Nov. 4 (Bloomberg) -- Babcock & Brown Infrastructure Group, owner of ports and energy transmission lines in Australia, Europe and the U.S., agreed to sell 50 percent of Powerco Ltd.'s New Zealand operations as it seeks to reduce debt.

The sale, to funds held by investment manager QIC, values the New Zealand business at NZ$2.05 billion ($1.2 billion), including debt, Sydney-based Babcock Infrastructure said today in a statement. It will retain Powerco's gas distribution unit in Tasmania, valued at NZ$200 million.

BBI, whose shares have slumped 81 percent in the past six months, said in August it may sell as much as half of three of its main businesses, Powerco, WestNet Rail and BBI Euroports, to cut borrowing and provide funds for investment. The NZ$2.25 billion valuation of the whole of Powerco, including debt, is 25 percent higher than the NZ$1.8 billion BBI paid in 2004.

``The price is solid given weak credit markets and a poor New Zealand economy, and supports our argument that at current prices BBI is undervalued,'' Merrill Lynch & Co. said in a report. ``Further asset sales will be much more difficult given falling commodity prices (WestNet) and a weak European GDP outlook (Euroports).''

Babcock Infrastructure today jumped 19 percent to 25.5 Australian cents in Sydney trading, beating a 0.2 percent slide in the exchange's benchmark index.

Further Sales

Net proceeds from the sale, due to be completed in the first quarter of 2009 subject to regulatory approvals, are expected to be about NZ$400 million, BBI said. Talks are continuing on the sale of stakes in BBI Euroports and WestNet Rail, it said, adding that the company will provide an update on the progress of the sales by the end of December.

``We think this suggests that a deal likely will not be done until 2009,'' Merrill said.

Powerco is New Zealand's second-biggest electricity and gas distributor, with more than 400,000 customers across more than 39,000 square kilometers of New Zealand's North Island.

``Powerco is a core regulated utility,'' Ross Israel, head of global infrastructure at Brisbane, Queensland-based QIC, which has more than A$80 billion ($54 billion) under management, said today. ``As a mature business we expect it to provide stable, long-term returns,'' he said in the statement, send to the exchange.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

Last Updated: November 4, 2008 01:52 EST