Spark Infrastructure abandons TransGrid stake deal
Spark has abandoned buying an extra 20pc of NSW power operator TransGrid, in part because it’s unhappy over valuations.
Spark Infrastructure decided against buying an extra 20 per cent stake in NSW electricity operator TransGrid over frustration the market had undervalued its existing holding in the business.
The investment fund was understood to have had Macquarie Capital on standby for a potential $2bn deal to increase its 15 per cent stake in TransGrid.
The Kuwait Investment Authority’s Wren House holds 20 per cent of TransGrid but is selling out of the network business with existing shareholders holding the first option to strike a deal under pre-emption rights.
However, Spark said after a long evaluation process it opted against the deal partly due to frustrations over valuations of TransGrid.
“One reason for elaborating on this process is the disconnect we have seen in the market’s sum of the parts valuation being applied to Spark Infrastructure’s 15 per cent ownership in TransGrid,” Spark chairman Doug McTaggart said.
“In short, it does not appear that the market is differentiating in its valuation methodologies between the multiples being applied generally to distribution networks and that for TransGrid.
“Put at its most simple, the high-growth Transgrid asset which has a compelling pipeline of both regulated and unregulated growth projects is attracting the same valuation multiple as our more mature distribution networks which have more mature growth profiles.
“We believe this inherently misses the sizeable value of growth opportunities in TransGrid’s once-in-a-generation integrated system plan-related regulated asset base growth and its unregulated contracted connection opportunities.”
A consortium including Spark paid $10.3bn in 2015 to buy TransGrid as part of a major privatisation drive by the NSW government, with major infrastructure including Ausgrid and a half stake in WestConnex also sold as part of an asset recycling scheme.
The consortium’s blockbuster bid was ahead of market expectations for a $8bn-$9bn deal and represented a multiple of 1.6 times the regulated asset base of the company, above the 1.4 - 1.5 times that analysts and investors say a company can afford to pay for electricity network assets and still make money.
Extracting returns from the asset was seen as difficult because of a five-year job guarantee imposed by the government ahead of the sale and a promise made to the state government that network charges would be lower in 2019 than they were in 2014.
Wren House was expected to offload its stake to Canadian pension giant OMERS but the COVID-19 pandemic has thrown the timing of the deal into doubt, with the Canadian investor also an owner of London City Airport, which has been hit hard by the coronavirus shutdown.
Spark hopes its TransGrid stake gets a boost if a deal does ultimately proceed.
“Unlisted infrastructure investors appear to recognise this more transparently than the listed market, and if this transaction is completed, we would expect a rerating of Spark Infrastructure’s investment in TransGrid,” Mr McTaggart said.
Spark owns stakes in $17bn of network assets across three states, including distribution in South Australia, western Victoria and the Melbourne CBD as well as TransGrid.
The investor also took a shot at government intervention in Australia’s electricity sector, which had pressured returns from its business.
“Over the last few years the entire industry, including others up and down the energy supply chain, have been subjected to intense scrutiny, which has led to a continual stream of reviews, regulatory change and government interventions,” Mr McTaggart said.
“We have been disappointed by many of these changes and interventions into the sector, which in our view has led to a deterioration in the quality of the regulatory environment and decision making, at a time when network businesses are central to the transition of the energy system to one supported by renewable generation in order to lower carbon emissions, and to meet consumers’ changing needs.
“At the same time we also find ourselves in a lower rate environment with lower-for-longer inflation, both of which put pressure on returns from our existing businesses.”
Spark shares reversed early gains to close down 1.3 per cent on Wednesday, at $1.94.