The AUD 9.3bn (USD 6.8bn) sale of 51% of the WestConnex motorway project to Transurban’s Sydney Transport Partners in August left a gaping deal gap after about six years of big government privatisations.
At the time of writing, there was just one, relatively small, government sale on offer in Australia – the 50-year concession to run Western Australia’s Landgate land registry system, which Investec oversaw, with EOIs due in by Christmas or early in the new year.
The seller has put a value of between AUD 1bn and AUD 1.5bn on the asset based on conservative earnings forecasts of about AUD 50m a year. Pre-sale estimates for Australia’s other three privatised land registries all ended up being way too low.
An important reason for the lack of major deals is that the two biggest states – New South Wales (NSW) and Victoria – and the federal government have all had elections due between November this year and May 2019.
Victoria already held its election, but that election promised much the same outcome for investors as both sides were outbidding each other on infrastructure. The election on 24 November returned the incumbent Labor government to power with an increased majority and it is now quickly moving to carry out its AUD 90bn “big build” agenda.
Prior to the election campaign, Premier Daniel Andrews, said privatisations had gone too far, so it appears there will be few brownfield deals on offer there.
Nevertheless, he did not rule out the long-term lease of two of Melbourne’s major wastewater treatment utilities which the Liberal-National Coalition opposition announced just before election day.
There have also been rumours Victoria and other states are considering leases of motor registries. South Australia agreed to consider privatising its motor registry in the contract to lease its land registry in 2017.
Most market observers Inframation spoke to said the halt of big government privatisations has long been anticipated and stressed it just meant they had to do more work to find and structure deals that will suit large fund mandates.
Some even claim to be relieved to have time to take stock and focus on managing assets, including taking advantage of the highly competitive bank and debt capital markets to refinance and lengthen tenor as interest rates rise.
“There is a lot of deal fatigue,” said one adviser working with major super funds to originate acquisitions and manage assets.
But that won’t stop investment bankers pushing deals and most expect a state government in one of the states will come up with another privatisation in 2019 once the elections are out of the way. Although it doesn’t need the money at the moment, NSW, for example, still has roughly half shares in three electricity networks as well as WestConnex that it will likely offload at some point.
In the meantime, the focus of many big investors and bankers has shifted to corporate takeovers, asset sales or co-investments in corporate assets.
“There is a similar level of activity [as previous years], but it’s not execution,” said one investment banker. “For years there is this regular deal flow. What you are doing now is you are marketing to clients.”
“On the brownfield side, there’s not an obvious new wave of 2019 Australian infrastructure privatisations beyond the WA land titles office,” says Paul Newfield, chief investment officer at Morrison & Co – a New Zealand based investor that now manages the Utilities Trust of Australia portfolio after it dumped Hastings Funds Management last year.
“In the absence of privatisations, a natural place for infrastructure investors to focus on is privatising publicly listed companies and taking infrastructure-like assets off the hands of corporates.”
The most obvious big deal in 2019 is expected to be another bid for APA Group. After CK Group’s AUD 13bn offer was blocked by the federal government, IFM Investors together with a number of Canadian pension funds and local super funds so far appears to be the only other local fund that can launch a new bid. As well as UBS, it is understood Credit Suisse is working with IFM.
Industry sources say there is no urgency to a new bid. One banker said the dust needed to settle on CK Group’s takeover offer first to allow APA to get on with its first major acquisition offshore – a circa AUD 3 to AUD 4bn pipeline deal in the US.
“A new offer so soon after the CKI bid would not be looked on kindly,” he said. As well as the distraction for APA, IFM Investors needed to regroup after its loss to Transurban on the WestConnex bid.
The APA board also has to accept a lower offer than CK Group’s AUD 11 per share. It would be very hard for them to do so soon after that benchmark was set and given it is obvious there is a high degree of interest in APA.