Deals

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Donald Trump talks a good game on infrastructure but so far there's been precious little action. Not so in supposedly sclerotic Europe, where Italian toll-road operator Atlantia SpA is mulling a multi-billion euro deal with Spanish rival Abertis Infraestructuras SA, Bloomberg reports.

Sure, toll roads won't win any prizes for sexiness. But it's a good time to be in the business of extracting coins from drivers. As long as Atlantia's controlling Benetton family doesn’t overpay and Abertis shareholders aren't greedy, there could be merit in knitting together a European infrastructure champion. The two parties tried to merge back in 2006, though the Italian government didn't play nicely.

Today, neither company is a minnow but a merged entity would have more than 10 billion euros ($10.7 billion) in yearly sales and be worth about 35 billion euros ($38 billion).

What's the appeal of managing thousands of kilometers of toll roads? Cash flow. Fairly predictable fee income helps support dividend payments, notes Citi Research. Both companies yield more than 4 percent.

Plus policymakers are waking up to the benefits of infrastructure spending, while Europe is emerging from a long economic funk and oil is cheap. Those last two factors should encourage more driving and generate more fees. Abertis revenue rose 6 percent last year.

True, both companies have lots of debt. But borrowing costs have fallen, thanks to Mario Draghi. Abertis issued half a billion euros of 10-year debt in November with a coupon of just 1 percent, a record for the company. Atlantia has borrowed at a similar rate.

Atlantia is keen to lessen its reliance on Italy. The Autostrade Italian motorways unit accounted for 70 percent of 2016 revenues. It discussed a possible public tender offer for Abertis shares that might use either cash, shares or a combination thereof but didn't specify which option, or how much, acccording to Abertis. The Italians should have the upper hand because Atlantia's market capitalization is almost one-fifth larger and its leverage lower.

But Abertis can argue that its bigger international footprint is worth paying for and, on one metric at least, investors agree. Abertis shares trade on more than 17 times estimated earnings compared to 16 times for Atlantia.

Abertis' Appeal
Unlike Atlantia, the Spanish toll-road operator isn't overly reliant on one market
Source: Bloomberg

The trouble is that combining the two companies might not extract enough savings to justify a big premium. Both are obliged to keep investing in road upkeep. There aren't any plants to shut down.

Still, it's reasonable to assume they'd find some modest overhead cuts. So let’s assume Atlantia only offers 10 per cent more than last week’s undisturbed price for Abertis stock, a 1.5 billion euro premium. Taxed and capitalized, about 200 million of annual savings (2 percent of combined revenue) should cover the premium, as well as the cost of capital. 

Funding the deal entirely in cash would push net debt towards an eye-watering 40 billion euros, or about six times Ebitda, up from about four times currently, according to Bloomberg data.  So a combination of cash and shares might be the way to go. It would still be accretive for Atlantia (unlike an an all-share deal) but less leveraged than an all-cash offer, Raymond James analysts note.    

Leverage Toll
A 100 % cash offer would make Atlantia one of Europe's most indebted companies
Source: Bloomberg
Based on 10 % premium to last week's undisclosed price, 100 % in cash.

Why would Abertis shareholders settle for a meager premium? The stock has been flying recently. But its performance during much of 2015 and 2016 was discouraging, in part because of a legal dispute. Two of its big Spanish concessions, which UBS estimates account for 20 percent of Ebitda, will expire within four years. Atlantia offers more certainty.  

Better Times
Abertis didn't perform very well in 2015, in part due to a Spanish legal dispute
Source: Bloomberg

Plus there are less tangible benefits. Until now, neither company has been very active in the U.S. With Trump promising a $1 trillion infrastructure plan, that might change.

While the president would doubtless rather American companies ran American roads, a combined European entity would bring clout and experience to the table. As Trump might say, an Atlantia and Abertis merger could be huge.

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

  1. On a like-for-like basis. 

  2. However if you look at EV/Ebitda, the gap disappears, indeed Atlantia trades on a slight premium. 

  3. If the premium rises to 13 percent, a possibility reported by Expansion on Thursday, Atlantia might need to find a few more cost savings.

  4. Altlantia's net debt was 3.1 times Ebitda at the end of 2016 on a like-for-like basis, the company says.

  5. In contrast, Atlantia’s main motorway concession doesn’t expire until 2038.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net