TransGrid buyers plug new revenues
The winning bidders in the $10bn auction of power business TransGrid plan to build up renewable energy.
The winning bidders in the $10 billion auction of transmission business TransGrid plan to build up connections to renewable energy sources and a large fibre-optic cable business as they face criticism they overpaid for a highly regulated energy transmission businesses.
The NSW Electricity Networks led by Spark Infrastructure and Hastings Funds Management surprised the state government and investors when it won the four-way auction for TransGrid with a $10.26bn bid, ahead of expectations for $8bn-$9bn.
The price sets the seal on the biggest M&A deal for the year after BHP Billiton’s South32 spin-off and clears the way for the NSW government to auction its remaining interests in the Ausgrid and Endeavour Energy electricity distribution businesses.
It 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.
“A price like that never works in anyone’s language,’’ said one of Spark’s shareholders who declined to be named.
William Allott, an analyst at CBA Equities, said he thought the asset would have been more likely to go to a bidder with a “different alignment of shareholder interests’’ such as a pension fund with longer investment horizons, instead of a public company that is answerable to the market.
“It is a big price, roughly in line with what we thought the winning bidder would have to pay, but we are surprised that it is Spark that is paying it,’’ Mr Allott said.
The NSWEN consortium is majority-backed by foreign investors including Canadian pension fund Caisse de depot et placement du Quebec with 24.99 per cent, and Abu Dhabi’s Tawreed Investments and the Kuwait Investment Authority’s Wren House with 19.99 per cent each.
It beat consortiums including the only all-Australian bid from industry super fund manager IFM Investors and QIC, which were believed to be the lowest bidder at $9.5bn, and AustralianSuper, which teamed with Canada Pension Plan Investment Board and Borealis.
Macquarie Group’s Infrastructure and Real Assets funds business and State Grid Corporation of China were seen as frontrunners for the auction, but baulked at paying a price around $10.3bn because it would not have met MIRA’s return hurdles.
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.
The Australian Energy Regulator imposed cuts totalling $7bn over five years to the revenue of the NSW poles and wires businesses, of which TransGrid is the largest.
Observers also noted that the AER would “capture’’ any savings made by the new owners, passing about 70 per cent of gains back to consumers in the form of lower charges, when it imposes its next five-year pricing period from 2018. But Spark chief executive Rick Francis defended the price paid and said the consortium was confident of being able to generate returns from the asset.
“We are very comfortable with the price we paid and we think it a very fair price,’’ Mr Francis said.
Spark Infrastructure and Hastings Funds Management said that even with the constraints on regulated revenue and cost-cutting there was an opportunity to grow unregulated income that accounted for just $32 million of TransGrid’s $2.2bn of revenue.
That included TransGrid connecting wind and solar energy providers to the network to meet growing demand for renewable energy as large coal-fired power generation declined. TransGrid also operates 4000km of fibre-optic cables piggybacked on the transmission network, some of which is used for its own control centres and by NSW and federal government agencies, but which was capable of delivering substantial revenue growth.
“When you look around the world it is unusual to see a business with such a large unregulated asset base,’’ said Peter Taylor, head of infrastructure at Hastings.
Analysts said Spark traded at a headline multiple of 1.4 times its regulated asset base, but the actual figure was closer to 1.25 times after excluding the unregulated income in the South Australian Power Networks and Victorian Power Networks business that it owns in partnership with its major shareholder, Li Ka-Shing’s Cheung Kong Infrastructure.
Spark is in the middle of a $405m capital raising via a non-renounceable accelerated rights issue at $1.88 a share to cover part of its $751m equity contribution for a 15.01 per cent stake. Ahead of the issue Spark told the market it was confident of being able to grow distributions from an expected 12c this year to 13.5c by 2018.
Analysts said the company would have met that guidance without the TransGrid deal, questioning its claims it would be accretive to earnings from this year.
