What's hot in Australian M&A? Infrastructure

In Australia infrastructure is hot.

By ansaradaThu Aug 20 2015

In Australia infrastructure is hot. A long line of global pension funds, sovereign wealth funds, infrastructure dedicated investors and Australian superannuation funds are seeking to partner with each other to purchase some of the $126.4 billion worth of ports, airports, road, rail and energy assets Australian state and Federal governments plan to sell, according to government documents. “We’ll continue to look at opportunities in this market,” says Sam Pollock, chief executive officer of Canada’s Brookfield Infrastructure Partners at a news conference this week after announcing his firm’s $12 billion takeover of Melbourne-based railway and port operator Asciano, the biggest takeover of an Australian company since another Canadian company, SABMiller, bought brewer Foster’s in 2011. “This is a market we like.” Brookfield, which has US$207 billion in assets, faces stiff competition for Australian infrastructure from the likes of Canadian pension funds such as Caisse de dépôt et placement du Québec with $226 billion in assets. Caisse de dépôt purchased a stake in the Port of Brisbane from Global Infrastructure Partners in 2013. New York-based Global Infrastructure Partners, which manages $15.4 billion in assets, hired Rob Stewart, the former Credit Suisse Australia chief executive this year, signaling its intent to pursue infrastructure M&A down under. “We look forward to further building our activities in Australia where we see an exciting opportunity to further advance Global Infrastructure Partners’ mission of investing in high quality infrastructure assets in our core sectors in the energy, transport, water and waste industries,” says the firm's managing partner Adebayo Ogunlesi. Joining the search for Australian infrastructure assets are a host of sovereign wealth funds such as the Abu Dhabi Investment Authority. Sovereign wealth funds and foreign pension funds’ exemption from taxes together with their longer term investment horizon put them at an advantage over Australian superannuation funds in acquiring Australian infrastructure, says KPMG partner Jeremy Hirschhorn. As a result, Melbourne-based investors Hastings Funds Management and AustralianSuper are teaming up with many of the sovereign and non Australian funds.


Foreign funds know from an Australian political and social perspective local infrastructure purchases are easier swallowed if the winning consortia includes Australian investors. “The community needs to be reassured about changes around asset ownership,” says Brendan Lyon, chief executive of Infrastructure Partnership Australia, a not for profit, public-private infrastructure think tank. These large infrastructure consortia are willing to pay very high prices for assets they perceive will deliver predictable earnings streams over decades amid volatile world markets that offer uncertain returns. Last year, Transurban, AustralianSuper and a unit of Abu Dhabi’s sovereign wealth Tawreed Investments acquired Queensland Motorways after agreeing to pay $7.05 billion for the 70-kilometre network of roads in the Brisbane area. Melbourne-based Transurban and its partners agreed to pay about 28 times Queensland Motorways’ 2013 earnings before interest, tax, depreciation and amortisation, a price that exceeded significantly what many analysts thought would be paid for the toll road network. It is not only roads that fetch rich prices. In 2014 Melbourne-based Hastings and its partner China Merchants Group, agreed to pay $1.76 billion, or 27 times 2014 forecast earnings before interest, tax, depreciation and amortisation, for the 98-year lease of the Port of Newcastle. “Australia at this point in time is one of the most attractive markets in the world,” says Infrastructure Partnership Australia’s Mr Lyon.


Teams working on infrastructure deals can be as many as 200 people, often spread out around the world, says John McLuckie, a director at Everything Infrastructure Group, a consultancy that advises on the delivery, maintenance and operation of infrastructure assets. Due diligence work is done in virtual data rooms that are typically bigger than most M&A transactions because of the detailed technical nature of the transactions. “Infrastructure deals are complex,” says Mr McLuckie. “There needs to be a fair degree of certainty in the bidders mind that these assets are built to last and are likely to perform with income streams that can be projected with a reasonable degree of certainty.” The intense work bankers put in on deals has its rewards when they successfully advise winning consortia or have been hired to advise the owners of infrastructure on the sale of their assets. If bankers charge on average just 1 percent on work done on the $126.4 billion of Australian infrastructure asset sales their investment banks could make as much as $1.26 billion of fees. Not only is infrastructure being sold in Australia but new infrastructure will be built under government plans. There is $42.8 billion worth of new road, rail and energy projects the Australian government says needs to be built with the help of infrastructure investors from around the world. “There is a huge backlog of infrastructure needs,” says Mr McLuckie. Sydney’s proposed new airport in its western suburbs will require $3.6 billion worth of infrastructure spending, according to the Commonwealth government.

High speed rail

Mr McLuckie says there is a need to build a new inland rail link from Brisbane to Melbourne to relieve the current rail congestion. He says many who live in the Sydney, Wollongong, Newcastle and Canberra regions would like a high speed rail link. “There is a crying need for high speed rail,” says Mr McLuckie. Road networks around Australia, particularly the 1,025 kilometer long Pacific Highway that serves as the main commercial and passenger road on the east coast of Australia, also needs investment. “The Pacific Highway’s congestion is going to get worse as freight and the population grows,” says Mr McLuckie. Australia’s gross domestic product is expected to grow to $2.6 trillion in 2031 from $1.4 trillion in 2011, according to the Australian government. The cost of delays on roads in the six largest capital cities was $13.7 billion in 2011 and that is expected to grow to $53.3 billion in 2031, says the government.