Fortune favours the independent in battle for Port of Melbourne

‘Contingent liabilities’ that loaded more risk on the government was the final arbiter in the Port of Melbourne bid.

Victorian Treasurer Tim Pallas. Illustration: Sturt Krygsman.

A range of “contingent liabilities” that loaded more risk on the government was the final arbiter in the $9.7 billion deal that gave the QIC-led consortium victory in the battle for the Port of Melbourne.

The losing bidder, IFM, is said to have offered virtually the same money but its bid included more demands on the state, which meant the QIC bid won by being “cleaner”.

Suffice to say the settlement of the auction based on both bids ­offering roughly the same money but one ahead on the subjective measure of better terms means IFM was not impressed.

The final price at nearly 25 times next year’s earnings ­before interest, tax, depreciation and amortisation of $400 million underlines the reality that highly regulated assets like this one, which gives all sides certainty, are prized in this financial ­environment.

The bid is obviously a financial boon to the Victoria government and tells you the bidders at least think there is no need to build a new port in the state any time soon, and makes a lie of the often spoken claim that Australian ­institutions don’t ­invest in ­infrastructure.

The winning bid has roughly $4.1bn in debt and $5.6bn in ­equity, which comes in equal parts of roughly $1.1bn from QIC, the ­Future Fund, GIP, China’s CIC and Canada’s Borealis.

Over half the $9.3bn the Future Fund has invested in infrastructure is invested in Australia but this is its biggest local deal yet after the $1bn Infrastructure Australia airport deal three years ago.

More than half the $7bn QIC invests in infrastructure is ­invested locally, including a 25 per cent stake in Brisbane Airport, a 27 per cent stake in the Port of Brisbane and the Lockhart gas ­facility in ­Brisbane.

QIC now has an interest in two of the three gateway ports to Australia but the ACCC has cleared both bids before the auction.

With interest rates at record lows, the bids are relatively conservatively funded, as with the ­recent Asciano sale in which the Pacific National railway assets were sold for $8.3bn, which ­included $3bn in debt and $5bn in equity.

GIP will manage 43 per cent of that asset including the 16 per cent stake owned by CIC and it will also manage CIC’s stake in the Port of Melbourne deal.

This means it and QIC will both have 40 per cent but the board will be comprised of representatives from all investors.

The Future Fund will have two of its own directors on the board controlling the port even though its stake in the company will be managed by QIC.

The debt will be bank-funded before the winning consortium ­issues its own debt through corporate bonds, as with the Pacific National deal, which will give the winning team the chance to get cheaper debt.

The tight regulatory control of the asset is welcomed by the bidders because it provides maximum transparency to all parties and allows it to charge full price for the assets subject to the ­stated rules.

Some argue the tight controls also minimise the chance of innovation with the assets because there is no incentive to try anything different because the rules are all set.

This provides financing certainty that suits the bidders but ­arguably limits their ability to manage the assets better.

The state government is of course not complaining because it pocketed well in excess of the early bid rumours around the $6bn-$8bn mark.

The losing bidder, IFM, is the controlling shareholder of the Port Botany asset.

The government was advised on this bid by Morgan Stanley and Flagstaff and its lawyer was Minter­Ellison, which, like Flagstaff, acted on the controversial Port of Darwin deal as well as the Brisbane and Sydney sales.

This means Minters was the ­effective arbiter of the deal given contingent liabilities were said to have split the two offers. But the infrastructure game is a cosy world and, given just a few million dollars separated the two bidders, the losing team would no doubt be angry but understand where the mistakes were made.

Those in the know were not saying last night other than they imposed more conditions on the government and governments hate risk.

This aside, it’s a great deal for the Victorian government and shows the benefit of selling ­assets at this time of the cycle while ­interest costs are low and ­investors are looking for long-yielding assets.

ACCC boss Rod Sims has long lectured governments on the benefits of privatising assets so long as they take into account industry structure and competition issues in setting down long-term regulatory guidelines.

If anything, the Victorian sale, in sharp contrast to the earlier NSW port sale, was overregulated with strict rules that prevent fee increases above inflation for the first 20 years.

The government also promised not to build a rival port in ­Hastings for at least 15 years, but with this bid the QIC team is ­obviously betting the present port will maintain its monopoly.

There will be three tenants from next year when The Philippines-based ICTSI takes up its berth at the dock, joining Qube’s Patrick and DP World.

Melbourne Port handles 35 per cent of all container traffic into Australia and serves a gateway to other places like Tasmania, South Australia and southern NSW.

About 70 per cent of the cargo ends up being delivered into Melbourne, which is another selling point for the asset.

Been here before

Back in 2011, not long after Elmer Funke Kupper started as the ASX boss, the exchange was shut with a computer snafu.

Lo and behold, yesterday, in the early days of Dominic Stevens’ reign as the ASX boss, it was hit with another more prolonged outage — which, to say the least, was highly embarrassing.

Funke Kupper only had one such ­moment and Stevens no doubt will be hoping for the same.

Tour of convenience

The Caltex board will shortly follow that well-worn path of Australian boards to Silicon Valley to see where the future lies.

Short term the focus is on ­establishing pilot stores for its new convenience offering, which will be rolled out in Sydney from next February.

Caltex boss Julian Segal is treading very carefully on this project, having first floated the idea 18 months ago before stepping it up late last year by hiring Bains to have a look through plans.

The company recently hired Viv DaRos from Hong Kong to head IT for the project.

Segal is a big believer in developing the right management talent for the job, as shown by the careful management of present head of supply Louise Warner, who trained in the trading arm at Chevron while the major was still a big shareholder and has since ­returned bringing key talent with her.