Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Theresa May's first privatization since becoming prime minister looks like it has just about given Macquarie Group Ltd. the better side of the deal.

On Thursday the British government agreed to sell its Green Investment Bank to a consortium led by the Australian infrastructure specialist for 1.7 billion pounds ($2.2 billion). It also gets out of a 600 million-pound investment commitment to the institution. 

Financially, U.K. taxpayers can't grumble. The government has invested 1.5 billion pounds in GIB in stages since it was set up in 2012 to support clean energy projects. Start-up costs will have burnt some of that. An exit nearly five years on for a 160 million-pound gain may not look great. But adjust for the phasing of the invested cash and the annualized return is around 5 percent, according to a person familiar with the situation. That feels about right given that a large part of GIB's portfolio is low-yielding senior debt.

With Yields Like These...
Returns on Britain's Green bank exceed what's available from government debt
Source: Bloomberg

The sale has generated much controversy that it undermines the public policy objective of developing the clean economy in the U.K. Such fears are understandable but look overdone. When the GIB was established, the market was failing to provide capital to green energy projects and there was a clear need for state intervention. Today, the need for a state-backed funding vehicle is no longer obvious. Renewables have taken off as an investment theme and GIB hasn't exactly struggled to attract partners for its projects.

Macquarie has assumed GIB's near-term investment targets and has committed to maintain its green ethos. A trust with five board members will check Macquarie is keeping its word. They can't direct GIB's executives. But Macquarie would suffer costly reputational damage if it attracted their opprobrium. That should ensure GIB sticks to its green mission. It is significant that the government can get happy with foreign takeovers so long as the governance feels right.

Capital Gains
Macquarie stock has beaten Australia's market comfortably over the last five years
Source: Bloomberg

So the deal makes sense for the government. The U.K. needs the cash and recoups more than its founding investment. The rationale for the GIB as a public entity is gone. In any case, the government cannot afford to put substantially more money in with Brexit clouding the economic outlook. 

But the deal makes even more sense for Macquarie. The price is around 1.1 times book value, according to person familiar with the situation. For this slight premium, the bank gets an established brand, a large portfolio, a heap of expertise and a useful network. It's not much to pay for saving five years' work.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net