The initial read from the market was unsurprisingly negative with the Link share price down 6.8 per cent at $5.08, because not only did Carapiet reject a bid for the parent company, he converted a $150 million intra-company loan into a bigger stake in PEXA at 47 per cent, up from 44 per cent.
But the spin doctors couldn’t have written the headline better on Monday: “Link wins big with PEXA”.
After saying he was a seller, Carapiet ended up outbidding the buyer by increasing his stake in PEXA at a higher price, which was quite a feat.
Hopefully his confidence remains 12 months from now after PEXA is listed with a $3.3 billion valuation or a heroic 30 times multiple on the valuation for the float later this year.
The chair has shown commendable faith in his decision but understandably some long-term shareholders saw it as the final straw in what has been a dog of an investment.
On his part Carapiet argues he is taking a commendable long-term view on valuations which will suit shareholders over time.
That makes sense so long as there is value there in the end. To gauge the risks you have to look no further than Nuix, with two downgrades in a matter of months since its December listing at $8.01 a share. Nuix closed Monday at $2.77 a share, down 17.8 per cent.
By the time Pexa lists Link’s shareholding will be lower because the float will include retail and perhaps offshore holdings.
Carapiet has a top-heavy team on the PEXA float including UBS, Macquarie, Barrenjoey and Morgan Stanley which helps repay loyalty and to minimise value leakage through negative spin from rival brokers.
Morgan Stanley’s infrastructure arm is selling out of Pexa on the float, so it wants a good price, Barrenjoey advised CBA so it was added, and just to know how well advised Link’s Carapiet was he had Lazard and Investec at the table cheering him along as independent advisers.
Shareholders now have a line in the sand.
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Plugging in the power
The five years it has taken Transgrid to get the $1.8 billion EnergyConnect transmission project off the ground is a damning illustration of the problems facing the energy sector in Australia.
The NSW and federal governments have a chance to show what can be done over the next two years as the paperwork grinds on to get the Hume Link up and running, linking the Snowy Hydro 2.0 project and a lot of renewable power to the Sydney market and the national grid through Wagga.
It’s a growing field, with the proposed Marinus link between Tasmania and Victoria stuck as the two states look at each other to see who will pick up the tab.
Paul Italiano and his team at TransGrid are rightly thrilled to have finally won FID investment approval for the EnergyConnect project, which will link Wagga Wagga with the South Australian border with a connector into Victoria.
A key to getting the project to this stage was the Clean Energy Finance Corporation (CEFC) which is backing a $295 million hybrid instrument with 50 per cent equity backing.
This is the largest ever financing by the CEFC and came with the backing of Energy Minister Angus Taylor.
Direct government intervention was necessary to offset the inhibiting regulation, which would otherwise make financing difficult because it limits revenue increases to CPI or whatever the regulator deems appropriate.
When he was energy minister Josh Frydenberg banned appeals against the regulator’s decisions, which made life even more difficult for the monopoly regulated transmission assets.
This, it should be noted, is a moot point. On the other side of the fence, Frydenberg did consumers a huge service by ending the gaming of the system.
What was happening was that transmission operators were leveraging appeals by concentrating on one or two of the 30 or 40 items ticked off by the regulator.
As much as transmission operators complain about the regulators, they are very happy to build new lines.
There are two regulator processes under the AER – one, whether the line is justified in the first place, and the other on its regular budgets.
The reason why transmission companies are happy to build the lines is that they provide regulated returns, which in this case is a regulated asset base of $1.8 billion multiplied by the allowed return of 6.13 per cent. Few businesses get guaranteed returns like this.
Once the transmission line is built consumers are stuck with the costs, so there is merit in assessing whether the project is viable.
Consumers in the process are represented by the regulator.
That said, the system needs to work better.
The EnergyConnect link is also important because it adds more security to a transmission network which until now just linked the country in a straight line from South Australia to Victoria to NSW and Queensland. This line runs from NSW to South Australia. It starts a mesh-like link which along the way adds three gigawatts of renewable energy and in turn provides offsets of up to 2.5 million tonnes of carbon a year.
This is just the sort of project ESB chief Kerry Schott has backed in her push for more transmission assets, which will be included in her post-2025 market update.
Snowy Hydro boss Paul Broad has also banged the drum about more transmission assets but the naysayers not surprisingly are the big energy companies led by AGL, Origin and EnergyAustralia.
The existing transmission network links the big coal-fired generators to the population centres, while more transmission to different assets increases competition for the big generators.
This means lower prices, which is what Australia has enjoyed since the explosion of renewables.
This also explains why Transgrid is boasting net benefits of $11.9 billion or $64 a year off the household bill of NSW residents.
The missing link is speed so more projects are built.
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Carbon competition
The list of potential bidders for the Clean Energy Regulator’s tender for exchange-traded carbon emissions includes the ASX, rival ChiX and the NSX, which pits the dominant equity and future exchange against rivals.
ChiX’s new owner, the Chicago Board of Options, comes with its own clearing house, which adds to its appeal for a government wanting to increase the international appeal of carbon trading units, with tenders due on June 11.
Competition is well established, with Singapore opening its carbon platform this month backed by the Singapore Stock Exchange, DBS bank and Standard Chartered.
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Time to perform
Renato Moto is now the biggest wealth manager in the country with $494 billion under management and 2.2 million clients in his advice-based business.
The MLC deal cost $4.5 billion and ANZ some $825 million and now Moto has his platform, his time to perform has arrived.
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Since listing nearly six years ago Link has underperformed the market in total return terms by 81 per cent, so it was a brave or foolhardy move by chair Michael Carapiet to reject two credible bids for the company and then claim credit for adding $1 a share in value in the process.