflation over the next five years, are very limited.

Spark owns a 15 per cent stake in NSW electricity transmission network TransGrid, a 49 per cent stake in SA Power Networks and a 49 per cent interest in Victoria’s largest electricity suppliers CitiPower and Powercor, known as Victoria Power Networks.

The upside for a bidder is that between $18m and $20m of costs could be cut, according to Macquarie analysts.

They also have additional earnings expected to come on stream through Project EnergyConnect – a proposed electricity transmission line connecting South Australia and NSW within the National Electricity Market in Australia, to enable more renewable energy onto the electricity grid.

Even though TransGrid has not traded above 1.5 times its regulatory asset base (RAB) since 2017, expectations are that the project will see a substantial earnings lift in the future.

A stake in TransGrid last year sold for a price of 1.6 times its regulated and contracted asset base on an enterprise value basis, or about 1.8 times RAB, although some argue that TransGrid is a better deal than the South Australian and Victorian power assets in the portfolio.

It is worth noting that CKI, which is the majority owner of the Victoria and South Australia power assets with TransGrid, has pre-emptive rights should another bidder come forward with an offer.

However, most do not believe it will have an interest in owning the assets outright.

Meanwhile, APA can’t be ruled out as a rival suitor. It declined to comment as to whether it had any interest in Spark as a takeover target.