Transurban Group shares dropped to a six-month low after analysts said that two Canadian pension funds are unlikely to raise a spurned A$7.2 billion ($6.4 billion) bid and the Australian toll-road operator sold shares at a discount.
Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and Sydney-based asset manager CP2 Ltd. are unlikely to raise their already sweetened A$5.57-a-share offer or make a hostile bid, analysts at Macquarie Group Ltd., Royal Bank of Scotland Group Plc and Southern Cross Equities Ltd. said.
“They want to leave some money on the table for their own shareholders,” said Sanjay Magotra, a Sydney-based infrastructure analyst at Southern Cross, which rates the stock as “reduce.” “The Canadians and CP2 don’t have to return with a revised offer because they’re long-term investors and they can sit on the sidelines for 12 months, a year, two years, till it drifts back to where it creates a return.”
The three funds, which owned a combined 42.4 percent of the company, were vying for control of assets including the Pocahontas 895 in Virginia and four Sydney toll roads, as they seek long-term income to match their future payouts. Upon rejecting their proposal, Transurban said it would go ahead with an A$542.3 million share sale to help fund its purchase of the Sydney Lane Cove Tunnel to extend its Sydney road network.
Transurban yesterday said it raised about A$410 million at A$4.60 a share from the institutional component of the equity sale. The shares slipped 0.9 percent to close at A$4.85 in Sydney, the lowest since Nov. 4, the day before the first offer from the two Canadian funds.
‘Predictable Cash Flows’
The bidding funds didn’t participate in the share sale, according to three people with knowledge of the capital raising.
That means their stakes will be diluted, meaning they may have to pay more if they make another bid in the future.
“We are disappointed by Transurban’s response,” Linda Sims, a Canada Pension spokeswoman, said in an e-mailed statement. “We believe we put forward a compelling offer.”
Ontario Teachers’ Chief Executive Officer James Leech declined to comment on Transurban following a speech in Toronto.
“Infrastructure assets such as toll roads, water, sewerage, all have predictable cash flows which pension funds can match with their outflows,” said Graeme McKenzie, head of asset management for Oceania at Ernst & Young in Sydney.
Transurban shares were at A$4.37 before the Canadian funds made their first offer, and have swung between a high of A$8.51 in May 2007, to a low of A$3.68 in September.
CP2, Transurban’s largest shareholder, said the rejection “is not in the best interests of shareholders.”
“We can see no logic in this decision and conclude the company has a disregard for the interests of long term shareholders,” Peter Doherty, managing director of CP2, said in a statement yesterday. “Just what the board thinks the value of Transurban securities are worth is a mystery.”
CP2’s investments include holdings in Zurich Airport, Copenhagen Airport, and Sydney’s Airport Link, it said in the statement.
At A$6.03 a share, Transurban is fairly valued, said Ian Myles, a Sydney-based analyst at Macquarie, which has a “neutral” rating on the stock.
A hostile bid, which appeals to shareholders in the face of board opposition, is unlikely as that would raise the approval bar to 90 percent, from 75 percent in an agreed deal, said Myles.
“The Canadians have gone home now,” he said in a telephone interview. “There could be a repeat of the current scenario or they could exit the register altogether.”
A selldown is unlikely given that the bidders value the assets above the current share price, said Luke MacNab, a Sydney-based analyst at RBS.
“So the status quo would probably be maintained for now,” said MacNab, who has a “buy” rating on the shares and said the fair value is A$5.70 to A$6.
Transurban gets more than 98 percent of revenue from Australia. Citylink, the company’s first toll road, connects Melbourne’s airport with the eastern and western suburbs. It also has a controlling stake in the construction of high-occupancy tolling lanes on the Capital Beltway that circles Washington DC.
Each existing road recorded increased revenue in fiscal 2009, the most recently completed year. Only one of the toll-road concessions the company owns expires in the next 15 years.
Buying the Lane Cove Tunnel, which cost $1.1 billion to build, would give Transurban control of a road that links directly with its M2 motorway through Sydney’s northwest suburbs. The company would then control most of the major motorways that ring Sydney as well as the main road connecting the airport with the central business district.
Canada Pension bought a 10 percent stake in June 2008 as Transurban CEO Chris Lynch sought to boost the company’s balance sheet and change the business model in response to the collapse of global credit markets.
Canada Pension, which is expanding the range of investment programs to include private equity, real estate, infrastructure and private debt, manages C$123.9 billion ($121.6 billion). The Toronto-based fund spent A$1.64 billion in June to buy Macquarie Communications Infrastructure Group, an investor in radio transmission towers, after raising its initial offer by 20 percent to win shareholder approval.
‘Need to Diversify’
Ontario Teachers’, responsible for investing and managing pensions for about 289,000 active and retired teachers in Canada’s most populous province, held C$96.4 billion in net assets, according to its website. It had 44 percent in equities, 7 percent in fixed income and 49 percent in inflation-sensitive investments such as infrastructure, real estate and real-return bonds at the end of 2009, it said last month.
“As pension trustees, the need to diversify in asset classes is now seen as the best way to manage risk and return,” said Sydney-based Pauline Vamos, CEO of the Association of Superannuation Funds of Australia, which represents pension funds and service providers across the industry. “With an aging population globally, you have to look at those less volatile assets where the income is more even, and that’s what’s making these assets more appealing.”