Future Fund exit upsets Transurban bid

At end 2009, Future Fund said it was discussing joining the bidding consortium, following Transurban’s rejection of a CPP IB/OTPP offer, but the news of its withdrawal had immediate effect – not least on Transurban’s share price, which fell almost 5%.

“The Future Fund Board of Guardians . . . advised that it had terminated discussions with the Canada Pension Plan Investment Board and Ontario Teachers' Pension Plan regarding their proposal to acquire Transurban Group,” the Future Fund announced tersely.

Latest developments

Transurban itself, being quite sensitive to the share price impact, immediately made its own statement to reassure the markets that the other two potential bidders were still in the frame. “Transurban Group notes the announcement made today by the Future Fund,” the company’s statement ran. “Transurban confirms that confidential discussions took place between Transurban and CPPIB and OTPP during the week commencing 15 March 2010.”

Sources had mixed views on the actual impact of the news on prospects for the deal completing. One pointed out that much short-term heat generated by hedge funds who had come into the stock expecting a sudden jump – a common pattern in Australian public-markets takeovers – and were now facing a loss had much to do with the stock dip. However, longer-term stockholders might take a different view, given the stock’s characteristics as essentially an inflation-hedged bond-like instrument delivering a yield of around 5%.

Transurban’s own prompt response may also reflect more than mere short-term market-facing IR. Some analysts speculated post the news that the Transurban board had overplayed its hand in response to the original bid, and might now have to accept something far closer to that offer, given the falloff in its share price. Hence the urge to reassure the markets, and keep valuations as high as possible.

The situation is further complicated, though, by the fact that the two bidders are also Transurban’s largest shareholders.

Canadian pension plans as investors – and owners?

CPP IB and OTPP currently own some 28% of Transurban's stock. With the support of Australian investment manager CP2, expected to ultimately back the CPP IB/OTPP bid, their total stake rises to just below 42%. Transurban’s board may therefore have fairly limited room for maneuver.

Also, according to AVCJ sources, the initial CPP IB/OTPP bid was the Canadian direct pensions investors’ response to a plan by Transurban to raise capital for further toll road assets in Australia. Essentially, the company’s two largest shareholders tabled a vote of no confidence – in the strongest monetary terms – in the Transurban board’s expansion plan, and proposed to take over the business instead, presumably to alter these plans or effect their own.

CPP IB’s own entry into Transurban was relatively recent, as a result of an A$998 million ($908 million) rights issue that was highly dilutive to existing shareholders, including CP2. Some sources conjectured that the pension fund’s medium-term agenda was to take control at the opportune time. But there is no doubt that the shareholders were unimpressed by the Transurban board’s new rights issue plan, especially given concerns over persistent underperformance at the company, even with its great toll road asset portfolio.

Transurban’s original rejection of the first joint CPP IB/OTPP bid, at a 20% premium to its latest closing price, was on the grounds that the Canadian consortium’s approach was too low and too conditional. The Future Fund, already a 1% stakeholder in Transurban, then said in December that it would become involved to potentially raise the total offer and, more probably, to remove some of the conditions, citing the attractiveness of infrastructure plays. Had it continued in the bid, the Future Fund would have apparently targeted around a 22% stake for itself, at around A$1.4 billion ($1.27 billion).

The characteristics of Transurban’s stock, as cited, make it a very attractive holding, and one potentially hard to duplicate. Set against that, though, is the fact that its two largest holders – and potentially CP2, as well as well as the Future Fund, at least provisionally – had essentially decided that privatization gave even better value.

Prospects for the asset

Where the deal goes now is an open matter. “It’s a finely poised situation,” said one source.

No one questions the long-term value of Transurban and its assets, which one source described as “probably one of the best portfolios of road assets in the world.” No one doubts that the Transurban stock should be trading higher than it is – especially now, after the recent slide. But also, no one expects very many other potential bidders to step up to join the CPP IB/OTPP consortium, or bid against it. As sources confirmed, very few other potential players have the firepower required for a potential A$6 billion ($5.45 billion) equity check, even in a consortium.

“To date, no further proposal has been received from CPP IB and OTPP,” Transurban said as the conclusion of its announcement.

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• Topics
• Australasia
• Buyouts
• Infrastructure