Deal focus: IFM swoops on Australian energy assets

When the Australian government blocked two Chinese bids in August for New South Wales electricity provider Ausgrid, citing national security interests, IFM Investors wasted no time picking up the pieces of the broken deal. Within a month, it scrambled an unsolicited offer for a 99-year lease on the asset, soothing nerves about foreign control and defusing cross-border bureaucracy with an all-local consortium including AustralianSuper. One more month down the track, the transaction was agreed.

The consortium is taking a 50.4% stake for A$16.2 billion ($12.3 billion), including $12 billion of company debt and $4.4 billion of equity. The lack of a competitive bidding process has stoked concerns at the state level that a higher valuation could have been achieved. But from a nationwide perspective, putting long-hold assets in the hands of local pension funds represents a logical but seldom-realized solution.

"The Australian government has been imploring the superannuation sector to invest more in infrastructure. We've been at pains to tell them that we're already doing a lot of the heavy lifting and this investment is a great example of that," says Michael Hanna, IFM's national head of infrastructure. "These taxpayer assets are slowly moving across to superannuants, who are also taxpayers, but they now benefit from having very experienced private owner-operators involved in running the businesses."

For IFM, which is owned by 29 superannuation funds, Ausgrid marks the largest single investment from its Australian Infrastructure Fund and a major step towards rebalancing the portfolio. The vehicle is long on GDP-linked assets such as ports and short on consumer-facing investments with more stable earnings outlooks.

Ausgrid operates one of the country's largest electricity networks, serving about 1.7 million homes and businesses via 200 large substations, 30,000 small distribution plants and 500,000 power poles. The government-driven expansion efforts that resulted in this scope mean Ausgrid has enough capacity to satisfy peak demand for the next decade or so. However, this history has also culminated in a raft of operational redundancies as well as a mismanaged and bloated workforce. Indeed, the energy regulator recently flagged the company as possibly the least efficient network supplier in the country.

"Investment in the asset base has been quite significant over the last 10 years, and that has actually contributed to an increase in electricity bills," says Hanna. "But we're absolutely confident that we can achieve further efficiencies that will deliver lower network charges in 2019 compared to 2014."

IFM is aiming to achieve this goal by leveraging its experience with Germany's 50Hertz Transmission and US-based Duquesne Light. Hanna, meanwhile, sees upside in a stronger focus on technology. "We see Ausgrid playing a leading role in managing the changing nature of how electricity is supplied and distributed around the network," he adds.

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• Topics
• Australasia
• Infrastructure
• Buyouts
• Infrastructure
• Australia
• LPs