IFM Investors is still weighing alliances with Spanish-owned contractors for the partial sale of Sydney’s WestConnex motorway, according to sources.
The Australian fund manager is expected to fund the bulk of its bid, containing upwards of AUD 4bn (USD 3.19bn) in equity, from pooled funds and co-investments from limited partners.
CIMIC, a contractor owned by Germany’s HOCHTIEF and ultimately Spanish builder ACS, approached IFM to form a bid consortium earlier this year, said two sources involved in the process.
Meanwhile, fellow Spaniard Globalvia Infraestructuras is looking to create a joint venture with a local developer to bid for the motorway and has engaged HSBC as a financial adviser, it is understood.
If it bids, Globalvia would likely gather at least part of its funding from its shareholders including Canadian pension manager OPTrust, Dutch pension fund PGGM and the UK’s Universities Superannuation Scheme, said two industry sources.
Indicative bids for the 51% privatization of Sydney Motorways Corporation, developer of the unfinished three-stage 33km motorway network, are due on 26 February.
Transurban is pairing with investors including Canada Pension Plan Investment Board, Abu Dhabi Investment Authority and AustralianSuper.
Fellow Spanish toll road group Abertis has also circled the auction, but it is not expected to bid because it is subject to takeover offers from HOCHTIEF and Italian contractor Atlantia, sources said.
Multiple sources confirmed China’s Shandong group is no longer planning a bid, after failing to secure a local partner because it wanted to hold a majority of the consortium. The sources said local investors believed it would struggle to gain foreign investment clearance.
NSW Treasury, overseer of the auction for the state, is allowing bidders to pay for part of the motorway upfront and make future payments based on traffic flows, in a model known as a contingent deferred contribution (CDC).
The mechanism is similar to one that Brisbane City Council offered as part of a concession for Legacy Way, a toll road that Transurban owns and operates.
Sources briefed on the sale material said the CDC will help level the playing field between Transurban, which owns large swathes of the motorway networks in Sydney, Melbourne and Brisbane, and other participants that may be less privy to information on traffic patterns in the cities. This will in turn help maximise the price the government gets for the toll road.
One of the sources said how much value bidders assign to the future traffic volumes will depend on the rate used to discount back the cash flows to today’s money.
“The strategy will be to put as much as you can upfront, and less into the future,” the source added, suggesting bidders will tend towards using a higher discount rate to maximise the value of their bid.
Another source suggested the government will specify the discount rate bidders should apply to the cash flows, meaning all consortia will have the same information to use in their valuations.
The sources said Treasury has already opened a data room ahead of the deadline for first round bids, containing information about WestConnex’s first two stages. Construction on the first part of Stage 1, an expansion of the M4 motorway, is complete and open to traffic while the M4 East tunnel is still being built as is Stage 2, a duplication of the M5.
However, detail on the progress of the linchpin M4/M5 link – seen as crucial to the motorway’s ability to meet its traffic forecasts and deliver economic benefits – has not yet been made available.
SMC is yet to appoint a D&C contract to build the connection running from St Peters to Haberfield and has not yet received planning and environmental approvals. One of the sources said Treasury is aiming to announce a preferred contractor and the winner of the sale in parallel midway through the year.
The future of Sydney Gateway, a proposed artery that would link the motorway with Port Botany and Sydney Airport, also remains under a cloud. While separate to WestConnex, if its completion runs behind schedule it may mean fewer vehicles use the M4/M5 link after it opens in 2023.
Another grey area is the NSW government’s plans for its 49% interest in SMC. Aspiring private owners say they would want visibility over a future trade sale or IPO of all or part of the shareholding.
“NSW will retain their ability to IPO their 49% stake,” one of the briefed sources said. “If they choose to sell their stake, would conduct a Right of First Offer process. This is where the private owner gets to table a first offer for the government’s 49%.” If the bid is above a pre-determined amount, it will succeed but if it is less, the stake will be offered to other investors.