Infratil CEO targets Europe for growth, defends Vodafone buy

17 May 2019 - 12:00 am UTC

Trans-Tasman infrastructure fund Infratil is plotting a move into the European renewable energy market after its successful foray into the US via Longroad Energy. 

The NZX and ASX-listed investor is in talks to appoint a team of investment managers and expects to launch the new business unit within 12 months, Chief Executive Marko Bogoievski told Inframation in an interview after the company’s earnings briefing for the financial year ended 31 March. 

“We have been reviewing the market for two years and are now in active discussions with parties,” Bogoievski said. “We will find a management team we can back in Europe and grow the business in the same way we have grown Longroad in the US,” 

The ongoing furore over the protracted Brexit negotiations made the UK an unattractive place to invest for now, Bogoievski said. 

Infratil will instead focus on utility scale solar projects in Southern Europe, as well as wind farms in the Nordic countries and Ireland. 

“Europe looks as profitable as the US, where projects are a lot smaller but returns are higher,” he added. 

“We would look to acquire development sites and run them through to completion. This would involve buying into developments when they have obtained permits, then arranging equipment, construction contractors, grid connections and overseeing construction.” 

Bogoievski said project developers could earn blended returns – for construction and operation of wind and solar projects – in the mid-teens, fitting the returns Infratil targets for what it terms “core plus” infrastructure.  

Bogoievski said Infratil has not to date used external advisers to assess takeover targets. 

Vodafone NZ acquisition
Details of the planned European tilt come as Infratil together with Brookfield unveiled an ambitious push into the telecommunications arena, splashing NZD 3.4bn on Vodafone NZ. 

Infratil today kicked off a rights issue to gather NZD 400m (USD 261.5m) of the NZD 1.029bn of its share of the equity for the transaction, which if approved by the NZ Commerce Commission would see it emerge with a 49.9% shareholding in the mobile and broadband carrier. 

Shareholders will receive 1 for every 7.46 Infratil shares they already hold. The NZD 4 offer price is a 10.4% discount to the NZD 4.46 volume weighted average price of Infratil shares traded on the NZX for the last five trading days before today. Shares will be offered to institutions today and on Saturday, and a retail offer will commence on 23 May and go until 11 June. 

Bogoievski does not expect all retail shareholders to take up their rights, as is often the case when New Zealand companies issue equity, but said any not taken up would be offered to institutions once the retail offer closes.  

Infratil has put in place a NZD 400m loan from a group of six banks, two of which are international, to raise part of the acquisition debt. It is also tapping NZD 400m from an acquisition debt facility which is currently NZD 800m in size.  

Analysts have questioned the logic of owning a telecoms carrier in New Zealand, where mobile and broadband penetration is already high. 
One that Inframation spoke to asked whether an infrastructure fund should be buying into a business in a highly competitive market with high rates of customer churn and exposure to risky activities such as the rollout of the 5G network. 

Bogoievski defended the rationale of the deal. He said he expects Vodafone NZ to generate returns of 17-18% and argued this would fit well into the current portfolio, which has space for growth and development businesses that deliver annual returns between 15-25%. 

He said some elements of Vodafone would produce stable cash flows as seen in other utility businesses, while it would also expose Infratil to new risks. 
“Vodafone NZ is a 10-year growth story. We are targeting a 10-year equity return. It’s going to be about improving the capital intensity and the cost structure of the business, and also retaining customers and persuading them to continue to upgrade their service offerings,” he said.

He expressed confidence in getting the deal cleared by the competition authority, arguing New Zealand has low barriers to entry because it has a single provider of fibre optic cable in Chorus, to which any telco could connect a retail broadband business. 

If given the go-ahead to acquire Vodafone, Infratil will hold 52% of its assets in New Zealand, with the balance spread across Australia and the US. 

Strategic review
In the past 12-months Infratil has invested NZD 679m in its existing businesses, including NZD 236.4m into Tilt Renewables, NZD 140.6m into Canberra Data Centres, NZD 87.2m into Longroad Energy and NZD 72.1m into Wellington International Airport. 

Tilt Renewables announced it will develop the Waverley Wind Farm, a 130MW project in the Taranaki region of New Zealand. 

It has signed an off take with local utility Genesis Energy, the size of which is not disclosed, although it is for less than the wind farm’s nameplate output. 

This follows Tilt’s acquisition of the Dundonell Wind Farm in November, for which it has secured long-term contracts from the Victorian Government and Snowy Hydro, which covers 87% of its output. 

Infratil is in the process of selling several portfolio companies including Perth Energy, NZ Bus – which is slated to be sold to Next Caital – and Snapper, an electronic payment platform. 

Infratil may be forced to divest the retail arm of its New Zealand energy business Trustpower, if the NZ competition regulator fails to clear the Vodafone acquisition within the required eight month time frame, as reported. 

Bogoievski said he would prefer the outcome to be “Plan A”, where Infratil is able to buy Vodafone and retain the Trustpower retail arm.

Infratil reported underlying earnings before interest, tax, depreciation and fair value adjustments (EBITDAF) before incentive fees of NZD 580.1m for the year ended 31 March 2019, up from NZD 482m in the prior year. 

It received a NZD 102.6m incentive fee from Morrison & Co, its external manager, because several of its portfolio companies delivered higher than expected returns. 

EBITDAF for the coming financial year is expected in the range of NZD 635m – NZD675m for the year ending 31 March 2020, including a seven-month contribution from Vodafone NZ.

 

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