Spark privatisation could lower operating costs: Macquarie

Analysts from Macquarie Group say that a privatisation of Spark Infrastructure Group could see it reduce operating costs by up to $20m.

Analysts from Macquarie Group say that a privatisation of Spark Infrastructure Group could see it reduce operating costs by up to $20m.

DataRoom revealed on Thursday that Spark Infrastructure Group had received a proposal worth close to $5bn to buy the business.

The company told the market on Thursday it had received two approaches from Ontario Teachers’ Pension Plan and Kohlberg Kravis Roberts – one at $2.70 per share and another at $2.80 per share.

It is understood that the latest offer values the target at 1.5 times its December 2020 Regulated Asset Base on an enterprise value basis.

Historically Spark’s peak RAB multiple was in 2017 at 1.5 times, Macquarie analysts said in a research note.

Since then, regulation has had an impact and growth has moderated.

Macquarie said this made such multiples harder to justify.

There is also a current regulatory review of allowed returns.

A privatisation would reduce operating costs by between $18m and $20m, which could add at least $0.12 to $0.15 per security, Macquarie analysts said on Wednesday.

They said that at $2.70 per share, the bid was a 20 per cent premium to its recent share price and implied a 1.34 times RAB and was about 11.9 times Spark’s earnings before interest, tax, depreciation and amortisation.

“A theme from the recent Sydney Airport bid, we believe, is that the unlisted investors have an expectation bonds will be lower for longer,” Macquarie said.

Macquarie said shifting its rising bond expectation to a flat 2 per cent suggests a valuation closer to $2.48 per share for Spark compared to its base value of $2.30 at 2.6 per cent.

Spark’s leverage to bonds was limited as its Victorian, South Australian and NSW assets all repriced periodically off the bond rate.

A stake in TransGrid last year sold for a price of 1.6 times its regulated and contracted asset base on an enterprise value.

This was reflective of a rate of RCAB growth of about 10 per cent annually over the next 5 years.

Macquarie said Spark did not exercise its pre-emptive right to buy an additional stake in TransGrid, but assuming this value holds as growth opportunities have expanded, they believed the residual business has an RCAB multiple of about 1.22 times on an enterprise value basis and about 1.34 times at $2.70 per share.